Fee Arrangement Exclusion Bars Coverage for Claims Arising from Alleged Force-Placed Insurance Scheme

A New York state trial court, applying New York law, has held that a fee arrangement exclusion contained in a professional liability insurance policy precludes coverage for claims arising from an insured’s force-placed insurance business.  QBE Americas, Inc. v. Ace Am. Ins. Co., 2017 WL 4122651 (Sup. Ct., N.Y. County Sept. 18, 2017).  The court also held that the policy does not cover costs incurred responding to third-party subpoenas.

The insured, a force-placed insurance business, allegedly participated in a scheme in which the insured would inflate premiums on force-placed insurance policies, i.e., mortgage policies sold to banks when homeowners fail to voluntarily procure mortgage insurance.  The banks allegedly would pass the cost of the policies onto homeowners and then receive a “kick-back” portion of the premiums.  The scheme also allegedly involved commissions that incentivized selling policies with high premiums.

Due to the alleged misconduct, the insured was sued in 50 civil suits, subpoenaed as a third party in 11 actions, and investigated by multiple state agencies.  The insured sought coverage under a professional liability policy for its costs.

In the resulting coverage litigation, the court held that a fee arrangement exclusion precluded coverage for the civil lawsuits and government investigations.  The exclusion barred coverage for claims arising out of “any agreement or other arrangement between an insurance broker or insurance agent and an insurance carrier involving the payment of increased fees, commissions or other compensation based on the volume, profitability or type of business referred to the insurance carrier.”  The court explained, “[t]here is no question that all of the underlying civil actions . . . are attributable to [the insured’s] participation in an alleged scheme with the lender banks to charge inflated force-placed insurance premiums.”  The court also rejected the insured’s argument that the exclusion did not apply because some transactions occurred between affiliates of the insured, stating, “[i]f anything, [the insured] has it backwards, as the incentive to game the system by inflating premiums to maximize commissions is exacerbated when the malfeasance can be accomplished with intracompany transactions.”

Finally, the court held that costs arising out of the third-party subpoenas were not covered by the policy, concluding that, “[t]he subpoenas themselves were not Claims because they merely sought discovery, and they were not assertions of monetary damage claims against [the insured].”