Four Claims Regarding Same Appraisal Methodology Are Covered but Related and Therefore Confined to One Policy Year
The United States District Court for the Northern District of Illinois, applying New York law, has held that a real estate service firm’s professional liability insurance policies cover four claims regarding the firm’s allegedly improper use of a certain appraisal methodology because neither the prior knowledge exclusion nor an exclusion regarding investment activity applied. Cushman & Wakefield, Inc. v. Illinois Nat’l Ins. Co., 2018 WL 1898339 (Apr. 20, 2018). In doing so, the court determined that the four claims were related and thus all properly treated under the same policy period and, therefore, the primary insurer for that policy period is entitled to recoup all amounts paid in excess of its limit for that policy. The court also granted summary judgment for the first excess insurer on the insured’s bad faith claim.
Over a three-year period, the insured real estate services firm performed a number of appraisals in connection with loans made to large, master-planned residential communities using a specific appraisal methodology. During the financial crisis, a number of the loans went into default, and several claims were asserted against the firm between 2010 and 2013 alleging that the methodology used was improper and resulted in a higher valuation than was proper.
The firm provided notice of the first such claim—a putative class action brought by property holders—to its professional liability insurer during the 2009-2010 policy period, which provided a defense to that action. The other three claims were made in different policy periods, but the first excess insurer took the position that all the claims were related because the appraisals at issue used the same methodology and therefore constituted a single claim first made under the under the 2009-2010 policy. The first excess insurer also reserved its rights to deny coverage pursuant to the primary policy’s prior knowledge exclusion and an exclusion for claims relating to “advising as to, promising or guaranteeing the future value of any investment or any rate of return or interest” or “the failure of any investment to perform as expected or desired.” Higher level excess insurers disputed that the claims were related, arguing that they should be treated under different policies and therefore that coverage under their excess policies was not triggered because the underlying insurance had not yet been exhausted. The firm and its insurers agreed to a standstill and interim funding agreement with respect to the defense of the underlying claims.
On cross-motions for summary judgment, the court held that the investment activity exclusion and prior knowledge exclusion did not apply, and therefore the policies provided coverage for the underlying claims. With respect to the former, the court concluded that it was ambiguous and looked to extrinsic evidence, including regulatory findings and expert testimony, to interpret the exclusion. Noting that exclusions are to be narrowly construed with any ambiguity resolved against the insurer, the court held that the insurers failed to meet their burden to show that the exclusion applied.
The court also held that the prior knowledge exclusion did not apply. Although the court agreed with the insurer that the knowledge of any Insured—not just the knowledge of the firm’s General Counsel or Risk Manager—was sufficient to trigger the exclusion, the court concluded that, although the appraisers may have had some concern about the methodology, they did not know that issuing appraisals using the methodology was inherently misleading, nor would a reasonable person with knowledge of the facts surrounding the appraisals expect such activity to lead to a claim. The court also held that knowledge of the first claim did not trigger the application of the prior knowledge exclusion for purposes of subsequent claims because the court in the initial case ultimately held that the firm owed no duty to third parties not mentioned in the appraisals—like the property owner plaintiffs in that case—and therefore no reasonable insured would have expected lawsuits from third parties to which it owed no duty.
However, applying the “sufficient factual nexus” test, the court held that the four claims were related and thus properly treated as a single claim made during the initial policy period. In so holding, the court noted that the claims involved the same alleged course of conduct, during the same time period, and many of the same property developments. Further, the claimants all alleged that they were harmed because the appraisal methodology used was inherently misleading. While the court agreed with the insured that each appraisal was a different work product, done by a different employee, and provided a unique valuation analysis and conclusion, it also noted that related claims need not involve precisely the same parties, legal theories, acts or requests for relief. Accordingly, the court concluded that sufficient overlap existed among the four underlying claims such that they were deemed a single claim first made during the 2009-2010 policy period. Accordingly, the court held that the first excess insurer for the 2009-2010 policy period was entitled to recoup amounts it paid in excess of its limit.
Finally, the court granted the first excess insurer’s motion for summary judgment on the firm’s bad faith claim, finding that most of the allegations of bad faith were based on a mere difference of opinion and did not demonstrate any gross disregard for the first excess insurer’s policy obligations.