No Coverage for Underlying Settlement with Government Because Government Was Not Insured’s “Client”
The Fifth Circuit, applying Louisiana law, has held that coverage was unavailable for an $11.7 million settlement with the government because the settlement did not relate to “professional services” provided by the insured to its “client.” IberiaBank Corp. v. Illinois Union Ins. Co., 2020 WL 1284958 (5th Cir. Mar. 18, 2020).
The insured, a mortgage lender, participated in a program supported by the United States Department of Housing and Urban Development (HUD). Under this program, the insured agreed to use HUD’s mortgage underwriting standards when approving borrowers for home loans and certify that the loans complied with those standards. The insured collected its customary fees from borrowers as compensation. In 2015, whistleblowers brought a qui tam action on behalf of the government against the insured, alleging that the insured violated the False Claims Act (FCA) because it was non-compliant with HUD’s underwriting requirements and caused the government to pay amounts it would not have paid had the insured conducted appropriate underwriting due diligence. In April 2017, the United States Department of Justice (DOJ) informed the insured of potential liabilities under the FCA. The DOJ and the insured ultimately entered into a settlement agreement, under which the insured agreed to pay $11,692,149.
The insured tendered the settlement to its insurers for coverage under its professional liability policies, but the insurers denied coverage. As a result, the insured filed a breach of contract action against the insurers. The district court granted the insurers’ motion to dismiss, and the insured appealed.
On appeal, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal because the settlement did not relate to the “professional services” provided by the insured to its “client.” In so holding, the court noted that both the insuring agreement and the definition of “professional services” required that the claim arising out of the insured’s services be brought by its client and that the services themselves be provided by the insured to a client. The “professional services” definition further mandated that the insured’s services be rendered to a client for consideration or pursuant to a written contract. The court rejected the insured’s argument that the term “client” could mean different things under each of the provisions, explaining that such an interpretation contravened contract interpretation principles. Rather, the insuring agreement incorporated the definition of “professional services” and the term “client” should mean the same thing in both provisions. The court thus concluded that HUD could not be a “client” because HUD did not pay the insured any consideration to provide the certifications. As such, coverage was unavailable for the settlement.