On April 19, 2016 the United States Circuit Court of Appeals for the First Circuit affirmed a decision in favor of the Herbert H. Landy Insurance Agency, Inc. (“Landy Agency”), of 75 Second Avenue, Needham, against the Utica Mutual Insurance Company “Utica”). The Court’s ruling found that Utica had a duty to defend a suit by another insurance agency alleging unfair competition and interference with economic opportunities.
California competitor’s suit for unfair competition and negligent interference with prospective economic advantage in placing insurance policies
CRES Insurance Services, LLC (“CRES”) was a competitor of the Landy Agency in the California real estate E&O liability program market. CRES wrote its program in California on admitted paper, but the Landy Agency wrote its program with excess and surplus carriers.
CRES sued the Landy Agency in the California Superior Court for Orange County seeking injunctive relief prohibiting the Landy Agency from continuing to violate California surplus lines insurance laws, restitution for financial losses from unfair competition, and disgorgement of “ill-gained” profits.
Competing agency alleged The Landy Agency illegally offered surplus lines policies and did not exercise reasonable care in soliciting and placing surplus line policies
CRES alleged in its complaint that California law, similar to Massachusetts law, divided the insurance market between “admitted” and “surplus” insurers.
Similar to Massachusetts, California permits an insurance broker to offer surplus line policies only in the circumstances when there is no reasonable admitted market for that policy with admitted carriers. CRES’ allegation in Count One of its complaint was that the Landy Agency had illegally offered surplus lines policies despite the adequacy of the admitted markets, to wit CRES’ offerings.
CRES alleged based on these facts that it had a claim for statutory violations alleging that the Landy’s agency’s violation of the state insurance code with regard to placing surplus lines policies constituted “unfair business practices” and, therefore, unfair competition.
The second claim made by CRES was that the Landy Agency negligently interfered with CRES’ perspective economic advantage in placing real estate professional liability policies. Specifically, CRES asserted that the Landy Agency “failed to act with reasonable care,” including “in the solicitation and placement of [insurance policies].”
In support of its claims, CRES alleged that the Landy Agency had “failed to conduct a diligent search of the admitted market, filed falsified documentation relating to the search, and evaded scrutiny … by failing to file required period statements.”
Utica reserves its rights, defends, and sues the Landy Agency seeking a declaratory judgment that there is no coverage for CRES’ suit
The Landy Agency demanded that Utica defend the agency in CRES’ lawsuit, under the terms of the policy it had with the insurer. In turn, Utica agreed to defend the agency under a full reservation of rights, but filed an action in the United States District Court for Massachusetts seeking a declaration that there was no coverage under the policy and that the negligence claim did not trigger its duty to defend.
The policy at issue provided coverage for suits “arising from Landy’s errors and omissions in ‘rendering or failing to render professional services’ as an insurance broker or insurance agent.” Utica asserted as a general proposition that a suit by a competitor regarding the Landy Agency’s business practices did not fall within this insuring agreement.
In response, the Landy Agency conceded that for the unfair competition claim that CRES brought, it had no coverage under the policy and Utica had no duty to defend that claim in and of itself.
However, the parties understood that if the second count relating to negligence triggered the duty to defend then, under Massachusetts law, Utica had the responsibility for defending the entire lawsuit as well as for paying the Landy’s Agency’s attorney’s fees and costs in defending the declaratory judgment and establishing Utica’s duty to defend.
The policy excludes “unfair competition of any type…”
The main issues dividing the parties related to whether a claim alleging “Negligent Interference with Prospective Economic Advantage” by a competitor was a claim essentially involving unfair competition and, thereby, excluded under the policy.
Utica took the position in the court that in essence the CRES claim was a claim of negligent unfair competition and that unfair competition of any type encompassed not only the statutory claim of CRES, but also the claim that the Landy Agency negligently and unfairly competed with CRES by interfering with its potential economic advantages in selling non-admitted surplus lines policies without following the strictures of the California Surplus Lines Law.
The Landy Agency, for its part said that under a Massachusetts insurance contract, Massachusetts law applied. As such, under Massachusetts law, “unfair competition” would encompass only conduct that misleads consumers. The Landy Agency argued that CRES’ complaint included no allegation of consumer confusion. The agency further argued that the exclusion for unfair competition did not apply to negligent performance of professional services “even if that negligence also harmed a business competitor.”
The Landy Agency ultimately prevailed in the United States District Court on cross-motions for summary judgment. Utica then appealed to United States Court of Appeals for the First Circuit.
Federal Appeals Court rules the CRES suits allegations dealt with acts that required “knowledge and skills particular to the insurance profession”
On appeal, the First Circuit reviewed the summary judgment decision against Utica de novo, meaning the Appellate Court gave the underlying United States District Court decision no legal weight and reviewed the summary judgment motion anew.
In its decision, the Appellate Court stated the “touchstone for professional service coverage is whether the alleged wrongful act or omission is inherent in the practice of the profession.”
Based on that interpretation, the Court found that CRES’ complaint could reasonably be construed to “sketch a professional liability claim, and it is therefore covered by the policy.”
The Court went on to state that the negligence count alleged that Landy “failed to act with reasonable care in the solicitation and placement [of insurance policies]” and that Landy “failed to conduct a diligent search of the admitted market, filed falsified documentation relating to the search and evaded scrutiny … by failing to file required statements.”
The Court went on to explain that these activities — soliciting and placing insurance policies, searching the admitted market, and filing related documentation — are part of the professional activity of an insurance agent or broker.
The Court held that, generally speaking, only insurance professionals solicit and place insurance policies and conduct due diligence into the admitted insurance market. Therefore, the Court reasoned that the solicitation and placement of insurance policies and research of the admitted insurance market, “required knowledge and skills particular to the insurance profession.”
Based on that conclusion, the Court found that the negligence claim fell within the insuring agreement of Utica’s policy.
Negligent solicitation and placement of insurance policies and failure to conduct due diligence into the admitted insurance market were professional services
The Court also found the counter-arguments made by Utica, that the labels in the complaint, i.e. “negligence” and “reasonable care,” should not apply and instead that the Court should look to the fact that CRES’ complaint was against the Landy’s Agency’s unfit business practices, not its professional negligence.
The Court agreed that the labels were not controlling, but held that some professional decisions affect business practices and, therefore, the categories of professional activities and business activities were not mutually exclusive. The Court therefore determined that the Landy Agency’s:
…allegedly unfair business practices derive from errors in the performance of professional services: negligent solicitation and placement of insurance policies and failure to conduct due diligence into the admitted insurance market.
The Court was also not impressed by Utica’s argument that an unpublished District Court opinion holding that professional liability insurance does not cover claims by competitors “at all”, made the Landy Agency’s claim untenable.
The Court distinguished the case by pointing out that “while professional liability policies often do not cover competitors’ suits alleging a negligent business decision, the reason is that the alleged wrongful act is not inherent in the practice of the profession, not that the suit was brought by a competitor.”
The Court made the definite statement “the gauge is the nature of the act, not the identity of the parties.”
Court finds that “arising out of” language allows coverage in E&O policy for lawsuit not alleging breach of professional obligations
In response to Utica’s final argument that the Landy Agency had not breached any professional’s duties owed to CRES, the Court held that professional liability coverage is not necessarily restricted to lawsuits based on allegations of breach of professional duty to the plaintiff.” The Court focused on the fact that the policy covers losses:
aris[ing] out of ‘wrongful acts’ … in rendering or failing to render professional services.
The Court held, as many courts before it have, that the term “arising out of” under Massachusetts law must be read expansively and suggests “but for” causation meaning without the particular act there would have been no claim.
The Court ended by finding that the policy applied where CRES alleged injuries actually caused by Landy’s wrongful performance of professional services. Moreover, it concluded that CRES need not have alleged any breach of professional duties owed to CRES itself in order for the Landy Agency to have the professional liability policy apply to the claim.
Term “of any type” in exclusion for unfair competition does not broaden exclusion
In the final portion of the decision, the Court interpreted the policy exclusion for “unfair competition of any type,” and found that Utica Mutual had not met its burden to establish the exclusion applied, as required under Massachusetts.
Utica argued that the words “any type” expanded the phrase “unfair competition” to encompass CRES’ negligence claim even though the claim had not alleged consumer confusion.
The Court disagreed and held that reading the policy naturally, the phrase “any type” refers to the noun it modifies. In other words, the use of the phrase, “any type”, meant any type of unfair competition and not an expansion of the term beyond what is commonly held to be unfair competition under Massachusetts law.
As a result of the decision, Utica Mutual will have to pay the $82,000.00 in costs, thus far agreed to in the case. As for the underlying case known as, CRES vs. Herbert H. Landy Agency, et al., it was settled while the instant case was pending on appeal. Thus, the terms were not clear beyond the obligation of Utica Mutual to pay the costs of defense and the costs of defending and prevailing on a declaratory judgment action.