APRIL 2003
by James E. Scheuermann and Brian S. Rudick
As putative class action claims continue to plague the residential mortgage lending industry, a recent decision by a Maryland federal district court in Hartford Casualty Insurance Co. v. Chase Title, Inc.
highlights the potential insurance coverage available for corporate policyholders facing such claims.
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BACKGROUND
Chase Title, Inc. (“Chase”), along with other defendants, was sued in the Superior Court for the District of
Columbia in a class action arising out of alleged deceptive settlement practices on home mortgage loans. The class action complaint contained five counts alleging violations of the District of Columbia Consumer
Protection Procedures Act (“CPPA”) and the Real Estate Settlement Procedures Act (“RESPA”), as well as common law claims for conversion, breach of fiduciary duty and negligence.
Chase’s errors and omissions (“E&O”) insurer, Hartford Casualty Insurance Company (“Hartford”), filed a declaratory judgment against Chase in the United States District Court for the District of Maryland seeking a declaration of no defense or indemnity coverage for the allegations asserted against Chase in the class action.
Both Chase and Hartford moved for summary judgment.
THE E&O POLICY AT ISSUE
Like many E&O policies, Chase’s E&O policy provided that:
1. [Hartford] will pay on behalf of [Chase] all sums which [Chase] shall become legally obligated to pay as “damages” and “claim expenses” because of a “wrongful act” to which this policy applies.
2. [Hartford] will have the right and duty to defend any claim or suit seeking damages in 1. above.
1 The Chase Title decision (No. CIV. JFM-02-3017, __ F. Supp. 2d__, 2003 WL 721931 (D. Md. Feb. 25,
2003)) represents the most recent judicial decision affording coverage for alleged violations of RESPA.
Other courts also have found coverage to exist under E&O policies for alleged violations of RESPA. See
Beyer v. Heritage Realty, Inc.
, 251 F.3d 1155, 1157-58 (7th Cir. 2001) (finding coverage for alleged unintentional violations of RESPA and rejecting insurer’s argument that such unintentional RESPA violations were excluded because they constituted violations of “deceptive trade practice law” within the meaning of a
“price fixing” exclusion contained in a real estate agents and brokers program professional liability policy);
Nowacki v. Federated Realty Group, Inc.
, 36 F. Supp. 2d 1099, 1109 (E.D. Wis. 1999) (holding that insurer owed a duty to defend broker for alleged RESPA violations).
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The policy went on to define “wrongful acts,” in pertinent part, as follows: any error, misstatement, misleading statement, act or omission, neglect, or breach of the duty actually or allegedly committed or attempted by any insured or by any person for whose conduct the insured is legally responsible in rendering or failure to render “covered services.”
Finally, the policy defined “damages,” in pertinent part, as follows:
9. “Damages” means compensatory “damages” which the insured becomes legally obligated to pay. “Damages” does not include:
. . .
(b) Disputes over fees, commissions, deposits, premiums or charges made for services rendered or which should have been rendered.
Analyzing this policy language, the Chase court concluded that Hartford had a duty to defend Chase for all suits involving the specified “wrongful acts” but that Hartford was not obligated to defend Chase in lawsuits involving “disputes over fees . . . for services rendered or which should have been rendered.” The principal issue in the coverage dispute was whether the class action was exclusively a dispute over fees.
THE CLASS ACTION WAS NOT EXCLUSIVELY A DISPUTE OVER FEES
The Chase court found that the “primary thrust” of the class action complaint filed against Chase involved a dispute over fees which was not covered under Chase’s E&O policy. The court held, however, that some of the counts in the class action complaint involved potentially more than a dispute over fees. Specifically, the court observed that the complaint included CPPA allegations that the defendants:
1. misrepresented that the HUD-1 settlement statement was accurate;
2. misrepresented that the disbursements would be made according to the HUD-1 settlement statements;
3. offered real estate settlement services to borrowers without the intent to provide them as offered; and
4. violated other statutes designed to protect the interests of the borrowers, such as RESPA.
The court also recognized that another count of the complaint also may involve more than a fee dispute, including the allegations that the defendants were negligent by breaching their duties to:
1. provide the plaintiffs with HUD-1 settlement statements that accurately detail the charges assessed against the borrowers, the actual services performed and the identities of all payees;
2. comply with RESPA; and
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3. make settlement disbursements as reflected in the HUD-1 settlement statement.
Applying well-recognized principles of contract interpretation that (1) an insurer must defend the entire action if any one or more of the claims is potentially within the coverage of the policy and (2) any doubt about the potential for coverage must be resolved in favor of the policyholder, the court found that Hartford had a duty to defend Chase. Because the court found that at least some of the class action allegations were potentially covered by the policy, Hartford had a duty to defend the entire class action.
2 While the court apparently did not find that the fee dispute allegations in the RESPA count itself potentially were covered, the court did find that the allegations contained in a separate count that Chase was negligent in breaching its duty to comply with RESPA potentially were covered.
CONCLUSION
Corporate policyholders who have been sued for alleged RESPA violations or related statutory and common law claims should carefully review both the allegations of the complaint and all of their potentially applicable insurance policies in order to assess the availability of insurance coverage.
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If you have any questions about this Alert, please contact James E. Scheuermann (412/355-6215),
Brian S. Rudick (412/355-6290) of our Insurance Coverage Practice Group (visit http://www.kl.com/ practices/practices_detail.asp?id=000002086003 ), or any member of the Mortgage Banking Group listed on the following page (visit http://www.kl.com/practices/practices_detail.asp?id=000002095003 ).
2 Because the issues in the underlying class action had not been resolved, the court found it premature to determine whether Hartford was required to indemnify Chase for any losses stemming from the class action.
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Kirkpatrick & Lockhart LLP was founded in 1946, and, with more than 650 lawyers, is one of the 50 largest law firms in the United States. K&L attorneys are based in ten offices in key U.S. cities—Boston, Dallas, Harrisburg, Los
Angeles, Miami, Newark, New York, Pittsburgh, San Francisco, and Washington. Our firm represents a broad range of clients in a wide variety of matters, including corporate and securities, e-commerce, investment management, insurance coverage, financial institutions, mortgage banking and consumer finance, creditors’ rights, intellectual property, tax, labor, environmental, antitrust, health care, and government contracts. More than half our attorneys are litigators. We litigate class actions on a range of financial issues, generally defending financial institutions, brokerdealers, public companies, and investment companies and their officers and directors against claims of violations of securities laws, consumer credit laws, and common law tort and contract claims. You can learn more about our firm by visiting our Internet website at www.kl.com.
The Mortgage Banking/Consumer Finance Group provides legal advice and licensing services to the consumer lending industry. We counsel clients engaged in the full range of mortgage banking activities, including the origination, processing, underwriting, closing, funding, insuring, selling, and servicing of residential mortgage loans and consumer loans, from both a transactional and regulatory compliance perspective. Our focus includes both first- and subordinatelien residential mortgage loans, as well as open-end home equity, property improvement loans and other forms of consumer loans. We also have experience in multi-family and commercial mortgage loans. Our clients include mortgage companies, depository institutions, consumer finance companies, investment bankers, insurance companies, real estate agencies, homebuilders, and venture capital funds. Members of the Mortgage Banking/Consumer Finance
Group and their telephone numbers and e-mail addresses are listed below:
ATTORNEYS
Laurence E. Platt 202.778.9034 lplatt@kl.com
Phillip L. Schulman 202.778.9027 pschulman@kl.com
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Melanie Hibbs Brody 202.778.9203 mbrody@kl.com
Steven M. Kaplan
Irene C. Freidel
202.778.9204 skaplan@kl.com
617.261.3115 ifreidel@kl.com
Jonathan Jaffe 415.249.1023 jjaffe@kl.com
R. Bruce Allensworth 617.261.3119 ballensworth@kl.com
Daniel J. Tobin 202.778.9074 dtobin@kl.com
Anthony P. La Rocco 973.848.4014 alarocco@kl.com
David L. Beam
Emily J. Booth
202.778.9026 dbeam@kl.com
202.778.9112 ebooth@kl.com
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Laura A. Johnson
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202.778.9249 laura.johnson@kl.com
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Sam A. Ozeck
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Marguerite T. Frampton 202.778.9253 mframpton@kl.com
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Kanasha Scott
Heidi M. Evans
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