The Delaware Superior Court has held that a professional services exclusion and a contract exclusion in a D&O policy do not bar coverage for a False Claims Act settlement. Guaranteed Rate, Inc. v. ACE Am. Ins. Co., 2022 WL 4088596 (Del. Super. Ct. Aug. 24, 2022). The court also held that the insurer had failed to show the amount of the settlement was unreasonable. However, the court dismissed the insured’s bad faith claim.
The U.S. Department of Justice and the U.S. Attorney’s Office for the Northern District of New York initiated an investigation into a mortgage loan company for alleged violations of the False Claims Act. The investigation alleged that the company failed to meet applicable quality-control standards in its underwriting process. The company and the federal government reached a $15 million settlement. Days after the settlement, an employment retaliation claim against the company was unsealed. The underwriter sought coverage for the settlement under the D&O and EPL coverages of its insurance policy. The insurer denied coverage. After the company sued, the parties cross-moved for summary judgment.
The court held that the settlement was covered under policy’s D&O coverage part. It first examined whether the policy’s professional services exclusion applied. The court found that the exclusion did not apply because the company owed a duty to meet certain quality control standards to the government, not the mortgage borrowers, so the complaint did not arise out of the underwriter’s professional services only offered to mortgage borrowers. Next, the court found that the policy’s contract exclusion did not apply because, even assuming a contractual relationship existed between the underwriter and the federal government, the investigation was not based on a breach of contract.
The court rejected the insured company’s contention that the EPL insuring agreement (which carried a lower retention) afforded coverage. The company claimed that it entered into the settlement agreement based on the belief that the agreement would also release it from any retaliation claims by the whistleblower who instigated the investigation. However, the settlement agreement made no mention of the retaliation claim, and the claim was not unsealed until after the settlement was reached.
The court found that the settlement was presumptively reasonable. The court noted that the company had sought its insurer’s consent and appeared to credit the company’s arguments that the insurer denied coverage. The court further held that the insurer failed to raise a fact question as to the amount of the settlement, the company’s methodology for reaching the settlement, or any suggestion of collusion between the company and the government. However, the court dismissed the bad faith claims because the insurer had a reasonable basis to deny coverage at the time that it did so.
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