D&O Policy’s Professional Services Exclusion Does not Bar Coverage for False Claims Act Settlement

The Delaware Supreme Court has held that a professional services exclusion in a D&O policy does not bar coverage for a False Claims Act settlement. ACE Am. Ins. Co. v. Guaranteed Rate, Inc., 2023 WL 5965619 (Del. Sept. 14, 2023). 

In 2017, a former employee of the insured mortgage loan company brought a qui tam action against the company alleging that the company had falsely certified loans to the government that it endorsed as eligible for government insurance in violation of the False Claims Act. In 2019, the U.S. Department of Justice initiated an investigation into the company’s alleged failure to meet applicable quality-control standards in its process for underwriting mortgage loans. The insured and the federal government reached a $15 million settlement. The insured sought coverage for the defense costs associated with the government investigation and the qui tam action and also sought coverage for the settlement under its D&O insurance policy. The insurer denied coverage under the policy’s professional services exclusion. The insured filed an action for declaratory judgment, and the parties cross-moved for judgment on the pleadings. The superior court granted the insured’s motion, and the insurer appealed.

The Supreme Court of Delaware affirmed. According to the court, the professional services exclusion – which precludes coverage for any claim “alleging, based upon, arising out of, or attributable to any Insured’s rendering or failure to render professional services” – did not apply because the insured’s acts of non-compliance with quality-control standards did not constitute “professional services.” Rather, the court observed, the insured’s business was underwriting and issuing loans to borrowers. The court rejected the insurer’s argument that the exclusion’s broad prefatory language (“arising out of”) dictated a different result, noting that no causal connection existed between the failure to perform professional services and the damages alleged by the government: “In a technical sense, without [insured’s] underwriting conduct, some of the certifications would not be false. But a meaningful linkage is absent given the difference between the subject of FCA claims—false certifications—and the underlying conduct used to demonstrate the falsity of the claims—underwriting loans.” The court reasoned that the insurer’s interpretation of the prefatory language would extend the exclusion to “just about anything remotely connected” to the insured’s professional services. The court, however affirmed summary judgment for the carrier on the insured’s bad faith claim, concluding that the insurer “had reasonable justification in denying coverage based on the professional services exclusion.”