Regulatory Action Sublimit Unambiguously Applies to State Disciplinary Proceeding Against Life Insurance Agent

Applying California law, a federal district court has held that a disciplinary proceeding initiated by a state insurance department against an insured life insurance agent is unambiguously subject to a regulatory action sublimit of liability.  Cerf v. Cont’l Cas. Co., Case No. 17-cv-07993-DSF-SS (C.D. Cal. Mar. 13, 2018).  Wiley Rein represented the insurer in this case.

The California Department of Insurance initiated a disciplinary proceeding against the insured agent alleging that he had perpetrated a “churning” scheme involving several clients by advising them to purchase new annuities and to incur excessive “surrender” fees in doing so, all so he could earn more commissions.  The agent’s professional liability insurer agreed to provide coverage for the matter pursuant to the subject policy’s “Regulatory Action Endorsement,” which applied to any claims brought by “any governmental . . .  official or agency, including but not limited to any state or federal securities or insurance commission or agency.”  Pursuant to the endorsement’s sublimit of liability, the insurer advised that the maximum amount of defense and indemnity coverage available for the disciplinary proceeding would be $25,000.  The agent filed coverage litigation, alleging that the insurer had breached the policy, acted in “bad faith,” and violated California’s Unfair Competition Law by limiting its coverage to $25,000.

In granting the insurer’s motion to dismiss, the court agreed that the disciplinary proceeding was subject to the policy’s “Regulatory Action Endorsement,” which unambiguously provided a $25,000 maximum sublimit of liability.  The court rejected the agent’s argument that his defense costs were not subject to the sublimit, and also disagreed with the agent’s contention that he should be entitled to a separate $25,000 for each of the six clients implicated in the alleged churning scheme.  The court also rejected the agent’s argument that the insurer had waived its right to rely on the regulatory action sublimit, observing that the insurer’s correspondence (which was referred to in the complaint and therefore appropriately considered for purposes of the motion to dismiss) clearly placed the agent on notice of the insurer’s coverage position and did not contain anything that amounted to a waiver.