A Louisiana federal court has held that settlement of a False Claims Act investigation did not trigger the insuring agreement of a bankers professional liability policy because the claim was not made by a third-party client for acts in rendering or failing to render professional services. Iberiabank Corp. v. Ill. Union Ins. Co., 2019 WL 585288 (E.D. La. Feb. 13, 2019).
A bank underwrote home mortgage loans that were insured by the Federal Housing Administration (FHA), an agency within the Department of Housing and Urban Development (HUD). When underwriting these loans, the bank certified to HUD that the mortgagor represented an acceptable credit risk pursuant to federal guidelines. Whistleblowers filed a lawsuit alleging that the bank violated the False Claims Act by making false and fraudulent claims for approval in connection with its acquisition of FHA insurance. Thereafter, HUD and the U.S. Department of Justice (DOJ) commenced an investigation against the bank.
After settling the government investigation and whistleblower suit, the bank sought coverage from its E&O insurers. The insuring agreement of the policies afforded coverage only for claims first made by a third-party client of the insured for wrongful acts in rendering or failing to render “Professional Services,” defined to include “services” performed for third-party clients. The insurers denied coverage, asserting that the insuring agreement was not triggered.
In the ensuing coverage litigation, the court granted the insurers’ motion to dismiss. The court first held that HUD was not a “third-party client” of the bank. The court observed that the bank’s clients were the individual borrowers who sought services from the bank. As the court noted, the bank was not accused of committing wrongdoing in the course of providing services to its customers, but rather in connection with its submission of information to HUD.
Second, the court held that the underlying claims were not for “Professional Services” as required by the policies. Citing various federal appellate cases, the court reasoned that while the bank’s “underwriting services provided to its borrowers might well fall within the ‘professional services’ contemplated by the [policies], the false certifications the bank made to the government – the crux of the [underlying claim] – do not.”