The U.S. Court of Appeals for the Fifth Circuit recently held that the U.S. Department of Housing and Urban Development ("HUD") is not a Direct Endorsement Lender's "client" because HUD did not pay the Lender for its services, and therefore that HUD was not covered by the Direct Endorsement Lender's professional liability insurance.
A copy of the opinion is available at: Link to Opinion
Various whistleblowers ("Whistleblowers") of a mortgage lender ("Lender") brought a qui tam action on behalf of the United States against the Lender alleging the Lender violated the False Claims Act ("FCA") during the Lenders participation in the Direct Endorsement Program ("DE Program").
Under the DE Program, Endorsement Lenders ("DE Lenders") submit a formal certification to HUD that they have used HUD's mortgage underwriting standards and guidelines when approving home loans. The FHA then insures the DE Lenders in the event the insured borrower defaults.
Here, the Lender was a DE Lender and as a result collected its customary fees from borrowers as compensation for originating the loans.
The Whistleblowers alleged that the Lender was non-complaint with HUD's underwriting requirements and as a result, the Lender supposedly caused the FHA to pay insurance claims that it would not have paid if the Lender had conducted appropriate underwriting due diligence.
The Department of Justice and the Lender entered into a Settlement Agreement ("DOJ Settlement") whereby the Lender agreed to pay $11,692,149. The Lender acknowledge that it did not comply with HUD's requirements but did not acknowledge liability and "reserve[d] the right to contest the use or application of [the Settlement Agreement] in any future litigation."
After the DOJ Settlement, the Lender submitted a claim under its professional liability insurance, both with its primary insurer and excess insurer, together ("the Insurers"). The Insurers denied coverage.
Both of the Insurers' polices adopted the relevant language:
"The Insurer shall pay on behalf of the Insureds Loss which the Insureds become legally obligated to pay by reason of any Claim first made by a third party client of the Company against the Insureds during the Policy Period or any applicable Discovery Period for any Wrongful Acts in rendering or failing to render Professional Services, if such Wrongful Acts take place prior to the end of the Policy Period."
The Policies define "Professional Services" as "[s]ervices performed by or on behalf of [Lender] for a policyholder or third party client of [Lender]. The Professional Services must be performed pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of [Lender].
Lender sued the Insurers for breach of contract arguing that Lender provided "Professional Services" to HUD when it underwrote mortgages as a DE Lender and that the government (acting as Lenders "third party client") claimed Lenders committed wrongful acts when rendering those services, bringing the DOJ Settlement within the Policies' Insuring Clause.
The Insurers moved to dismiss, arguing that (1) the DOJ Settlement does not relate to "Professional Services" provided by Lender, and (2) the government is not Lenders "client."
The trial court held that the government is not a "client" of Lender, concluding that Lender's clients were the mortgagees who borrowed money from Lender, not the government. Lender appealed.
The Fifth Circuit noted "[w]ords and phrases used in an insurance policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning." Cadwallader, 848 So. 2d at 580, and that the burden rests with the insured to prove that an insurance policy covers a particular claim, Jones v. Estate of Santiago, 870 So. 2d 1002, 1010 (La. 2004).
The Lender argued that (1) the trial court's reliance on the Black's Law Dictionary definition of "client" was incomplete; (2) both borrowers and the government can be Lenders "clients"; (3) payment of consideration is not necessary for the government to become a "client"; and (4) Louisiana's "reasonable expectations" doctrine should apply to bring Lender's claim within the scope of the Policies.
The Insurers responded that (1) the Black's Law Dictionary definition of "client" provides sufficient guidance regarding the plain and ordinary meaning of the term; (2) Lender cannot claim that HUD is its "client" for purposes of the Insuring Clause and that its borrowers are its "client" for purposes of determining to whom it provides "Professional Services"; (3) the Insuring Clause, by incorporating the definition of "Professional Services," explicitly requires that the insured services be provided to a client who pays consideration to Lender under written contract; and (4) the "reasonable expectations" doctrine is inapplicable because the policy is unambiguous.
The Fifth Circuit reviewed the Black's Law Dictionary definition of a "client" but ultimately looked to plain language of the policies noting that "the definition of 'Professional Services' makes clear that, to be insurable, services rendered by [Lender] must be rendered to a 'policyholder or client for consideration' and 'pursuant to a written contract.'" Therefore, HUD cannot be a "client" because the certifications were not provided "for consideration" as HUD did not pay Lender to provide the certifications.
The Fifth Circuit also noted the Lender cannot rely on Louisiana's "reasonable expectations" doctrine where "[a]mbiguity will . . . be resolved by ascertaining how a reasonable insurance policy purchaser would construe the clause at the time the insurance contract was entered." La. Ins. Guar. Ass'n, 630 So. 2d at 764, because that doctrine does not apply when "the policy wording at issue is clear and unambiguously expresses the parties' intent," as it does here.7 Id.
Accordingly, the Fifth Circuit held that HUD is not Lender's "client" and did not become Lenders "client" as a result of the DE Program and therefore, the Lender's DOJ Settlement claim is not covered by the Policies, affirming the trial court's order granting the Insurers' motions to dismiss.
Ralph T. Wutscher
Maurice Wutscher LLP
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