Wednesday, March 6, 2019
Majority Says California Statute Barring Coverage for ‘Willful Act’ Doesn’t Preclude Action for Defense, Indemnity Where Insureds Paid $1.5 to Compensate Homeowners
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals—-for the second time—yesterday reversed a District Court determination that The Hartford Casualty Insurance Co. has no duty to defend and indemnify its insureds in connection with an action over illegal business practices that resulted in a $1.5 million settlement.
The insureds are First One Lending Corporation and its CEO, John Vescera. Claims under their policy stem from an action brought against them in 2012 by the Neighborhood Assistance Corporation of America (“NACA”) in 2012 seeking restitution of amounts paid by California homeowners for unlawful mortgage modification services.
Alleging that First One and Vescera falsely represented to homeowners that their outfit was affiliated with NACA—including using its “Save-the-Dream” theme and its slogan, “Helping Homeowners to Save Their Dream”—the action was brought under the Lanham Act and common law unfair competition. The Lanham Act prohibits trademark infringement, trademark dilution, and false advertising.
It was asserted that First One impermissibly charged for services which NACA provides at no cost. The complaint alleged:
“The purpose of defendants’ numerous misrepresentations, including misrepresentations about First One’s affiliation with NACA, is to gain the confidence of consumers so that defendants can accomplish their goal: taking hard-earned money from vulnerable homeowners who can ill afford to squander the $1,450 to $1,850 typically charged by First One for its purported services.”
District Court Judge Andrew J. Guilford of the Central District of California on March 13, 2017, granted summary judgment to Hartford, explaining:
“Plaintiffs’ conduct of charging upfront fees for mortgage modification services, which is alleged in NACA’s complaint, is illegal in California….Under Section 533 of California’s Insurance Code, ‘[a]n insurer is not liable for a loss caused by the willful act of the insured.’…The California supreme court has interpreted that section to mean insurers aren’t liable for inherently harmful acts.”
He went on to say:
“Plaintiffs’ inherently harmful acts of illegally charging up-front fees to homeowners seeking mortgage advice, which were the basis of NACA’s lawsuit, are uninsurable under California law.”
“Plaintiffs’ remaining claims all fail because they depend upon the premise that Hartford owed policy benefits to Plaintiffs.”
Points to Exclusion
The judge also pointed to an exclusion in the policy for injuries “resulting from the rendering of or the failure to render financial services by any insured to others,” and said:
“[S]ince the Policy excludes injuries caused by the very activities Plaintiffs allegedly performed, Hartford is entitled to summary judgment as a matter of law.”
Guilford previously granted summary judgment to Hartford on Aug. 12, 2014 on the ground that the complaint sought restitution of ill-gotten gains which, under California law, is not coverable by insurance. The Ninth Circuit reversed on Oct. 20, 2016, saying that compensatory damages had not been waived and “the underlying action potentially sought damages covered by the policy.”
Yesterday’s reversal came in a memorandum opinion signed by Senior Circuit Judge Diarmuid F. O’Scannlain and by District Court Judge Matthew F. Kennelly of the Northern District of Illinois, sitting by designation. Circuit Judge Sandra Ikuta dissented.
The memorandum opinion declares that Guilford erred in granting summary judgment based on §533, explaining:
“Because at least the Lanham Act trademark infringement claim in the underlying complaint against the appellants did not require a showing of willfulness within the ambit of section 533 to impose liability, there was a sufficient ‘potential for liability’ to trigger the insurer’s broad duty to defend under California law.”
The majority disagreed with Guilford that other claims were linked to the illegal acts.
The opinion also says that the exclusion Guilford pointed to “does not capture all the claims in the underlying complaint because at least some of those claims bore an insufficient causal nexus with financial services.”
“[E]ach claim in the underlying complaint was inseparably intertwined with willful conduct….Based on the allegations in the underlying complaint, any conduct on the part of the defendants that could be characterized as merely negligent standing alone was ‘so closely related to intentional misconduct as to be inseparable from it.’…Therefore, the entire action was uninsurable under Cal. Ins. Code § 533.”
“[A]s an element of its trademark infringement and unfair competition claims, NACA alleged reputational harm and loss of goodwill that were caused by the defendants’ false claims of association with NACA in conjunction with their failure to render (or negligent rendering of) the advertised financial services. Because the policy’s financial services exclusion precluded coverage for injuries resulting from “the rendering of or the failure to render financial services” to others, these claims were not covered by the policy.”
The case is First One Lending Corp. v. Hartford Casualty Insurance Co., 17-55492.
Vescera, of Dana Point, Calif., on May 3, 2016, pled guilty in U.S. District Court for the District of Connecticut to false advertising and misusing a government seal in connection with mortgage modification services. He was sentenced on Sept. 27, 2016, to a year and a day in prison.
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