Utica Mutual Insurance v. Herbert H. Landy Insurance Agency, Inc. ( 2016 )

United States Court of Appeals
For the First Circuit
No. 15-1220
UTICA MUTUAL INSURANCE COMPANY,
Plaintiff, Appellant,
v.
HERBERT H. LANDY INSURANCE AGENCY, INC.,
Defendant, Appellee,
CRES INSURANCE SERVICES, LLC,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Indira Talwani, U.S. District Judge]
Before
Howard, Chief Judge,
Lynch and Lipez, Circuit Judges.
Erin K. Higgins, with whom Russell F. Conn, Katherine A.
Kelter, and Conn Kavanaugh Rosenthal Peisch & Ford LLP were on
brief, for appellant.
John A.K. Grunert, with whom Goganian & Associates, P.C. was
on brief, for appellee.
April 19, 2016
HOWARD, Chief Judge. Utica Mutual Insurance Company
("Utica") appeals from a summary judgment order requiring it to
defend its insured Herbert H. Landy Insurance Agency ("Landy") in
a California state court lawsuit. Agreeing with the district court
that Utica is obligated to defend Landy under its professional
liability insurance policy, we affirm.
I. Background
Landy and Utica each are insurance companies. Landy
provides insurance to real estate professionals, and Utica insured
Landy under a professional liability insurance policy. This
policy, which the parties agree is governed by Massachusetts law,
contains a "duty to defend" obligation that required Utica to
defend Landy in certain lawsuits arising from errors and omissions
in Landy's provision of professional services as an insurance
broker and agent.
Landy alleges that Utica's duty to defend was triggered
when Landy was sued by CRES Insurance Services, LLC ("CRES"). CRES
is a competitor of Landy in the California real estate professional
liability insurance market. CRES sued Landy in California state
court, alleging that Landy had engaged in unfair business practices
in violation of California state law.1
1 The underlying action is CRES Ins. Servs. LLC v. Sun Coast
Gen. Ins. Agency, Inc., Herbert H. Landy Ins. Agency, Inc.,
Alexander Anthony Ins., LLC, d/b/a Alexander Anthony Ins. Agency,
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Specifically, CRES alleged that California law divides
the relevant insurance market between "admitted" and "surplus"
insurers. See generally Cal. Ins. Code § 1763; Cal. Code Regs.
tit. 10, §§ 2131-2140; 39 Cal. Jur. 3d Insurance Companies § 227.2
According to CRES's complaint, admitted insurers generally charge
higher premiums than surplus insurers. Nevertheless, California
law favors the admitted insurers. See Cal. Code Regs. tit. 10, §
2132(a). California permits an insurance broker to offer a surplus
insurer's policy only in limited circumstances when the admitted
pool is deemed inadequate. See Cal. Ins. Code § 1763(a); Cal.
Code Regs. tit. 10, § 2132(b). CRES alleged that Landy improperly
offered surplus insurers' policies despite the adequacy of the
admitted market.
Based on these facts, CRES asserted two causes of action.
CRES's first claim was a statutory claim alleging that Landy's
violation of the state insurance code constituted unfair business
practices. See Cal. Bus. & Prof. Code § 17200, et seq.
CRES's second claim was for negligence, alleging that
Landy's conduct negligently interfered with CRES's prospective
LLC, and Does 1 to 100, No. 30–2009–00332596–CU–BT–CJC, (Cal. Sup.
Ct., Orange Cty.). This action has since settled.
2 "Admitted" insurers are those admitted to do business in
California by the state insurance commissioner. See Cal. Ins.
Code § 700. "Surplus" insurers, also known as nonadmitted
insurers, are those that are not so admitted and are subject to
restrictions on their ability to provide insurance in California.
See Cal. Ins. Code §§ 25, 1763.
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economic advantage. Specifically, CRES asserted that Landy
"failed to act with reasonable care," including "in the
solicitation and placement of [insurance policies]." It further
alleged that Landy "failed to conduct a diligent search of the
admitted market, filed falsified documentation relating to the
search, and evaded scrutiny . . . by failing to file required
statements."
Landy demanded that Utica defend it in the CRES lawsuit
under the policy. In response, Utica filed this action in
Massachusetts federal district court, seeking a declaration that
CRES's negligence claim did not trigger its duty to defend.3
The parties dispute the meaning of two policy
provisions. First, the policy covers only suits arising from
Landy's errors or omissions in "rendering or failing to render
professional services" as an insurance broker or insurance agent.4
3
Landy concedes that CRES's statutory claim does not trigger
the duty to defend. And Utica does not contest that if CRES's
negligence claim triggers the duty to defend, then Utica is
responsible for defending the entire CRES lawsuit, as well as for
paying Landy's attorney fees and costs in this action.
4 Specifically, the policy provides that in order to trigger
Utica's duty to defend, Landy's
"loss" must arise out of "wrongful acts"
committed in the conduct of the insured's
business, wherever committed or alleged to
have been committed, by the insured or any
person for whose "wrongful acts" the insured
is legally liable in rendering or failing to
render professional services as:
(1) A General Insurance Agent;
(2) An Insurance Broker;
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It does not provide comprehensive liability insurance. Utica
argues that CRES's negligence claim did not arise from alleged
errors in Landy's professional insurance services, but rather from
Landy's allegedly unfair business practices. Landy's position is
that the two are not mutually exclusive: Landy's allegedly unfair
business practices were committed in the course of providing
allegedly negligent professional insurance services.
Second, the policy expressly excludes coverage for
"unfair competition of any type." The policy also contains an
exclusion for intentional misconduct.5 Utica argues that, in order
(3) An Insurance Agent;
(4) An Insurance Consultant;
(5) A Managing, Master, or Brokerage General
Agent;
. . .
(7) A Surplus Lines Broker; . . . .
"Wrongful act" is defined as "any negligent act, error, or
negligent omission to which this insurance applies."
"Loss" means
any amount which an insured becomes legally
obligated to pay as damages for any "claim"
arising out of a "wrongful act" to which this
insurance applies and shall include judgments
and settlements. To the extent allowed by
law, "loss" shall include punitive or
exemplary damages. "Loss" shall not include:
a. Fines or penalties imposed by law;
b. Taxes; and
c. Matters which may be deemed uninsurable
under the law pursuant to which the policy
shall be construed.
5 The intentional misconduct exclusion applies to
[a]ny active and deliberate, dishonest,
criminal, fraudulent, malicious, or knowing
conduct committed or alleged to have been
committed by or at the direction of the
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to give independent meaning to both the unfair competition and
intentional misconduct exclusions, the unfair competition
provision excludes not only intentional unfair competition, but
also negligent unfair competition. Utica characterizes CRES's
negligence claim as just such a claim of negligent unfair
competition.
Landy disagrees for two reasons. It says that under
Massachusetts law, "unfair competition" encompasses only conduct
that misleads consumers, and the CRES complaint includes no
allegations of consumer confusion. Alternatively, Landy argues
that the exclusion does not apply to negligent performance of
professional services, even if that negligence also harmed a
business competitor.
On competing motions for summary judgment, the district
court denied Utica's motion and granted summary judgment to Landy.
UTICA Mut. Ins. Co. v. Herbert H. Landy Ins. Agency Inc., No. 13-
insured. If a "suit" is brought against the
insured alleging both "wrongful acts" within
the coverage of the policy and dishonest,
fraudulent, malicious, or criminal conduct,
then [Utica] will defend the insured in the
trial court, but [Utica] shall not have any
liability for any judgment for dishonest,
fraudulent, malicious, or criminal conduct nor
shall [Utica] have any further obligation to
defend after judgment in the trial court.
This exclusion applies only to insureds who
participated in, acted with knowledge of, or
acquiesced to such conduct.
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11471, 2014 WL 5475038, at *1 (D. Mass. Oct. 29, 2014). It held
that the policy required Utica to defend Landy in the CRES lawsuit
because CRES's negligence claim arose out of Landy's allegedly
negligent performance of professional services, and because the
exclusion for unfair competition did not cover CRES's negligence
claim.
II. Analysis
We review summary judgment decisions de novo. Batista
v. Cooperativa De Vivienda Jardines De San Ignacio, 776 F.3d 38,
41 (1st Cir. 2015). We may affirm a grant of summary judgment on
any ground supported by the record, so long as there is no genuine
issue as to any material fact and the moving party is entitled to
judgment as a matter of law. Id. at 42. "Where [as here] facts
are not in dispute, the interpretation and application of the
[insurance] policy language is a question of law. The parties and
the district court agree that Massachusetts law governs, and we
accept this premise." Massamont Ins. Agency, Inc. v. Utica Mut.
Ins. Co., 489 F.3d 71, 72 (1st Cir. 2007) (citation omitted).
Generally the insured bears the initial burden of establishing
coverage, while the insurer bears the burden on exclusions from
coverage. Boazova v. Safety Ins. Co., 968 N.E.2d 385, 390 (Mass.
2012).
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Three sets of settled principles under Massachusetts
decisional law guide our analysis. First, on the duty to defend,
the Massachusetts Supreme Judicial Court has stated that
[a]n insurer has a duty to defend an insured
when the allegations in a complaint are
reasonably susceptible of an interpretation
that states or roughly sketches a claim
covered by the policy terms. . . . In order
for the duty of defense to arise, the
underlying complaint need only show, through
general allegations, a possibility that the
liability claim falls within the insurance
coverage. There is no requirement that the
facts alleged in the complaint specifically
and unequivocally make out a claim within the
coverage. However, when the allegations in
the underlying complaint lie expressly outside
the policy coverage and its purpose, the
insurer is relieved of the duty to investigate
or defend the claimant. The nature of the
claim and not the ultimate judgment against
the insured triggers the duty to defend even
though the plaintiff may not succeed and the
claim may, in fact, be weak or frivolous. . . .
Metropolitan Prop. & Cas. Ins. Co. v. Morrison, 951 N.E.2d 662,
667 (Mass. 2011) (citations and internal formatting omitted).
Second, the Massachusetts court construes insurance
contracts in the same way as ordinary contracts. Id. at 671.
[W]e must construe the words of the policy in
their usual and ordinary sense. Every word
must be presumed to have been employed with a
purpose and must be given meaning and effect
whenever practicable. If in doubt, we
consider what an objectively reasonable
insured, reading the relevant policy language,
would expect to be covered. When confronting
ambiguous language, we construe the policy in
favor of the insured and against the drafter,
who is invariably the insurer, unless specific
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policy language is controlled by statute or
prescribed by another authority. This rule of
construction applies with particular force to
exclusionary provisions.
See id. (citations and internal formatting omitted).
Third, for purposes of professional service insurance
policies, Massachusetts defines
[a] professional act or service [a]s one
arising out of a vocation, calling,
occupation, or employment involving
specialized knowledge, labor, or skill, and
the labor or skill involved is predominantly
mental or intellectual, rather than physical
or manual. In determining whether a
particular act is of a professional nature or
a professional service we must look not to the
title or character of the party performing the
act, but to the act itself. . . . [T]here
must be a causal relationship between the
alleged harm and the complained-of
professional act or service . . . not an act
or service that requires no professional
skill. Common sense, of course, will always
provide a useful guide in differentiating
covered from uncovered cases.
Roe v. Fed. Ins. Co., 587 N.E.2d 214, 217 (Mass. 1992) (internal
formatting omitted).
The touchstone for professional services coverage is
whether the alleged wrongful act or omission is inherent in the
practice of the profession. See id.; see also Massamont, 489 F.3d
at 73. Thus, professional liability policies generally do not
cover, for example, business management activities, business
decisions of a nonprofessional nature, activities not requiring
professional expertise, or activities totally unrelated to the
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profession. See Med. Records Assocs., Inc. v. Am. Empire Surplus
Lines Ins. Co., 142 F.3d 512, 514-16 (1st Cir. 1998). While these
other acts may "set the stage" for the performance of professional
services, they are not themselves professional services and thus
are not covered by most professional liability policies.
Massamont, 489 F.3d at 74.6
A. Professional Liability
Applying this law to the facts here, CRES's complaint
can be reasonably construed to sketch a professional liability
claim, and it is therefore covered by the policy. CRES's
negligence claim alleged that Landy "failed to act with reasonable
care in the solicitation and placement [of insurance policies]."
It further alleged that Landy "failed to conduct a diligent search
of the admitted market, filed falsified documentation relating to
the search, and evaded scrutiny . . . by failing to file required
statements." As we explain below, these activities -- soliciting
and placing insurance policies, searching the admitted market, and
6This is not to say that a professional liability policy can
never cover errors in non-professional activities. Whether it
does depends on how the policy is worded. See, e.g., Visiting
Nurse Ass'n of Greater Phila. v. St. Paul Fire & Marine Ins. Co.,
65 F.3d 1097, 1102 (3d Cir. 1995) (citing Biborosch v. Transamerica
Ins. Co., 603 A.2d 1050 (Pa. Super. Ct. 1992)) (broadly worded
policy covering profession of "Manager" covered wrongful
employment termination suit). The policy here, however, is not so
broadly worded, but covers the usual, limited range of professional
errors like those recognized in Roe, Massamont, and Medical Records
Associates.
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filing related documentation -- are part of the professional
activity of an insurance agent or broker.
Generally speaking, only insurance professionals solicit
and place insurance policies and conduct due diligence into the
admitted insurance market.7 Indeed, California law criminalizes
7 As described by Landy:
"Placing" a real estate agents and brokers
errors and omissions insurance policy
typically involves, among other things,
understanding the type and extent of coverage
a particular applicant needs; determining what
endorsements may be appropriate for a
particular applicant; determining whether a
particular insurer is a good match for the
particular applicant; rating the applicant and
determining what the premium should be in
light of the applicant's potential exposure,
claims history, and level of coverage;
determining what regulatory requirements must
be met if a particular applicant is placed
with a particular insurer; and making certain
that required regulatory filings are properly
made. . . .
Landy employees were trained, either through
formal education or through experience in the
insurance industry or both, to, among other
things, evaluate the complexity of
transactions applicants typically handle,
investigate and evaluate the claims histories
of applicants, evaluate the level of
experience of applicants' licensed sales
staffs, investigate applicants' relationships
with and degree of control over independent
contractors and part-time employees,
investigate the extent to which an applicant's
service and operations or syndication
activities may affect coverage expectations,
identify and understand specialized statutes
and regulations that are relevant to placement
of coverage for the applicant with particular
insurers, and evaluate the adequacy of filings
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the transaction of insurance without a valid license. Cal. Ins.
Code § 1633. Moreover, these activities are not ordinary business
activities common to other professions -- such as renting a
building, purchasing supplies, charging fees, hiring employees, or
contracting to expand one's business. See Massamont, 489 F.3d at
73-74. Nor are they business decisions of a non-professional
nature, such as violating a contract in order to procure a business
advantage, see id., or stealing trade secrets or other property,
see Albert J. Schiff Assocs., Inc. v. Flack, 417 N.E.2d 84, 87-88
(N.Y. 1980); Crum & Forster Managers Corp. v. Resolution Trust
Corp., 620 N.E.2d 1073, 1079 (Ill. 1993).
Neither are these activities ones not requiring
professional expertise, such as sending a client a bill, answering
a phone call, driving to a specified location, see Med. Records
Assocs., 142 F.3d at 512, or discarding old files, see Saint
Consulting Grp., Inc. v. Endurance Am. Specialty Ins. Co., 699
F.3d 544, 555 (1st Cir. 2012). To the contrary, solicitation and
placement of insurance policies and research of the admitted
that those statutes or regulations may
require.
Placing a real estate agents and brokers
errors and omissions insurance policy
typically draws on special training or
attainments, exacts the use or application of
special learning or attainments, and involves
exercise of professional judgment.
Utica did not contest the factual accuracy of these
statements, although it did assert that they were not material.
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insurance market require knowledge and skills particular to the
insurance profession. Finally, there is no claim that these
activities are wholly unrelated to the insurance profession. Cf.,
e.g., Roe, 587 N.E.2d at 218 (sexual assault is unrelated to
profession of dentistry).
Utica's counterarguments are unpersuasive. First, Utica
contends that the labels in the complaint, such as "negligence"
and "reasonable care" are not dispositive. Rather, Utica urges us
to assess the source of the alleged injury. And because the
gravamen of the CRES complaint was Landy's unfair business
practices, not its professional negligence, the policy does not
apply.
Utica is correct that labels are not controlling, see
Bagley v. Monticello Ins. Co., 720 N.E.2d 813, 817 (Mass. 1999),
and that professional and business activities are not identical,
see Med. Records Assocs., 142 F.3d at 515. But neither are these
two categories mutually exclusive, for the provision of insurance
is both a profession and a business. Naturally then, some
professional decisions also affect business practices. Such is
the case here. Landy's allegedly unfair business practices derive
from alleged errors in the performance of professional services:
negligent solicitation and placement of insurance policies and
failure to conduct due diligence into the admitted insurance
market.
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Second, Utica suggests that professional liability
insurance does not cover claims by competitors at all, relying on
an unpublished district court opinion in Welch Foods, Inc. v. Nat'l
Union Fire Ins. Co., No. 09-12087, 2010 WL 3928704, at *5 (D. Mass.
Oct. 1, 2010) aff'd on other grounds, 659 F.3d 191 (1st Cir. 2011).
Welch Foods addressed whether professional liability insurance for
"promotion and marketing services" covered false advertising
claims brought by the insured's competitor. See id. at *5. The
district court in that case observed that professional liability
insurance is "usually intended to provide liability protection for
insureds whose clients hire them to provide professional
services." Id. Such insurance is "not intended to cover claims
by competitors." Id. (citing Visiting Nurse Ass'n, 65 F.3d at
1102).
That general observation is unexceptional, but it is not
a categorical rule. While professional liability policies often
do not cover competitor suits alleging negligent business
decisions, the reason is that the alleged wrongful act is not
inherent in the practice of the profession, not that the suit was
brought by a competitor. See Roe, 587 N.E.2d at 217. The gauge
is the nature of the act, not the identity of the parties. See
id.
Relatedly, Utica argues that the policy does not apply
because Landy did not breach any professional duties owed to CRES.
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It is true that CRES did not allege that Landy breached
professional duties to it. But professional liability coverage is
not necessarily restricted to lawsuits based on allegations of
breach of professional duty to the plaintiff. See Harad v. Aetna
Cas. & Sur. Co., 839 F.2d 979, 984 (3d Cir. 1988). And there is
no reason to read this policy so narrowly.
Here, the policy covers losses "aris[ing] out of
'wrongful acts' . . . in rendering or failing to render
professional services." "The phrase 'arising out of' must be read
expansively," and suggests "but for" causation. Bagley, 720 N.E.2d
at 816. Thus, the policy applies where, as here, CRES alleges
injuries actually caused by Landy's wrongful performance of
professional services. CRES need not allege any breach of
professional duties owed to CRES itself.
B. Exclusion for "Unfair Competition of Any Type"
Turning to the policy's exclusion for "unfair
competition of any type," Utica has not met its burden of
establishing that the exclusion applies. In construing insurance
policies, some Massachusetts courts have interpreted "unfair
competition" according to its common law meaning: "conduct that
causes confusion on the part of consumers, such as palming off or
passing off." Open Software Found., Inc. v. U.S. Fid. & Guar.
Co., 307 F.3d 11, 17 (1st Cir. 2002). See also generally Datacomm
Interface, Inc. v. Computerworld, Inc., 489 N.E.2d 185, 191-92
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(Mass. 1986) (discussing various forms of unfair competition).
Accordingly, "unfair competition" does not encompass the full
range of unfair business practices prohibited by state statutes.
See Open Software, 307 F.3d at 19 n.9 ("Massachusetts courts
construe the term 'unfair competition' in a liability insurance
policy not only to signify that common law tort, but also to
distinguish it from the statutory cause of action for unfair
business practices under Chapter 93A.").
The policy at issue here refers to "unfair competition
of any type." Applying the Massachusetts definition as described
by the cases above, this means "any type" of "conduct that causes
confusion on the part of consumers."8 The CRES lawsuit, however,
did not allege consumer confusion. Therefore, given the meaning
of "unfair" competition in Massachusetts law, Utica has not shown
that the exclusion applies.
In an attempt to get around this plain reading, Utica
argues that the modifier "any type" expands "unfair competition"
to encompass CRES's negligence claim -- even though that claim did
not allege consumer confusion. We disagree. Read naturally, the
phrase "any type" refers to every kind of the noun that it
modifies. See, e.g., Ali v. Fed. Bureau of Prisons, 552 U.S. 214,
8 We take Massachusetts law as described in the cases above
but offer no prediction about whether in the future Massachusetts
law might be more flexible so as to encompass other types of
conduct as "unfair competition."
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220 (2008) (The "use of 'any' to modify 'other law enforcement
officer' is most naturally read to mean law enforcement officers
of whatever kind."); see also any, Webster's Third New
International Dictionary (1993) (defining "any" to mean "one or
some indiscriminately of whatever kind"). And while the word "any"
may have an "expansive" meaning, it does not have a
"transformative" one: it can "never change in the least[] the clear
meaning of the phrase" it modifies. Freeman v. Quicken Loans,
Inc., 132 S. Ct. 2034, 2042 (2012); see also Ali, 552 U.S. at 220
n.4. For example, "any type of fruit" includes apples,
blueberries, cranberries, and every other kind of fruit. It does
not include leafy vegetables or red meat.
Similarly, the provision here should be construed
consistently with the term of art "unfair competition." See Lodge
Corp. v. Assurance Co. of Am., 775 N.E.2d 1250, 1252 n.4 (Mass.
App. Ct. 2002) ("technical terms and words of art are given their
technical meaning when used in a transaction within their technical
field" (quoting Restatement (Second) of Contracts § 202(3)(b)
(1981))). Accordingly, "any type of unfair competition" means
every kind of conduct leading to consumer confusion. At the very
least, this is a reasonable construction. Even assuming that a
more expansive construction is also reasonable, Massachusetts law
requires us to adopt the construction more favorable to the
insured, Landy. See Metropolitan, 951 N.E.2d at 671.
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Utica also makes two further arguments based on the canon
against surplusage. Under this canon, "[e]very word in an
insurance contract must be presumed to have been employed with a
purpose and must be given meaning and effect whenever practicable."
Valley Forge Ins. Co. v. Field, 670 F.3d 93, 99 (1st Cir. 2012).
Utica first argues that the provision must embrace forms of unfair
competition not recognized by the common law -- such as CRES's
negligence claim -- lest the modifier "any type" be surplus.
Even assuming that the provision embraces forms of
competition not recognized by the common law, however, we do not
think that it necessarily covers CRES's negligence claim. As the
Supreme Judicial Court has recognized, the traditional core of
unfair competition is consumer confusion as to the source or origin
of goods or services. Datacomm, 489 N.E.2d at 192. However, some
courts have expanded the term beyond its common law meaning to
include "confusion as to sponsorship, endorsement, or some other
affiliation." Id. Thus, "any type" can be reasonably construed
to embrace these other forms of consumer confusion. But even this
expanded reading does not extend beyond consumer confusion. CRES's
negligence claim would not be excluded, and again, we are required
to adopt the reasonable construction more favorable to the insured.
See Metropolitan, 951 N.E.2d at 671.9
9 By doing so, we do not mean to transform "any type of unfair
competition" into a new term of art under Massachusetts law. "As
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Utica's second surplusage canon-based argument fares no
better. Utica says that "any type" must embrace negligence claims
since a different provision of the policy excludes intentional
claims. This argument is unavailing, however. To restate, the
CRES lawsuit did not allege any kind of consumer confusion, whether
intentional or negligent.10
III. Conclusion
For the foregoing reasons, the judgment of the district
court is AFFIRMED.
a federal court sitting in diversity, we try to apply our best
understanding of the principles [Massachusetts] has adopted. It
is not our role to expand [Massachusetts] law; that is left to the
courts of [Massachusetts]." Douglas v. York Cty., 433 F.3d 143,
149 (1st Cir. 2005).
10 The parties agree that if the judgment is affirmed on
appeal, then the district court's award of attorney fees and costs
was proper.
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