From the November, 2003 issue of The Title Insurance Law Newsletter
In a key decision, a title agent errors and omissions carrier has been found obligated to defend its insured in a class action charging the agent with marking up settlement charges in violation of RESPA and a consumer law, despite the argument that the acts were intentional and thus not covered, according to a Minnesota federal court.
Burnet Title of Minneapolis was sued by a customer, on behalf of a class, who claimed that the title agent fraudulently pumped up settlement charges such as overnight delivery services. The complaint alleged that Burnet broke RESPA regulations by not disclosing the "mark-ups," which the plaintiff branded a RESPA Section 8(b) fee-split. State law prohibits "padding" or "marking up" of third-party fees. The complaint alleged in several places that the conduct was intentional. One count was for conversion of the plaintiff's money.
Burnet tendered its defense to its errors and omissions carrier, Pacific Insurance Company. Pacific agreed to retain Burnet's choice of counsel, Faegre & Benson, and did not make a typical reservation of rights. However, it sent several letters over the span of a year, advising that it would not pay punitive damages, a judgment for conversion, or for intentional acts. Finally, a year after accepting the defense, it wrote to announce that there was no coverage at all under the policy. It gave three reasons: (1) the class action arose from intentional, not negligent acts; (2) the claims asserted did not seek "damages" as the term was defined in the policy; and (3) the class action alleges conversion and conversion is expressly exempted from coverage. The letter also "reserve[d] the right to seek reimbursement of all attorney's fees, litigation expenses and costs ... that are incurred in the defense of non covered claims." Pacific then filed suit, asking the court to relieve it of the duty to defend further.
The court emphasized that the Pacific policy covers Burnet's negligent performance of "professional acts or services," and is "loosely equivalent to medical malpractice coverage it usually covers negligent, but not intentional acts, undertaken as part of one's profession." The "professional services" covered by the policy are defined as "services performed or advice given in the Insured's capacity as a Title Agent, Title Abstractor and Escrow Agent."
The policy says the insurer will pay "damages" that the agent becomes obligated to pay due to its "act, error, or omission." Damages "does not include ... the return or reimbursement of fees for 'professional services.'"
Professional Service?
Pacific marched down the ladder of the above policy definitions to make its case. It argued first that the setting of a fee for courier delivery or other charges was not a "professional act or service." It scoured the country and located a recent First Circuit case that held that setting fees for copies is not a "professional service." The court agreed that simply "setting a price for photocopies and producing accurate invoices" was not a professional service, but was merely "an incidental part of the business but not the profession of medical records processing." However, the court accepted Burnet's argument that the issue in the lawsuit was bigger than merely setting a price. It noted that RESPA also includes disclosure requirements, such as identifying affiliated business arrangements. The court viewed the disclosure as a referral, and analogized to a doctor who refers a patient to a specialist. It said:
Although Burnet's employees probably utilized less discretion and professional judgment, the principle is applicable here. On the "professional continuum," the Court finds that making referrals is close enough to the "professional" end of the spectrum to be included in the E & O policy.
Intentional Acts
Next, Pacific urged that every count in the complaint specifically alleged intentional conduct, and that the E & O policy excludes intentional acts. Burnet countered that the root issue was the alleged violation of RESPA, and that "RESPA violations do not necessarily require 'intent'- in other words, it is possible to negligently violate RESPA." The language of the complaint allowed the interpretation that some of the alleged misrepresentations and omissions were either negligent or intentional. The court agreed with Burnet. It fixed on a Minnesota case holding that, "where the complaint does not distinguish between intentional and unintentional misrepresentation, it is reasonable to include both."
Damages
Finally, Pacific argued that none of the damages and penalties claimed in the class action were within the policy definition of damages. The court broke the complained-of damages into three categories: the overcharges, attorneys' fees, and the trebling of those fees under RESPA. Burnet lost on two classes:
It is clear that the return of overcharged fees is not the type of "damages" that triggers coverage under the policy. Also excluded from the covered "damages" is RESPA's trebling of those fees, because that is clearly a penalty.
As to attorneys' fees, Pacific argued that such an award is a penalty; Burnet called it damages. Burnet argued that the RESPA language permitting the court to award attorney fees and costs was similar to ERISA's language. Courts have held in ERISA cases that costs and fees are separate. This was enough to support the court's finding that "the complaint seeks the appropriate 'damages' to implicate coverage under the policy."
The court concluded that Pacific had a duty to defend Burnet. The agent was also teed up to obtain a ruling that Pacific was estopped to withdraw defense by waiting so long to do so. The court begged off on that issue as being moot.
This significant decision comes to the same conclusion as, but in considerably greater depth than, Nowacki v. Federated Realty Group, E.D.Wis. No. 97-C-1380, reported in June, 1999. In that case, the court found a duty to defend a real estate broker accused of failing to properly disclose an affiliated business arrangement in violation of RESPA. The Nowacki court said the case involved professional services, and the conduct might be either intentional or negligent.
Pacific Ins. Co. v. Burnet Title, Inc., ___ F.3d ___, 2003 WL 22283355 (D.Minn.) (not yet released for publication).
