Professional liability policies provide coverage for wrongful acts undertaken by the insured in the performance of professional services.  In the medical and legal fields, professional services are generally clear.  In other professional contexts professional services may not be as clear.  In a recent case, the Fifth Circuit Court of Appeals addressed whether professional liability coverage applied to a bank’s activities as a direct endorsement lender under a federal mortgage program.

In Iberiabank Corp. v. Illinois Union Insurance Co., No. 19-30190 (5th Cir. Mar. 18, 2020), the policyholder bank was a Direct Endorsement Lender under the Housing and Urban Development’s (“HUD”) Direct Endorsement Program for insuring mortgages that met all HUD requirements.  A whistleblower reported that the bank did not comply with the program and falsely certified compliance.  The Department of Justice investigated and ultimately settled with the bank for its non-compliance.

The bank sought insurance coverage for the settlement from its professional liability insurers and the insurers denied coverage.  The policy provided coverage for losses the bank became legally obligated to pay because of a claim made “by a third party client” of the bank for any wrongful acts in rendering or failing to render professional services.  The policy defined “professional services” to mean services performed by or on behalf of the bank for a “policyholder or third party client” of the bank.  The professional services had to be performed “pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of [the bank].”

In response to the denial of coverage, the bank sued for breach of contract.  The district court granted the insurance companies’ motions to dismiss the complaint for failure to state a claim because the government was not the bank’s client under the program and the bank did not provide professional services to the government as the lender under the program.  The bank appealed and the Fifth Circuit affirmed.

In affirming, the circuit court rejected the bank’s argument that both the borrowers and the government were the bank’s clients.  The court held that the definition of “professional services” in the policy made it clear “that, to make it insurable, services rendered by [the bank] must be rendered to a ‘policyholder or client for consideration’ and ‘pursuant to a written contract.”  HUD, said the court, could not be a client under the policy because the certifications rendered to HUD by the bank were not provided for consideration.

Moreover, the court rejected the argument that the borrowers brought the bank’s actions with the coverage grants.  The court held that the bank did not engage in wrongful acts by providing mortgages to the borrowers.  Rather it was the bank’s wrongful certification to HUD that was the wrongful act.  The court rejected the bank’s attempt to separate the definition of client from the object of the wrongful act.  The court concluded that the bank could not procure coverage for a claim brought by the government on the basis of professional services provided to the bank’s borrowers.

The government was not the bank’s client and did not become the bank’s client because of the HUD program.  Accordingly, held the court, the settlement with the Department of Justice was not covered by the policies and the district court properly granted the motions to dismiss the complaint.