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D. WHAT CONSTITUTES A CLAIM? The Insuring Agreement of the MCPL policy applies to “Loss…which the Insured shall become legally obligated to pay as a result of any Claim…” A “Claim” is defined as: a written demand for money damages received by an Insured, including service of suit and the institution of administrative or arbitration proceedings. Types of Claim. As so defined, a Claim may include a legal proceeding, i.e., (a) a suit that has been served on the insured or (b) an administrative or arbitration proceeding that has been instituted against it. However, a legal proceeding is not required to constitute a Claim. Any written demand made upon the insured for the payment of money damages may be considered a Claim, e.g., a letter sent to the insured demanding damages. Money Damages. Not all suits or demand letters necessarily constitute a Claim. The MCPL policy covers demands for payment of damages. Thus, a demand that seeks reimbursement of allegedly improper charges imposed by the insured does not seek money damages and is not a Claim. Likewise, the following categories of demands or suits do not qualify as a Claim if they do not include a demand for payment of damages: • A suit that seeks equitable relief, such as injunctive or declaratory relief, if it does not include a demand for money damages; • A mere accusation of wrongdoing; • Disciplinary proceedings; • News accounts or other public reports of an insured’s professional misconduct. Governmental Investigations. An insured may tender notice of a subpoena or other investigation by a governmental entity, such as a regulatory agency. Subpoenas and other investigations generally do not qualify as a Claim under the policy definition. The policy does not afford the insured a defense to such proceedings, nor indemnify the insured for the cost of its response. A Claim typically does not include a governmental agency’s order requiring the insured to comply with regulations, to pay fines or penalties or to pay restitution. Such orders are not demands for payment of damages. However, even if a governmental action qualified as a Claim, any resulting Loss is expressly excluded under the terms of the policy. Repurchase Demands. The MCPL policy is frequently issued to mortgage lenders who originate mortgage loans to borrowers and then sell the loans to third party investors. The loan sale contracts governing the sale of the loans require the insured, as seller, to repurchase the loans it sold in the event of an early payment default or if loans do not meet specific quality standards. When the loan buyer sends a letter that demands “repurchase,” it usually does not demand payment of damages, but rather seeks adherence to the terms of the parties’ contract. Such demands generally are not “Claims” within the meaning of the MCPL policy. Repurchase demand letters typically are potential Claims, rather than actual Claims. If the loan buyer eventually files a lawsuit seeking, for example, damages for breach of contract, the repurchase demand may become a Claim. In such cases, however, other exclusions of the MCPL policy often apply to preclude coverage. Class Action Complaints. Class action complaints may include damages allegations that trigger a duty to defend under the policy. Defense Costs can be high, but frequently only a small portion of the resulting civil judgments or settlements are attributable to Claims seeking recovery of damages. The larger component of class action awards tend to be based on restitution or civil penalties that are more easily awarded on a class-wide basis. That portion of class action judgment awards are not within the scope of the coverage. 7 · PROFESSIONAL LIABILITY COVERAGE
E. WHAT CONSTITUTES A WRONGFUL ACT? The insuring clause of the policy applies to “Loss… as a result of any Claim first made against the Insured … for a Wrongful Act….” The MCPL policy states: “Wrongful Act” means any actual or alleged negligent act, negligent error or negligent omission committed by the insured solely in the performance of or failure to perform professional services for others in the Insured’s Profession as stated in Item 1.A. of the Declarations. Negligent Act, Error or Omission. Coverage under the policy applies to a “Wrongful Act,” defined as a “negligent act, negligent error or negligent omission” by the insured. This condition does not necessarily limit coverage to Claims that assert a “negligence” cause of action. Courts generally hold that the phrase “negligent act” implies that the conduct giving rise to the alleged liability must be inadvertent or unintentional in some sense. The cause of action may be based on a contractual relationship, statutory violation or a tort that does not require intentional conduct. The specific tort at issue should be evaluated to determine whether “intent” is an element. The Claim allegations against the insured must “sound in” negligence. In practice, that means that many lawsuits superficially alleging only intentional conduct or that do not describe the defendant’s “intent” may trigger coverage if the liability might arise from a negligent act. Performance of or failure to Perform Professional Services for Others. Coverage applies only when the alleged negligent act, error or omission arises from the performance of or failure to perform professional services for others in the insured’s profession. The insured’s profession is typically identified in the policy declarations. “Professional services” has generally been interpreted to mean that there must be some service performed for another. Thus, for example, under this condition professional liability coverage does not apply to employment or partnership disputes, or to conflicts with competitors alleging theft of proprietary customer information, since the Claims do not involve the performance of professional services for others. In one case, an attorney’s conduct of a lawsuit in which he represented himself did not constitute a “professional service” as it did not involve services performed for another, namely a client. Also, general administrative activities are not considered to be “professional services” because they do not involve expertise related to performance of a particular profession. The professional services requirement has not been as uniformly enforced. In a recent case, the court held that fraudulent conduct by lawyers arose out of the rendering of professional services because had defendants not been acting as attorneys they would not have been able to commit the alleged fraudulent acts. While the insurance company was correct that the definition of legal services typically does not (and should not) include the commission of fraud, the acts alleged in the underlying complaint qualified as professional services because they bore a substantial nexus to professional services sought. PROFESSIONAL LIABILITY COVERAGE · 8
- Page 1 and 2: MORTGAGE COMPANY Professional Liabi
- Page 3 and 4: MORTGAGE COMPANY PROFESSIONAL LIABI
- Page 5: C. WHAT ARE DEFENSE COSTS? The MCPL
- Page 9 and 10: B. NOTICE OF CLAIMS The MCPL Policy
- Page 11 and 12: the policyholder being defended and
- Page 13 and 14: EXCLUSIONS A. IMPROPER BENEFIT EXCL
- Page 15 and 16: K. GOVERNMENTAL ACTION EXCLUSION Th
- Page 17: COMMON ENDORSEMENTS In addition to
E. WHAT CONSTITUTES A WRONGFUL ACT?<br />
The insuring clause of the policy applies to “Loss… as a result of any Claim first made against the Insured … for a<br />
Wrongful Act….” The MCPL policy states:<br />
“Wrongful Act” means any actual or alleged negligent act, negligent error or negligent omission committed<br />
by the insured solely in the performance of or failure to perform professional services for others in the<br />
Insured’s Profession as stated in Item 1.A. of the Declarations.<br />
Negligent Act, Error or Omission. Coverage under the policy applies to a “Wrongful Act,” defined as a “negligent<br />
act, negligent error or negligent omission” by the insured. This condition does not necessarily limit coverage to<br />
Claims that assert a “negligence” cause of action. Courts generally hold that the phrase “negligent act” implies<br />
that the conduct giving rise to the alleged liability must be inadvertent or unintentional in some sense. The cause<br />
of action may be based on a contractual relationship, statutory violation or a tort that does not require intentional<br />
conduct. The specific tort at issue should be evaluated to determine whether “intent” is an element.<br />
The Claim allegations against the insured must “sound in” negligence. In practice, that means that many lawsuits<br />
superficially alleging only intentional conduct or that do not describe the defendant’s “intent” may trigger<br />
coverage if the liability might arise from a negligent act.<br />
Performance of or failure to Perform Professional Services for Others. Coverage applies only when the alleged<br />
negligent act, error or omission arises from the performance of or failure to perform professional services for<br />
others in the insured’s profession. The insured’s profession is typically identified in the policy declarations.<br />
“Professional services” has generally been interpreted to mean that there must be some service performed for<br />
another. Thus, for example, under this condition professional liability coverage does not apply to employment or<br />
partnership disputes, or to conflicts with competitors alleging theft of proprietary customer information, since<br />
the Claims do not involve the performance of professional services for others.<br />
In one case, an attorney’s conduct of a lawsuit in which he represented himself did not constitute a “professional<br />
service” as it did not involve services performed for another, namely a client. Also, general administrative activities<br />
are not considered to be “professional services” because they do not involve expertise related to performance<br />
of a particular profession.<br />
The professional services requirement has not been as uniformly enforced. In a recent case, the court held that<br />
fraudulent conduct by lawyers arose out of the rendering of professional services because had defendants<br />
not been acting as attorneys they would not have been able to commit the alleged fraudulent acts. While the<br />
insurance company was correct that the definition of legal services typically does not (and should not) include<br />
the commission of fraud, the acts alleged in the underlying complaint qualified as professional services because<br />
they bore a substantial nexus to professional services sought.<br />
PROFESSIONAL LIABILITY COVERAGE · 8
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