Utilizing a narrow interpretation of the term “unfair competition”, the First Circuit Court of Appeals has affirmed a decision requiring an insurer to defend its insurance agency insured against claims brought against the insured by a competitor. The case is Utica Mutual Insurance Company v. Herbert H. Landy Insurance Agency, Inc., et al.[1]
At issue were claims brought against the Herbert H. Landy Insurance Agency, Inc. (“Landy”). Landy focuses on obtaining professional liability insurance for its clients, principally real estate brokers. Landy itself was insured for professional liability under a policy (“Policy”) issued by Utica Mutual Insurance Company (“Utica”). As is typical of such policies, it provided that the insurer had a duty to defend its insured against lawsuits arising from errors and omissions in the provision of professional services as an insurance broker and agent.
Landy was sued in California by CRES Insurance Services, LLC (“CRES”), a competitor of Landy in the real estate professional liability insurance market. CRES alleged that Landy improperly offered California clients lower priced surplus lines insurance policies despite the availability of policies in the admitted market. CRES claimed that these actions constituted negligence in the placement of insurance policies and unfair business practices.
Landy sought a defense of the CRES suit under the Policy. Utica sought a declaration that it owed no duty to defend Landy because the claims against Landy do not arise out of the performance of professional services and because the Policy contained an exclusion for claims of “unfair competition of any type.” The United States District Court ruled that Utica had to provide a defense to Landy, and Utica appealed.
In considering the issue of coverage, the First Circuit noted that its decision was guided by two principles applicable to all insurance coverage disputes. First, Massachusetts holds that an 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.[2] Second, Massachusetts construes insurance contracts in the same way as ordinary contracts. That means words are interpreted in their usual and ordinary sense and every word must be presumed to have been employed with a purpose and must be given meaning whenever practicable. Moreover, ambiguities are to be interpreted in favor of the insured and against the drafter, who is invariably the insurer, and the court should consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered. Applying these principals to the claims and coverages at issue, the First Circuit agreed with the lower court that Utica was obligated to provide a defense to its insured.
1. Professional Services
The court first addressed whether the claims asserted by CRES arose from Landy’s alleged errors or omissions in “rendering or failing to render professional services” as an insurance broker or insurance agent. Utica argued that they did not, but rather from Landy’s allegedly unfair business practices. Landy argued that they did, and that the nature of the claim was that Landy’s allegedly unfair business practices were committed in the course of providing allegedly negligent professional insurance services.
As with all such disputes, the court first looked to the language of the complaint itself. Therein, CRES 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.”
The court determined that these such alleged conduct was 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. Nor were they are activities which do not require professional expertise—such as sending a client a bill, answering a phone call, or driving to a specified location. Rather, they required knowledge and skills particular to the insurance profession. In fact, they are actions which cannot be done without a valid insurance brokerage license. Therefore, the court found that these activities—soliciting and placing insurance policies, searching the admitted market, and filing related documentation—are part of the professional activity of an insurance agent or broker.
The court rejected Utica’s argument that this was an unfair business practices claim simply styled as a negligence claim. The court stated that the provision of insurance is both a profession and a business. As a result, some professional decisions also affect business practices. In this case, it was alleged that Landy’s alleged errors in the performance of professional services constituted unfair business practices. Thus, merely because an activity is claimed to be unfair doesn’t mean it was not also the result of negligence.
The court also rejected Utica’s claim that professional liability insurance does not cover claims by competitors at all. Addressing an unpublished decision cited by Utica,[3] the court noted that while professional liability insurance is “usually intended to provide liability protection for insureds whose clients hire them to provide professional services,” that is not a categorical rule. The issues for coverage purposes is whether the alleged wrongful act is inherent in the practice of the profession, not whether the suit was brought by a client or competitor.
2. Exclusion for “Unfair Competition of Any Type”
Addressing the exclusion for unfair competition, the court looked to the definition of “unfair competition” to determine if the allegations in the complaint fell within such definition. The court held that “unfair competition” is a technical term meaning “conduct that causes confusion on the part of consumers, such as palming off or passing off.” Under this definition, an unfair competition claim is one alleging conduct that causes confusion on the part of consumers. Accordingly, the exclusion for “any type of unfair competition” only applied to conduct leading to consumer confusion. Since the CRES lawsuit did not allege consumer confusion, the exclusion did not apply.
Utica argued that the exclusion is broader, and encompasses any type of unfair business practice. However, the court disagreed, ruling that the exclusion should be construed consistently with the term of art “unfair competition.” The court further held that even if both the narrow and more expansive interpretations of the exclusion are reasonable, Massachusetts law requires adoption of the interpretation more favorable to the insured.
Conclusion
The court’s ruling is instructive to agents and brokers both in their capacity as providers of liability insurance and as insureds themselves. Massachusetts law strongly favors narrow application of exclusions and broad application of coverage. This is particularly the case when considering the duty to defend. In order to refuse to defend based on an exclusion requires an almost definitive statement in the complaint that no claim exists other than one squarely within the confines of that exclusion. Where a complaint is drafted in such a fashion as to be open to interpretation as to what types of claims might be available to the plaintiff, the Massachusetts courts are more likely to find than an insurer must defend such suit on behalf of its insured.
[1] The other party was CRES Insurance Services, LLC, the insurance agency which brought suit against the Landy Agency.
[2] Citing Metropolitan Prop. & Cas. Ins. Co. v. Morrison, 460 Mass. 352 (2011).
[3] Welch Foods, Inc. v. Nat’l Union Fire Ins. Co., No. 09–12087, 2010 WL 3928704, at *5 (D.Mass. 2010), aff’d on other grounds, 659 F.3d 191 (1st Cir. 2011).
