5th Circuit Affirms District Court Dismissal of Bank’s Insurance Coverage Breach of Contract Action Related to Bank’s FCA Settlement

The Fifth Circuit recently affirmed a district court’s dismissal of a bank’s breach of contract action against its primary and excess professional services liability insurers regarding claims for coverage related to the bank’s FCA settlement with the DOJ.

In 2017, the bank and the DOJ reached a nearly $11.7 million settlement regarding alleged violations of the FCA related to mortgage origination and underwriting activities, and certifications to HUD about the bank’s compliance with HUD guidelines.  Subsequently, the bank claimed coverage for its losses under its primary and excess professional services liability insurance policies.  The insurers denied coverage, asserting that the policy language did not cover the claims.

The operative insuring clauses of the bank’s policies provided loss coverage for wrongful acts related to “Professional Services,” defined as those performed by or on behalf of the bank for a policyholder or third party client of the bank pursuant to a written contract with a policyholder or “client for consideration” inuring to the benefit of the bank.

At the district court level, the bank argued unsuccessfully that its DOJ settlement fell within the policies’ coverage language because it provided “Professional Services” to HUD when it underwrote mortgages as a Direct Endorsement lender, and that the government was a “third party client” when the bank allegedly committed wrongful acts when rendering those services.  The district court found the government was not the bank’s client under the Direct Endorsement program, and the bank did not provide professional services to the government as a DE lender.

Sitting in diversity jurisdiction, the Fifth Circuit applied the state substantive law of Louisiana, which is where the insurance policies were issued.  Louisiana contract law principles require giving the words of a contract their generally prevailing meaning with no further interpretation being necessary when the words of the contract are clear and explicit and lead to no absurd consequences.

In its appeal, the bank argued that both its borrowers and the government were bank clients, payment of consideration was not necessary for the government to be a client, and Louisiana state law doctrine permitted a “reasonable expectation” that its coverage claim should fall within the scope of the policy language.

The court held that the government was not the bank’s client under the policy language.  The bank’s clients were the borrowers to whom it provided mortgage services.  Further, under the terms of the policies, the “client for consideration” was the same client toward whom the bank’s wrongful acts in rendering or failing to render professional services were directed. Since the bank did not engage in wrongful acts in providing mortgage loans to borrowers, but rather, when it certified to HUD that it had properly underwritten loans under the DE program, the coverage language was inapplicable to the bank’s insurance claims against the insurers.

As to the bank’s “reasonable expectation” argument, the court found the policy terms to be unambiguous.  The bank could not assert a reasonable expectation that the policy terms contemplated broader coverage for claims beyond the clear and explicit expression of the parties’ intent under the policies.