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IberiaBank Corp. v. Illinois Union Insurance Co.

United States District Court, E.D. Louisiana

February 13, 2019


         SECTION M (4)

          ORDER & REASONS


         Before the Court are: (1) a motion to dismiss filed by defendant Illinois Union Insurance Company (“Chubb”), [1] to which plaintiff Iberiabank Corporation (“Iberiabank”) responds in opposition, [2] and in further support of which Chubb replies;[3] and (2) a motion to dismiss filed by defendant Travelers Casualty and Surety Company of America (“Travelers”), [4] to which Iberiabank responds in opposition, [5] in further support of which Travelers replies, [6] and in further opposition to which Iberiabank files a surreply.[7] Having considered the parties' memoranda and the applicable law, the Court issues this Order & Reasons.

         I. BACKGROUND

         This case involves a dispute regarding coverage under bankers' professional liability insurance policies. For the policy period of September 30, 2015 to September 30, 2016, Iberiabank purchased primary and excess bankers' professional liability insurance from Chubb and Travelers, respectively.[8] Chubb issued the primary policy with a limit of $10, 000, 000 above Iberiabank's $500, 000 self-insured retention.[9] Travelers issued the excess policy that adopts all relevant terms and conditions of Chubb's primary policy, and provides $5, 000, 000 in excess of the $10, 000, 000 in coverage provided by the primary policy.[10]

         The Federal Housing Administration (“FHA”), an agency within the Department of Housing and Urban Development (“HUD”), insures approved lenders against losses on mortgage loans made to buyers of single-family homes.[11] The Direct Endorsement program (“DE program”) is one such mortgage insurance program operated by the FHA.[12] Under the DE program, HUD relies on approved mortgage lenders to apply HUD's requirements in determining whether a borrower represents an acceptable credit risk for HUD to certify loans for FHA mortgage insurance without prior review or approval by HUD.[13] Iberiabank has participated in the DE program since 1984.[14]

         On July 8, 2015, a former Iberiabank employee and a then-current Iberiabank employee (collectively “Relators”) brought a whistleblower qui tam action on behalf of the United States government against Iberiabank alleging violations of the False Claims Act (“FCA”), 31 U.S.C. §§ 3729, et seq., arising from Iberiabank's participation in the DE program.[15] In the Iberiabank qui tam action, the Relators alleged that Iberiabank submitted false and fraudulent claims and records to HUD regarding mortgage loans Iberiabank made to its borrower clients to secure mortgage insurance from the FHA under the DE program.[16] Specifically, the Relators alleged that Iberiabank violated the FCA by: (1) falsely certifying to the FHA that loans submitted to be insured complied with HUD regulations and therefore were eligible for FHA insurance; (2) making false and fraudulent claims for approval in connection with its acquisition of FHA insurance for mortgages and fraudulently causing the government to pay insurance claims on these mortgages; (3) paying mortgage underwriters commissions in violation of HUD regulations; and (4) refusing to self-report known defective and fraudulent loans.[17]

         On July 1, 2016, HUD's Inspector General served a subpoena on Iberiabank seeking production of documents related to: certain mortgage loans issued by Iberiabank; Iberiabank's rules, policies, procedures, guidelines, or practices regarding mortgages to be insured by the FHA; and Iberiabank's participation in the DE program.[18] On September 22, 2016, Iberiabank informed Chubb and Travelers of the subpoena and HUD's investigation.[19]

         On April 18, 2017, representatives of the Department of Justice (“DOJ”) met with Iberiabank representatives and informed them of Iberiabank's potential liability under the FCA for what Iberiabank now says was “its alleged loan underwriting errors and omissions.”[20] On August 8, 2017, the DOJ made a settlement demand to Iberiabank asking it to pay $17, 263, 982 to settle the government's claims against it in connection with its participation in the DE program.[21] On September 21, 2017, Iberiabank offered to settle with the government for $11, 692, 149; the government accepted the offer, and the Relators consented.[22] The settlement was finalized on December 12, 2017.[23]

         Iberiabank made a claim on the Chubb and Travelers bankers' professional liability insurance policies for the DOJ investigation and settlement.[24] Chubb and Travelers both denied the claim.[25] As a result, Iberiabank filed this suit against Chubb and Travelers alleging that they breached the insurance contracts by failing to pay the claim.[26]

         Chubb and Travelers filed the instant motions to dismiss arguing that Iberiabank cannot state breach-of-contract claims against them because the DOJ settlement is not a loss covered by the policies.[27] Travelers also argues that Iberiabank cannot state a claim against it as an excess insurer because the primary insurer has not yet paid the limits of its policy.[28] Iberiabank opposes the motions arguing that it has stated enough facts in its complaint to establish that the DOJ settlement is covered and to state claims for breach of contract against Chubb and Travelers.[29]

         III. LAW & ANALYSIS

         A. Rule 12(b)(6) of the Federal Rules of Civil Procedure

         The Federal Rules of Civil Procedure require a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Rule 8 “does not require ‘detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The statement of the claim must “‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.'” Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A pleading does not comply with Rule 8 if it offers “labels and conclusions, ” “a formulaic recitation of the elements of a cause of action, ” or “‘naked assertion[s]' devoid of ‘further factual enhancement.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555-57).

         Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a party to move to dismiss for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). A claim is plausible on the face of the complaint “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting Twombly, 550 U.S. at 556). Plausibility does not equate to probability, but rather “it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (citing Twombly, 550 U.S. at 556). “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of “entitlement to relief.”'” Id. (quoting Twombly, 550 U.S. at 557). Thus, if the facts pleaded in the complaint “do not permit the court to infer more than a mere possibility of misconduct, the complaint has alleged - but it has not ‘show[n]' - ‘that the pleader is entitled to relief.'” Id. at 679 (quoting Fed.R.Civ.P. 8(a)(2)). Motions to dismiss are disfavored and rarely granted. Turner v. Pleasant, 663 F.3d 770, 775 (5th Cir. 2011) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d 141, 147 (5th Cir. 2009)).

         In considering a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court employs the two-pronged approach utilized in Twombly. The court “can choose to begin by identifying pleadings that, because they are no more than conclusions [unsupported by factual allegations], are not entitled to the assumption of truth.” Id. However, “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id.

         A court's review of a Rule 12(b)(6) motion to dismiss “is limited to the complaint, any documents attached to the complaint, and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint.” Lone Star Fund V. (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010) (citing Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000)). A court may also take judicial notice of certain matters, including public records and government websites. Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338 (5th Cir. 2007); see also Hawk Aircargo, Inc. v. Chai., 418 F.3d 453, 457 (5th Cir. 2005). Thus, in weighing a Rule 12(b)(6) motion, district courts primarily look to the allegations found in the complaint, but courts may also consider “documents incorporated into the complaint by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint whose authenticity is unquestioned.” Meyers v. Textron, Inc., 540 Fed.Appx. 408, 409 (5th Cir. 2013) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)).

         B. Insurance Policy Interpretation under Louisiana Law[30]

         Under Louisiana law, an insurance policy, like any other contract, is construed according to the general rules of contract interpretation set forth in the Louisiana Civil Code. Cadwallader v. Allstate Ins. Co., 848 So.2d 577, 580 (La. 2003) (citations omitted). Contracts are interpreted to determine “the common intent of the parties.” Id. (citations omitted). “Words and phrases used in an insurance policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning.” Id. (citations omitted). An insurance policy “should not be interpreted in an unreasonable or strained manner under the guise of contractual interpretation to enlarge or to restrict its provisions beyond what is reasonably contemplated by unambiguous terms or achieve an absurd conclusion.” Id. (citations omitted). A court cannot exercise “inventive powers to create an ambiguity where none exists or the making of a new contract when the terms express with sufficient clearness the parties' intent.” Id. (citations omitted). Thus, clear and unambiguous policy wording that expresses the parties' intent is enforced as written. Id.

         Ambiguous provisions and “equivocal provisions seeking to narrow an insurer's obligation, ” on the other hand, are strictly construed against the insurer and in favor of coverage. Id. (citations omitted). However, the strict construction principle applies only if the ambiguous policy provision is susceptible of more than one reasonable interpretation. Id. (citations omitted). “[T]he insurer has the burden of proving the applicability of a coverage exclusion.” Hampton v. Lincoln Nat'l Life Ins. Co., 445 So.2d 110, 113 (La.App. 1984). “The determination of whether a contract is clear or ambiguous is a question of law.” Cadwallader, 848 So.2d at 580.

         C. Coverage of the Settlement

         In determining whether insurance coverage exists here for the settlement of the Iberiabank qui tam action, the Court refers to the bankers' professional liability policy (the Chubb policy), [31] the complaint in the qui tam action, and all facts known to the insurer. Chubb contends that facts known to it at the time it denied coverage included the settlement agreement between the government and Iberiabank resolving the Iberiabank qui tam action as well as the order of dismissal in the Iberiabank qui tam action, and Chubb asks the Court to take judicial notice of these documents. Iberiabank does not oppose the request, so the Court will consider these documents as well.

         The Chubb bankers' professional liability insurance policy at issue provides coverage as follows:

The Insurer [Chubb and/or Travelers] shall pay on behalf of the Insureds [Iberiabank] Loss[32] which the Insureds [Iberiabank] become legally obligated to pay by reason of any Claim[33] first made by a third party client of the Company [Iberiabank] against the Insureds [Iberiabank] during the Policy Period … for any Wrongful Acts[34] in rendering or failing to render Professional Services, if such Wrongful Acts take place prior to the end of the Policy Period.

         The Chubb policy defines the term “Professional Services” to mean:

services performed by or on behalf of the Company [Iberiabank] for a policyholder or third party client of the Company. The Professional Services must be performed pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of the Company.[35]

         Iberiabank argues that its settlement with the DOJ is a covered claim. Specifically, Iberiabank argues that, by participating in the DE program, it provided professional services to HUD in underwriting and originating loans backed by FHA insurance based on HUD's guidelines, such that HUD was Iberiabank's “third party client” for purposes of the professional liability policy.[36] Iberiabank also argues that the policy does not require that the “third party client” who brings a claim against Iberiabank have a written agreement with Iberiabank, pay for its professional services, or be the same entity to whom the professional services were provided.[37] Finally, Iberiabank argues that its claim is covered because its participation in the DE program was pursuant to a contract for which it received a benefit.[38]

         Chubb and Travelers contend that a plain reading of the policy demonstrates that Iberiabank's claim is not covered. The insurers argue that the government was not a customer or client of Iberiabank for whom Iberiabank performed professional services as defined in the policy.[39] The government did not seek advice from Iberiabank or pay it for services in issuing mortgages.[40] Instead, Iberiabank's clients were the borrowers to whom it issued mortgages, as a part of the underwriting that constituted its professional services, and Iberiabank was a client of the government (not vice versa) from whom Iberiabank obtained the mortgage insurance.[41] The insurers also argue that FCA claims are not covered under a professional liability insurance policy.[42]

         1. The government was not a “client” of Iberiabank

         The Court agrees with the insurers that a plain reading of the unambiguous policy language shows that Iberiabank's claim is not covered. The policy clearly states that it provides coverage for a loss incurred by Iberiabank on a claim made against it by a third-party client of Iberiabank for wrongful acts in performing professional services pursuant to a written contract “with such … client for consideration inuring to the benefit of” Iberiabank.[43] Because the term “client” is not defined in the policy, it is construed according to its plain and ordinary meaning. Cadwallader, 848 So.2d at 580. Black's Law Dictionary defines “client” as “[a] person or entity that employs a professional for advice or help in that professional's line or work.” Client, Black's Law Dictionary (10th ed. 2014). When the definition of “client” is considered in light of the terms of the policy, it is clear that the policy covers “wrongful acts” performed in rendering “professional services” to a “client” and that the wronged “client” must be the one to make the claim. See D'Amato v. Endurance Am. Specialty Ins. Co., 2012 WL 12872722, at *9 (S.D. Tex. Oct. 5, 2012) (interpreting similar policy language and stating that the “receipt of professional services thus appears to be the central characteristic defining what it means to be a client”).

         In the Iberiabank qui tam action, Iberiabank was accused of committing wrongful acts against HUD by submitting false and fraudulent information to the agency in connection with the bank's participation in the DE program. The structure of the transactions shows that HUD was not Iberiabank's client. Iberiabank, as a mortgage lender, was engaged by mortgage borrowers to make loans. The mortgage borrowers were the people who employed, and paid fees to, Iberiabank to underwrite the loans - one of its principal services. Thus, the borrowers were Iberiabank's clients. Iberiabank in turn submitted information to HUD to obtain mortgage insurance on those loans through the FHA, thereby providing a service to its borrowers, not HUD. Although Iberiabank was participating in a HUD-endorsed program, HUD was not the client paying Iberiabank for its professional services within the meaning of the policy. Further, Iberiabank was not accused of committing wrongful acts in the ...

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