On October 28, the United States District Court for the District of Massachusetts denied an insurer’s motion for summary judgment in a coverage action it had brought against its insured on a professional liability policy, an insurance broker who specialized in the placement of professional liability coverage for professionals including real estate agents and brokers. 

The insured broker was sued in California state court by a competitor insurance broker, which alleged that the insured placed real estate coverage for California applicants with non-admitted surplus lines insurers even though similar coverage was available from California-admitted insurers. The claims in the underlying action were for unfair business practices under the California statute, and negligent interference with prospective economic advantage. For relief, the complaint sought restitution, disgorgement and attorneys’ fees, as well as “such other and further relief as the court may deem just and proper.” Shortly after the lawsuit was filed and noticed as a claim, the insurer issued a reservation of rights letter stating that the policy did not cover the claim, but that it would provide a defense pending the outcome of a declaratory judgment action. After the ROR had been issued, another defendant in the underlying case successfully moved to strike the plaintiff’s demands for attorneys’ fees, restitution and disgorgement, on the grounds that “compensation for a lost business opportunity is not restitution,” and plaintiffs were not permitted to amend the complaint to include a demand for compensatory damages. 

In the declaratory judgment action, the insurer first argued that the acts alleged in the complaint did not constitute “wrongful acts” as defined in the policy. The court agreed that the first cause of action required intentional illegal conduct, and was therefore not covered, but found that the second cause of action of negligent interference with prospective economic advantage was “reasonably susceptible to an interpretation that it states or adumbrates a claim for negligence, which falls under the policy’s definition of wrongful act” and also fell within the definition of professional services. The insurer had argued that professional services coverage is not intended to cover claims by competitors, and is instead intended to cover breaches of professional duties, not claims over how the insured does business. The court was not persuaded, and concluded that the negligence claim did pertain to the insured’s performance of professional services. 

Next, the insurer argued that because there was no prayer for money damages remaining in the complaint, there could be no covered loss. The court again disagreed, because the catch-all prayer, “other just and proper” relief, remained in the complaint, and could justify an award of money damages. Furthermore, the plaintiffs could still make a request at trial for damages, even though such a claim was not included in the complaint on file. The insurer tried to further assert that any possible damages would be uninsurable under Massachusetts law, because any amount awarded would be restitution, and “loss within the meaning of an insurance contract does not include the restoration of an ill-gotten gain.” This argument by the insurer was rejected as well. Because the court in the underlying action had specifically forbidden the plaintiff from seeking restitution or disgorgement, any amount that the plaintiff might be ultimately awarded would now have to be damages for lost business opportunities, and therefore susceptible to coverage. 

The insurer did prevail on one point—the court agreed with it that the unfair business practices claim was barred by the policy’s exclusion for “unfair competition of any type.” However, the remaining negligence claim against the insured broker stood on its own and was not encompassed by that exclusion. 

Because the insurer retained the duty to defend, the insured was entitled to attorneys’ fees and legal expenses incurred in connection with the declaratory judgment action. This case illustrates how individual claims within a complaint will be considered by courts in a coverage action, and that developments in the underlying action may affect coverage in a variety of ways. 

A copy of the decision can be found here