Opinion ID: 788877
Heading Depth: 2
Heading Rank: 2

Heading: The Case Law on Professional Malpractice Insurance

Text: 18 Since our primary analytical considerations under California law — the plain language of the PMI policy and the canons of interpretation applicable to insurance policy contracts — both demand a finding of coverage, we need proceed no further. However, since the district court ultimately arrived at the opposite conclusion via a different analysis, it is appropriate to address the disposition below on its own terms. 19 Confronted with the PMI policy's strikingly broad definition of Professional Services, the district court turned to leading judicial constructions of that term in traditional professional malpractice policies. 2002 WL 32065867, at . The most authoritative construction of the term professional services as used in the malpractice insurance setting was made by the Ninth Circuit in Bank of California, N.A. v. Opie: 20 Something more than an act flowing from mere employment or vocation is essential.... A `professional' act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual.... In determining whether a particular act is of a professional nature or a `professional service' we must look not to the title or character of the party performing the act, but to the act itself. 21 663 F.2d 977, 981 (9th Cir.1981) (quoting Marx v. Hartford Accident & Indem. Co., 183 Neb. 12, 157 N.W.2d 870, 871-72 (1968)). To be considered a professional service for insurance purposes, a liability must arise out of the special risks inherent in the practice of the profession. Id. This standard has been cited with approval by several courts across the country, including a California federal district court applying California law. See, e.g., Pac. Ins. Co. v. Burnet Title, Inc., 380 F.3d 1061, 1064-65 (8th Cir.2004) (applying a similar standard); Med. Records Assocs., Inc. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 514 (1st Cir.1998) (applying the same standard); Horizon W., Inc. v. St. Paul Fire & Marine Ins. Co., 214 F.Supp.2d 1074, 1078 (E.D.Cal.2002) (applying California law and adopting the Opie standard). 22 In keeping with this general rule, California state courts have uniformly held that insurance policies covering professional services reach only those acts committed by the insured in his or her capacity as a professional — they do not cover general administrative activities that occur in all types of businesses. For example, Inglewood Radiology Medical Group, Inc. v. Hospital Shared Services, Inc., held that professional malpractice insurance does not cover a lawsuit concerning a physician's decision to fire an employee, even though the physician's professional medical knowledge was required to make employment evaluations. 217 Cal.App.3d 1366, 266 Cal.Rptr. 501, 503 (Ct.App.1989) ([T]he decision to terminate employment is a business or administrative decision. In making such a decision, the physician is acting as an employer and not as a `physician rendering services.'). Similarly, Blumberg v. Guarantee Insurance Co. held that professional malpractice insurance does not cover a lawsuit between attorneys over an alleged breach of their partnership agreement since, in bringing the suit, the plaintiff was acting in his capacity as a law partner, not as an attorney rendering services. 192 Cal.App.3d 1286, 238 Cal.Rptr. 36, 39 (Ct.App.1987). Transamerica Insurance Co. v. Sayble held that professional malpractice insurance did not cover litigation expenses arising from an attorney's alleged mismanagement of a law firm. 193 Cal.App.3d 1562, 239 Cal.Rptr. 201, 205 (Ct.App.1987). Since the case was held to concern essentially a business dispute, it did not implicate the defendant's professional activities as an attorney. At least one California court has held that, in such cases, the dispositive question is whether the alleged injuries occurred during the performance of professional services. Tradewinds Escrow, Inc. v. Truck Ins. Exch., 97 Cal.App.4th 704, 118 Cal.Rptr.2d 561, 568 (Ct.App.2002). 23 In applying these precedents to the case at bar, the district court characterized PMI's alleged kickback scheme and disclosure failures as a [b]illing matter involving undercharging its clients for ... products and services. 2002 WL 32065867, at . It cites Medical Records for the proposition that the bill is an effect of the service provided, not part of the service itself. 142 F.3d at 516. Insurers also cite several cases that establish the general proposition that claims regarding the amount of fees charged for professional services are not covered under professional liability policies. 7 This conclusion, anchored in an unqualified analogy between the PMI policy and traditional professional malpractice policies, is flawed. 24 It should be observed, first, that PMI is a major financial institution whose core lines of business include, among other things, the sale of mortgage insurance. PMI is not engaged in one of the traditional professions as that term is commonly understood, and it does not render the physical or intellectual acts of service one commonly associates with doctors or lawyers. Additionally, it is important to note that the PMI policy language is significantly broader than the language at issue in any of the aforementioned professional malpractice insurance cases. The professional malpractice policies in virtually all of those cases define professional services narrowly, explicitly limiting coverage to acts performed by the insured in its professional capacity. See, e.g., Johnson v. First State Ins. Co., 27 Cal.App.4th 1079, 33 Cal.Rptr.2d 163, 165 (Ct.App.1994) (Professional Services defined as all services rendered or which should have been rendered for others: 1. by the Insured in the Insured's capacity as a lawyer, notary administrator of an estate....) (emphasis added); Sayble, 239 Cal.Rptr. at 203 n. 2 (Professional Services defined as all services rendered or which should have been rendered for others: 1. By the Insured in the Insured's capacity as a lawyer ....) (underscore emphasis added); Inglewood Radiology, 266 Cal.Rptr. at 502 (professional services defined as those services performed in the practice of the profession of a physician ) (emphasis added); Blumberg, 238 Cal. Rptr. at 37 (policy covers claims arising out of ... any acts or omissions of the Insured in rendering or failing to render professional services for others ... in the Insured's capacity as a lawyer ) (emphasis in original). The PMI policy does not contain any such explicit restriction and thus is distinguishable from the policies analyzed in these cases. A policy that uses the buzzwords professional services, but then proceeds to define them more broadly than most standard malpractice policies, should certainly be read differently than policies containing narrower language. 25 But even to the extent that the aforementioned malpractice precedents are indirectly relevant here — PMI's core business does, after all, involve specialized knowledge and expertise — it is not clear that they favor the Insurers. PMI was acting in its professional capacity as a mortgage lender, and within the context of its specialized relationships with its lender-clients, when the alleged improper conduct occurred. While the kickback scheme at issue does involve the valuation or pricing of services, PMI has not been charged merely with sending customers inflated invoices. It has been accused of participating in an ongoing collusive scheme under which it received customer referrals in exchange for undercharging lender clients for its services. And while PMI was not formally charged with disclosure violations under RESPA, the Baynham plaintiffs alleged that PMI acted in concert with its lenders to violate Regulation X [of RESPA] which specifically imposes a duty to disclose ... the nature of the relationship between the lender and a required service provider. 8 This alleged kickback scheme goes to the heart of PMI's business. It implicates the way in which it finds and serves its customers, the business opportunities that it enjoys and the network of professional relationships through which it operates. 9 This alleged behavior is a far cry from more conventional administrative pricing decisions or improper billing practices. 26 In short, even assuming, arguendo, that we may look beyond the text of the PMI policy in resolving this case, Insurers find little support in California case law on professional malpractice policies, which apply narrower policy language to professional conduct fundamentally different from that at issue here. The district court's invocation of these precedents to characterize PMI's alleged kickback scheme as merely an administrative or billing matter was erroneous.