Court Opinion

ID: 9839921
Source: CourtListenerOpinion
Date Created: 2023-09-14 17:05:51.609645+00
Date Added: 2024-06-11T09:42:06.367785
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

ACE AMERICAN INSURANCE            §
COMPANY,                          §
                                  §      No. 360, 2022
    Defendant Below,              §
    Appellant and Cross Appellee, §      Court Below: Superior Court
                                  §      of the State of Delaware
    v.                            §
                                  §      C.A. No. N20C-04-268
GUARANTEED RATE, INC.,            §
                                  §
    Plaintiff Below,              §
    Appellee and Cross Appellant. §

                       Submitted: June 28, 2023
                       Decided:   September 14, 2023

Before SEITZ, Chief Justice; TRAYNOR and GRIFFITHS, Justices.

Upon appeal from the Superior Court. AFFIRMED.

John L. Reed, Esquire (argued), DLA PIPER LLP (US), Wilmington, Delaware;
David Newmann, Esquire, Courtney Devon Taylor, Esquire, Victoria A. Joseph,
Esquire, Brittany Armour, Esquire, HOGAN LOVELLS US LLP, Philadelphia,
Pennsylvania; Robert J. Katzenstein, Esquire, SMITH KATZENSTEIN &
JENKINS LLP, Wilmington, Delaware, for Defendant Below, Appellant and Cross
Appellee ACE American Insurance Company.

Thomas E. Hanson, Jr., Esquire, William J. Burton, Esquire, BARNES &
THORNBURG LLP, Wilmington, Delaware; Lilit Asadourian, Esquire (argued),
Alice Kyureghian, Esquire, BARNES & THORNBURG LLP, Los Angeles,
California; Aaron D. Lindstrom, Esquire, BARNES & THORNBURG LLP, Grand
Rapids, Michigan, for Plaintiff Below, Appellee and Cross Appellant Guaranteed
Rate, Inc.
SEITZ, Chief Justice:

      Management liability insurance policies provide insurance coverage for a

variety of risks associated with running and managing a business. Professional

liability policies cover specific risks for businesses that provide professional

services. Guaranteed Rate, Inc., a mortgage lender, purchased both types of

policies from ACE American Insurance Company. It sought coverage under the

policies for an investigation and eventual settlement of claims brought by the

federal government under the False Claims Act.

      ACE denied coverage under both policies.          According to ACE, the

Professional Liability Policy expressly excluded False Claims Act charges. ACE

also contended that the False Claims Act charges arose from Guaranteed Rate’s

professional services, which were excluded under the Management Liability

Policy. Only the Management Liability Policy is at issue in this appeal.

      In Guaranteed Rate’s suit against ACE, the Superior Court held that the

False Claims Act investigation and settlement did not arise out of Guaranteed

Rate’s professional services. Instead, it arose out of false certifications made to

the government. Thus, the Management Liability Policy covered the loss. We

agree with the Superior Court and affirm its judgment, including its disposition

of the claims raised on cross-appeal.

                                        2
                                              I.

                                              A.

       Guaranteed Rate, Inc. (“GRI”) underwrites and issues loans to borrowers.

GRI is an approved lender in the federal government’s Direct Endorsement (“DE”)

mortgage insurance program. As an approved lender, GRI can endorse single-family

residential mortgage loans for insurance and guaranty by the Federal Housing

Administration (“FHA”) and the United States Department of Veterans Affairs

(“VA”). 1 Under the DE program, approved lenders like GRI certify to the

government that each loan and the lender’s loan program meet FHA and VA

program rules. 2 If a mortgage loan is endorsed by an approved lender and the

borrower defaults, the lender can submit a claim to the government to cover certain

losses from the default.3

       In 2017, a former GRI employee brought a qui tam action against GRI. The

plaintiff, or relator in qui tam parlance, alleged that GRI violated the False Claims

Act by falsely certifying to the government that the loans it endorsed were eligible

for government insurance. The former GRI employee also claimed that GRI falsely

certified that it complied with all lending requirements.4 Under the False Claims

1
  App. to Opening Br. at A00208 (Settlement agreement) [hereafter “A__”].
2
  Id; A00217–18 (Relator’s complaint).
3
  A00208.
4
  A00219–20 (complaint). The former GRI employee alleged that GRI falsely represented: it was
not paying commissions to employees performing underwriting services, A00250; it was not
pressuring employees to endorse bad loans, A00255; it did not have a policy allowing management

                                              3
Act, a party is civilly liable if it “knowingly presents, or causes to be presented, a

false or fraudulent claim for payment or approval” or “knowingly makes, uses, or

causes to be made or used, a false record or statement material to a false or fraudulent

claim.”5

       On June 22, 2019, the U.S. Attorney’s Office for the Northern District of New

York and the U.S. Department of Justice issued a civil investigative demand (“CID”)

to GRI. The government notified GRI that it was investigating it for FCA violations.

According to the government, “[t]he investigation concern[ed] allegations that [GRI]

violated the Act by originating and underwriting federally-insured mortgage loans

that failed to meet applicable quality-control requirements.”6

                                               B.

       On July 8, 2019, GRI notified ACE that it received the CID.7 ACE is part of

the Chubb Group and has been referred to as “Chubb” in this litigation.8 As noted

to override government requirements, A00263; employees performing underwriting functions
were not being managed by mortgage origination activities, A00271; it was not manipulating
variables in order to endorse FHA loans for unqualified buyers, A00272; and it properly calculated
and verified borrowers’ financials in approving government-insured loans, A00276, A00280,
A00281, A00284. The relator also alleged that GRI failed to maintain an adequate quality control
program. A00287.
5
  31 U.S.C. § 3729(a)(1)(A)-(B).
6
  A00421 (CID).
7
  A01782.
8
  A00123 (Amended complaint).

                                                4
above, GRI purchased two insurance policies from ACE – a Management Liability

Policy and a Miscellaneous Professional Liability Policy.9

       Under the Management Liability Policy, ACE agreed to insure “the Loss . . .

which [GRI] becomes legally obligated to pay by reason of a Claim . . . for any

Wrongful Acts.” 10 Relevant here, “Loss” includes “settlements and Defense

Costs;” 11 “Claim” includes “a civil, administrative or regulatory investigation

against the Insured;” 12 and “Wrongful Acts” include “any error, misstatement,

misleading statement, act, omission, neglect, or breach of duty actually or allegedly

committed by” GRI.13

       Under the Management Liability Policy, ACE is not liable for a Loss from

any Claim “alleging, based upon, arising out of, or attributable to any Insured’s

rendering or failure to render professional services.”14 The Policy does not define

professional services. The Policy covers up to $5 million of liability, subject to a

$2.5 million self-insured retention. 15 The Professional Liability Policy defines

professional services as “mortgage banking and mortgage underwriting services and

9
  Opening Br. at 7-8; A01295 (ACE’s letter on December 31, 2019).
10
   A00327 (Management Liability Insurance).
11
   A00354–55.
12
   A00353.
13
   A00331–32.
14
   A00357.
15
   A00325.

                                             5
loan servicing for others for a fee.”16 That Policy expressly excludes coverage for

any Claim arising out of the False Claims Act.17

                                              C.

       ACE acknowledged receipt of GRI’s notice but did not respond substantively

until September 2019.         In the meantime, GRI supplemented its notice with

information that the government investigation also concerned whether GRI’s

officers or employees violated the False Claims Act.18 In September 2019, ACE

requested a copy of the CID, which GRI provided in December 2019 after the parties

negotiated a non-disclosure agreement.19 GRI also notified ACE in December that

they expected to receive a demand from the government in January 2020 and

requested a “formal coverage position on an expedited basis.”20

       On January 13, 2020, ACE responded and highlighted the definition of

“Claim” and the professional services exclusion in the Management Liability Policy:

       Since no regulatory proceeding has been commenced at this time and
       no request has been made of an insured individual, Chubb will treat this
       matter as Notice of Potential Claim under the Policy.

       To the extent this matter becomes a claim under the Policy, you should
       be aware that Exclusion 2 [i.e., the professional services exclusion] may
       preclude coverage for this matter.21

16
   Opening Br. at 9; A01296.
17
   Opening Br. at 9; A01296.
18
   A01802 (Email from Michael Tang).
19
   A02659–60 (GRI’s expert report).
20
   A01814 (Email from Kathryn Metz).
21
   A01866 (ACE’s denial letter on January 13, 2020).

                                              6
      Three days later, GRI advised ACE that the government demanded $24

million to settle the False Claims Act charges.22 After ACE requested additional

information, the parties spoke by phone on January 30, 2020.23 Even though GRI

sought authority to settle, ACE did not take a coverage position on the settlement.24

On February 5, 2020, GRI settled the FCA claims with the government and the

relator for $15.06 million. 25 The government and GRI reached the settlement

amount by sampling GRI’s FHA loans, analyzing for “defects material to false and

fraudulent claims,” and calculating a defect rate.26

      In the settlement agreement, GRI admitted that it underwrote and originated

government-insured loans that were not eligible under the FHA and VA programs,

“despite representing that such loans complied with applicable program

requirements.” 27 It also admitted that it did not adhere to the self-reporting

requirements, had provided commissions or gifts to its FHA underwriters in

violation of FHA requirements, and did not properly organize electronic folders for

government loan files. As a result, GRI agreed that it certified, and the government

22
   A02670 (GRI’s expert report).
23
   A01845–46 (Jon F. Varley’s deposition); A01877 (Anwar Shatat’s deposition); A01914–15
(Sylvia Toyos’ deposition).
24
   A01855 (Varley’s deposition).
25
   A00129, A00133 (Amended complaint); A01969 (Email from Shatat).
26
   A00988 (Letter regarding settlement).
27
   A00209 (Settlement agreement).

                                           7
insured, loans approved by GRI that were not eligible for certification and insurance

coverage. 28

       In a March 3, 2020 notice, ACE denied coverage for the settlement payment

under the Management Liability Policy and invoked the professional services

exclusion:

       The Civil Investigative Demand alleges, is based upon, arises out of,
       and is attributable to the Insured’s rendering or failure to render
       professional services. The investigation concerns allegations that
       Guaranteed Rate, Inc. violated the False Claims Act by originating and
       underwriting federally-insured mortgage loans that failed to meet
       applicable quality-control requirements. In this regard, Exclusion 2.
       serves to preclude coverage for this matter.29

                                            D.

       GRI filed this action against ACE and sought coverage for the settlement

amount and defense costs for the government investigation and the qui tam action.

GRI asserted claims for breach of contract and bad faith and sought a declaratory

judgment. The parties filed cross motions for partial judgment on the pleadings.

       In its first decision, the Superior Court granted GRI’s motion and held that the

CID fell within the definition of “Claim” under the Management Liability Policy,

which triggered ACE’s duty to advance defense costs.30 The court also held that the

28
   A00210.
29
   A01526 (ACE’s letter on March 3, 2020).
30
   Guaranteed Rate, Inc. v. ACE Am. Ins. Co., 2021 WL 3662269, at *5 (Del. Super. Aug. 18,
2021) [hereinafter “GRI I”], reargument denied, 2021 WL 4726608 (Del. Super. Oct. 11, 2021),
cert. denied, 2021 WL 5370794 (Del. Super. Nov. 16, 2021), and appeal refused, 266 A.3d 212
(Del. 2021).

                                             8
professional services exclusion did not bar coverage under the Policy. As the court

explained, ACE’s position – that the FCA claims fell within the professional services

exclusion – contradicted its position in another coverage dispute in IberiaBank Corp.

v. Illinois Union Insurance Co.31 In IberiaBank, Chubb argued successfully that

False Claim Act charges – like here, involving false loan compliance certifications

– did not qualify as professional services and therefore were excluded under a

professional services policy.

       The court also found that the exclusion must be interpreted narrowly in favor

of coverage. The term “professional services” was not defined in the Policy, which

caused the court to find, based on the record, that GRI’s business was underwriting

and issuing loans to borrowers, and not maintaining compliance with quality-control

standards.32 Thus, according to the court, the exclusion did not apply.33

       After discovery related to ACE’s affirmative defenses, the parties filed cross

motions for summary judgment. ACE argued again that the professional services

exclusion applied because the settlement negotiations showed that the settlement

was based on GRI’s underwriting services. The court disagreed and found that,

regardless of whether the FCA claims were about “quality control deficiencies” or

31
   2019 WL 585288 (E.D. La. Feb. 13, 2019), aff’d, 953 F.3d 339 (5th Cir. 2020).
32
   GRI I, at *4.
33
   The court also denied ACE’s motion for reargument. Guaranteed Rate, Inc. v. ACE Am. Ins.
Co., 2021 WL 4726608 (Del. Super. Oct. 11, 2021).

                                            9
“underwriting errors,” GRI’s duty to meet certain standards was owed to the

government, not to the borrowers. The professional services exclusion therefore did

not bar coverage.34 The court granted summary judgment to GRI on its breach of

contract and declaratory judgment claims.

       Finally, the Superior Court granted summary judgment to ACE on GRI’s bad

faith claim. The court found that there were good faith disputes about whether ACE

had grounds to deny coverage, and GRI’s expert report on ACE’s bad faith offered

only legal conclusions and did not create any genuine issues of material fact.35

       ACE has appealed the Superior Court’s rulings on the professional services

exclusion at the pleadings stage and the summary judgment stage. GRI has cross-

appealed the Superior Court’s ruling on its bad faith claim and failure to credit GRI’s

expert report.

                                              II.

       We review the grant of a motion for judgment on the pleadings as well as

summary judgment do novo.36 The factual allegations are reviewed in a light most

favorable to the non-moving party.37 “A motion for judgment on the pleadings may

34
   Guaranteed Rate, Inc. v. ACE Am. Ins. Co., 2022 WL 4088596, at *3 (Del. Super. Aug. 24,
2022).
35
   Id. at *9.
36
   Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 925 (Del. 2017),
as revised (June 28, 2017); Enrique v. State Farm Mut. Auto. Ins. Co., 142 A.3d 506, 511 (Del.
2016).
37
   Chicago Bridge, 166 A.3d at 917 n.13; Enrique, 142 A.3d at 511.

                                              10
be granted only when no material issue of fact exists and the movant is entitled to

judgment as a matter of law.”38 Similarly, if disputed issues of material facts exist,

summary judgment should not be granted.39

                                                A.

       The parties agree that GRI renders professional services when engaged in

“mortgage banking and mortgage underwriting services and loan servicing for others

for a fee.”40 There also appears to be agreement, or at least the lack of a serious

dispute, that GRI was not providing professional services if it engaged in wrongful

activity that violated the False Claims Act.41 Where the parties disagree is whether

the FCA claims arose out of GRI’s loan originating and underwriting services, which

triggers the professional services exclusion under the Management Liability Policy.

       We start our analysis with IberiaBank, where Chubb (ACE) argued

successfully that False Claims Act charges against the bank did not qualify as

professional services under professional liability policies and were therefore

excluded from coverage.42 At the outset, it is important to note that IberiaBank is

38
   Chicago Bridge, 166 A.3d at 925.
39
   Enrique, 142 A.3d at 511.
40
   Opening Br. at 9; A01296.
41
    ACE argues that GRI’s settlement was based on underwriting errors while performing
professional services. But as we explain later, the settlement was based on false statements to the
government, not the performance of GRI’s underwriting practices.
42
   A02517 (Response Brief of Appellee Illinois Union Insurance Company at 16, IberiaBank Corp.
v. Illinois Union Ins. Co., 953 F.3d 339 (5th Cir. 2020) (No. 19-30190)); Illinois Union Insurance
Company’s Memorandum in Support of Rule 12(b)(6) Motion to Dismiss, IberiaBank, 2019 WL
585288 (No. 18-1090).

                                               11
not pertinent as a matter of judicial estoppel. Instead, it bears on how Chubb (ACE)

has interpreted “professional services” under similar policies in similar

circumstances. It is also a matter of agreeing with the reasoning supporting Chubb’s

(ACE’s) successful argument to the federal court.

      In IberiaBank, a former bank employee brought a qui tam action against the

bank on behalf of the United States government. The employee alleged that the bank

falsely certified to the FHA that loans submitted for insurance complied with

relevant regulations and were eligible for FHA insurance. Following a government

investigation into the charges, the bank paid to settle the dispute.

      Chubb insured IberiaBank under professional liability policies. After Chubb

denied coverage for the settlement payment and defense costs, IberiaBank filed suit

in federal district court. The Eastern District Court of Louisiana agreed with

Chubb’s argument that submitting false certifications to the federal government was

separate from IberiaBank’s professional services – loan underwriting for clients –

and therefore were not covered losses under the policies:

      The crux of the FCA claims in the qui tam action against Iberiabank is
      that the bank promised to provide a certain level of underwriting in
      connection with its participation in the DE program; and the bank
      certified to the government that it provided the agreed level of
      underwriting when it had not, resulting in the issuance of FHA
      insurance on ineligible loans, the payment of insurance claims on
      ineligible loans, and the payment of mortgage commissions in violation
      of HUD regulations. Thus, while Iberiabank urges coverage by
      focusing only on its underwriting as the “professional services”
      triggering coverage under the Chubb policy, the bank ignores its

                                          12
       conduct that lay at the heart of the FCA claim and that falls outside the
       ambit of insurance coverage – namely, Iberiabank’s false certifications
       to the government that it had provided the agreed level of underwriting
       in connection with obtaining the FHA insurance.43

       The district court concluded that FCA claims “are not predicated on the

insured’s professional services” and the insured did not provide “professional

services” to the government when it falsely certified loans in the participation of the

DE program.44

       The IberiaBank court was on firm precedential footing when it denied

coverage under the professional liability policy.45 For instance, the Seventh Circuit

held in Health Care Industry Liability Insurance Program v. Momence Meadows

Nursing Center, Inc. that a FCA claim did not trigger coverage under the insured’s

professional liability policy.46 There, the government alleged that a nursing center

falsely certified that it met Medicare and Medicaid provider requirements.47 The

appellate court rejected the insured’s argument that the FCA damages were “because

43
   IberiaBank, 2019 WL 585288, at *7.
44
   Id. at *5.
45
   Id. at *5 (“Every federal circuit faced with the issue has held that coverage under a professional
liability insurance policy is not triggered by claims asserted under the False Claims Act because
such claims are not predicated on the insured’s professional services that are covered by such a
policy.”); Illinois Union Insurance Company’s Memorandum in Support of Rule 12(b)(6) Motion
to Dismiss; See Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., Inc.,
566 F.3d 689, 695 (7th Cir. 2009); Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d
916, 921-23 (10th Cir. 2008); Horizon W., Inc. v. St. Paul Fire & Marine Ins. Co., 45 F. App’x
752, 753-54 (9th Cir. 2002); Jenkins v. St. Paul Fire & Marine Ins. Co., 8 F. App’x 573, 574 (8th
Cir. 2001).
46
   566 F.3d at 694–96.
47
   Id. at 691.

                                                13
of” injuries from medical incidents that arose out of the rendering of professional

services.48 The court found that the damages in the FCA action “result[ed] from

th[e] allegedly false filings” and that “[l]iability under the FCA is based solely upon

the creation or presentation of false claims to the government, not upon the

underlying conduct used to establish the falsity of such a claim.”49 “[A]ll plaintiffs

need to show [for a FCA claim] is that [the insured] billed the government for

services and a level of care that it knew it was not providing.”50

       Another example is Zurich American Insurance Co. v. O’Hara Regional

Center for Rehabilitation, a case once again involving false medical billing by a

nursing center. The Tenth Circuit held that “[t]he government’s injury [in an FCA

action] was not caused by O’Hara’s failure to provide professional services, but

instead resulted from O’Hara’s submission of false and fraudulent claims for

reimbursement.” 51 “The problem,” the court noted, “was not the actual level of

services provided to O’Hara’s patients, but rather that O’Hara billed for services it

did not provide —namely, enhanced services.”52

       Although these cases involved exclusions under professional liability policies

rather than an exclusion in a management liability policy, they nonetheless map

48
   Id. at 694.
49
   Id. at 694–95 (quoting Horizon W., 214 F.Supp.2d at 1077–79).
50
   Id. at 695.
51
   Zurich, 529 F.3d at 921.
52
   Id. at 921-22.

                                             14
closely to the coverage determination in this case. GRI provided professional

services to borrowers through mortgage banking, mortgage underwriting, and loan

servicing.   The FCA charges, however, did not relate to the performance of

professional services it provided to others. Instead, GRI settled charges that it

defrauded the government under the FCA by falsely certifying that loans met FHA

and VA insurance requirements. GRI’s alleged misconduct arose out of the false

certifications, not the professional services GRI provided to borrowers. Thus, the

FCA charges and eventual settlement did not fall within the professional services

exclusion in the Management Liability Policy.

                                         B.

      We are not persuaded by Ace’s arguments to the contrary. First, ACE argues

that the federal cases are distinguishable because the insurance policies in those

cases did not use the words “arising out of.”       But for the deficiencies in its

underwriting, Ace argues, the FCA claims would not exist. More specifically, ACE

claims that the government must demonstrate the deficiencies in GRI’s underwriting

services to prove that the certifications were false and that the government was

harmed. ACE contends further that even if GRI’s false certifications are not the only

“but for” cause for the FCA claims, multiple “but for” causes should be considered.

      It is correct that Delaware courts have interpreted liberally the words “arising

out of” in insurance policies. For instance, this Court held in Pacific Insurance Co.

                                         15
v. Liberty Mutual Insurance Co. that “arising out of” requires “some meaningful

linkage between the two conditions imposed in the contract.” 53                  There, the

meaningful linkage existed between the two conditions – the contractor’s operations

and the railroad company’s resulting liability in a wrongful death action – because

the plaintiff alleged that the railroad company had notice of the dangerous condition

created by the contractor and failed to exercise reasonable care to eliminate it. Also,

in Eon Labs Manufacturing, Inc. v. Reliance Insurance Co., this Court found that

the underlying mass tort claims known as the “fen-phen suits” arose from Eon’s

pharmaceutical product. 54 We held that, even when liability is based on the

combined use of Eon’s product and another product, there was a meaningful linkage

to Eon’s product because “in all of the cases it is the involvement or presence of

Eon’s phentermine . . . that is the basis of the fen-phen suits.”55 “[B]ut for Eon’s

product,” the Court found, “there would be no combination that would lead to the

fen-phen claims.”56

       The main problem with ACE’s “but for” argument in this case is that the FCA

claims were not caused by the professional services provided to borrowers. There

is “no causal connection [] between the failure to perform [professional] services

53
   Pac. Ins. Co. v. Liberty Mut. Ins. Co., 956 A.2d 1246, 1256-57 (Del. 2008).
54
   756 A.2d 889, 889–90 (Del. 2000).
55
   Id. at 893.
56
   Id.

                                               16
and the damages alleged by the government.”57 Also, unlike Pacific Insurance Co.

and Eon, where the harm arose from negligent conditions or the use of a product, the

underlying lawsuit here is not based on the failure to perform professional services.58

In a technical sense, without GRI’s underwriting conduct, some of the certifications

would not be false. But a meaningful linkage is absent given the difference between

the subject of FCA claims – false certifications – and the underlying conduct used

to demonstrate the falsity of the claims – underwriting loans.59

       ACE has also failed to persuade us that the policy language in this case is

materially different from the policy language in other cases. In IberiaBank, for

example, the operative language was whether the FCA claim was “for any Wrongful

Acts in rendering or failing to render Professional Services.” 60 In Zurich, the

policies used the words “because of” or “arising out of” the rendering of professional

services.61 Even with the different language, the court found that false certifications

were an independent significant act that interrupted the “but for” causal chain

between the insured’s failure to furnish adequate nursing services and the

57
   Zurich, 529 F.3d at 923.
58
   Momence, 566 F.3d at 695 (“Liability under the FCA is based solely upon the creation or
presentation of false claims to the government, not upon the underlying conduct used to establish
the falsity of such a claim.” (quoting Horizon W., 214 F.Supp.2d at 1077–79)).
59
   Momence, 566 F.3d at 695; IberiaBank, 2019 WL 585288, at *7.
60
   IberiaBank, 2019 WL 585288, at *4 (emphasis added).
61
   Zurich, 529 F.3d at 923–24 (emphasis added).

                                               17
government’s injury.62 The same goes for Gallup, Inc. v. Greenwich Insurance Co.

There, the professional services exclusion excluded claims “based on, arising out of,

directly or indirectly resulting from, in consequence of, or in any way involving any

actual or alleged act . . . in connection with the Insured’s performance or failure to

perform professional services.” 63 The Delaware Superior Court held that the

exclusion did not apply because the alleged fraudulent billing practices were not

professional services and the exclusion was drafted so broadly that it rendered

coverage meaningless under the policy.64

       ACE’s interpretation of “arising out of” effectively extends coverage of the

exclusion to just about anything remotely connected to the professional service.

62
   Id. at 924. As ACE notes, Colorado law governed in Zurich and required more than a mere “but
for” relation between the injury and the covered activity. Although under Delaware law “arising
out” is perhaps more broadly defined, we agree with the Zurich court’s alternative holding that
there is no causal connection between the failure to perform professional services and the FCA
claims here.
63
   Gallup, 2015 WL 1201518, at *11.
64
   Id. at *12-13. ACE argues that the language of the exclusion here is not as broad as the one in
Gallup. That is correct. The decision, however, is still an example where the court is reluctant to
read professional services exclusions to include FCA claims when they are based on false
certifications, not professional services. See also Ambrosio v. Brit UW Ltd., 606 F. App’x 885,
887-88 (9th Cir. 2015) (professional services exclusion did not apply where policy provided
coverage for “any act, error or omission in connection with the performance of any professional
services” whether it was “in connection with,” “arising out of,” or “due to” professional services
because the alleged wrongful conduct in the underlying complaint (encumbering invested property
without investors’ consent) was too tenuously connected to the rendering of professional services
(the sale of securities); M/G Transp. Servs., Inc. v. Water Quality Insur. Syndicate, 234 F.3d 974,
977-78 (6th Cir. 2000) (coverage denied where FCA charges against government contractor for
falsely certifying Clean Water Act compliance did not arise “by reason of or with respect to”
liability under the Clean Water Act: “An FCA action is not converted into a Clean Water Act
action simply because a violation of the Clean Water Act is a predicate to establishing the falsity
of a claim, or may be used as a measure of damages under the FCA.”).

                                                18
Courts have often held that professional service exclusions do not apply when the

act complained of is only incidental to an insured’s professional services. 65 In

Delaware Insurance Guaranty Ass’n v. Birch, for example, the Superior Court held

that the professional services exclusion in a doctor’s general liability policy did not

apply to a claim brought by a patient alleging the doctor breached the duty not to

disclose her confidential medical information. As the court held, record keeping was

incidental to the doctor’s professional service. 66 Adopting ACE’s interpretation

would mean that many acts only incidentally related to professional services, such

as record keeping or false certifications, would be excluded under the professional

services exclusion if the act would not have arisen but for the rendering of

professional services. 67       In other words, a linkage must be meaningful, not

tangential.

       ACE points us to two cases in support of its argument that the FCA claims

arose out of the rendering of professional services and fall under the professional

65
   See, e.g., Ambrosio, 606 F. App’x at 887–88; Am. Nat’l Fire Ins. Co. v. Abrams, 2002 WL
243455, at *6 (N.D. Ill. Feb. 19, 2002) (finding that claims against a law firm alleging violations
of RICO and fraud did not arise out of the rendering of professional services because risk of fraud
is not inherent in the practice of law).
66
   2004 WL 1731139, at *6 (Del. Super. July 30, 2004).
67
   See also Hartford Cas. Ins. Co. v. Samuel Eng’g, Inc., 2014 WL 959326, at *6 (D. Colo. Mar.
12, 2014) (rejecting the insurer’s contention “that the phrase ‘arising out of,’ as used in the
[professional services] exclusion, cause[d] the exclusion to cover non-professional activities that
are tied in some way to professional services.”). But see Beazley Ins. Co., Inc. v. ACE Am. Ins.
Co., 880 F.3d 64, 73 (2d Cir. 2018) (holding that the insured’s incorrect advertising, although not
part of its professional services, was within the professional services exclusion because the claim
arose out of the rendering of professional services).

                                                19
services exclusion. In HotChalk, Inc. v. Scottsdale Insurance Co., former employees

filed a qui tam action against HotChalk and alleged that HotChalk violated federal

regulations governing enrolling students receiving financial aid, including bans on

incentive compensation.68 The former employees alleged that the violations caused

students and the universities they attended to submit false claims to the federal

government.

       HotChalk purchased a directors and officers liability policy that excluded

claims “alleging, based upon, arising out of, attributable to, directly or indirectly

resulting from, in consequence of, or in any way involving the rendering or failing

to render professional services.”69 The Ninth Circuit found that “HotChalk’s alleged

liability derived from the fact that its professional services caused ineligible students

and ineligible universities to submit claims for federal financial aid to the DOE. As

a result, the liability arose out of HotChalk’s rendering of professional services and

was therefore excluded from coverage.”70

       Importantly, the Ninth Circuit also found the connection between the

underlying conduct and the FCA violations more than incidental. Instead, as the

court held, “the relationship between HotChalk’s professional services and its

alleged liability was direct and well within the plain language of the professional

68
   736 F. App’x 646 (9th Cir. 2018).
69
   Id. at 648.
70
   Id.

                                           20
services exclusion at issue in this case.”71 Here, however, GRI’s false certifications

are only incidental to its underwriting services.

         Similarly, in Beazley Insurance Co. v. ACE American Insurance Co., the

Second Circuit held that a claim alleging that the insured made misstatements and

omissions in violation of federal securities law arose out of the insured’s professional

service providing a functioning trading platform. 72 The insured argued that its

misstatements were in advertisements for its business services and thus were not

professional services. The court held, however, that the plaintiffs’ loss was directly

caused by the insured’s failure to design properly and maintain its trading platform.

The loss was not attributable to the insured’s marketing. The same cannot be said

in this case. What directly caused the government’s injury was not GRI’s failure to

provide professional services, but its false certifications.

         The Superior Court correctly concluded that the professional services

exclusion did not bar coverage under the Management Liability Policy.

                                          III.

         GRI cross-appeals the Superior Court’s summary judgment ruling dismissing

its bad faith claim. GRI argues that genuine issues of fact exist about whether ACE

lacked reasonable justification for denying GRI coverage. According to GRI, ACE’s

71
     Id. at 648 n.2.
72
     880 F.3d at 71–73.

                                           21
denial of coverage based on the professional services exclusion was in bad faith

because it contradicts ACE’s contemporaneous position in IberiaBank, the legal

authority on the same issue, and ACE’s position on its professional liability policy

that it issued to GRI. Further, GRI argues that before the government made a

demand, ACE acted in bad faith in interpreting the government’s civil investigation

demand as a notice of potential claim rather than a “Claim” as defined and covered

by the Management Liability Policy. GRI also claims that ACE delayed its claim

handling in bad faith.

          “We have recognized that an insured has a cause of action for breach of the

implied covenant of good faith when the insurer refuses to honor its obligations

under the policy and clearly lacks reasonable justification for doing so.”73 “Mere

delay is not evidence of bad faith, provided that a reasonable justification exists for

refusing to make payment . . . .”74

          ACE had reasonable justification in denying coverage based on the

professional services exclusion. ACE made colorable arguments that the same

policy language at issue here, i.e., “arising out of,” is distinguishable from many

cited federal cases and the professional liability policy that ACE issued to GRI.

73
     Enrique, 142 A.3d at 511.
74
     Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 266 (Del. 1995).

                                                 22
Although we ultimately disagree with ACE’s position, we cannot say that its position

clearly lacks reasonable justification.

       GRI also argues that the Superior Court erred by not considering its expert

report, which opined that ACE’s claim-handling process fell below industry

standards. GRI’s expert report reads like a legal brief rather than an expert opinion

relating to facts. The report cited legal treatises and authorities to support nine

general claim-handling principles, which were referred to as “proper claims

practices and standards.”75 The expert then expressed an opinion throughout the

report that what ACE did fell below such standards. The Superior Court correctly

accorded the report little weight for expressing opinions on the law.76

                                                IV.

       The judgment of the Superior Court is affirmed.

75
    A02643–45 (ACE’s expert report) (the principles include treating the interests of its
policyholder as equal to its own, undertaking thorough and timely investigation, looking for and
considering facts and theories that support coverage, being aware that it ultimately bears the burden
of proof on establishing exclusion, being aware that courts commonly construe coverage grants
broadly and exclusion narrowly, giving words plain meaning, not taking irreconcilable positions
whose only consistency is denial of coverage, not hiding the ball regarding coverage positions,
and acting in a timely manner).
76
   See Enrique, 142 A.3d at 515–16.

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