Court Opinion

ID: 4517629
Source: CourtListenerOpinion
Date Created: 2020-03-19 00:00:23.460098+00
Date Added: 2024-06-11T11:25:35.416470
License: Public Domain

Case: 19-30190        Document: 00515350430         Page: 1       Date Filed: 03/18/2020

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                            United States Court of Appeals
                                                                                     Fifth Circuit

                                                                                   FILED
                                        No. 19-30190                         March 18, 2020
                                                                              Lyle W. Cayce
IBERIABANK CORPORATION,                                                            Clerk

          Plaintiff - Appellant

v.

ILLINOIS UNION INSURANCE COMPANY; TRAVELERS CASUALTY &
SURETY COMPANY OF AMERICA,

          Defendants - Appellees

                    Appeal from the United States District Court
                       for the Eastern District of Louisiana

Before WIENER and HIGGINSON, Circuit Judges.*
STEPHEN A. HIGGINSON, Circuit Judge:
      This case turns on the scope of professional liability insurance policies
issued to IberiaBank Corporation (“IberiaBank”). In late 2017, IberiaBank
entered into an $11,692,149 settlement (“DOJ Settlement”) with the United
States Department of Justice (“DOJ”), under which it acknowledged that it
provided mortgage certifications to the Department of Housing and Urban
Development (“HUD”) that did not meet all HUD requirements. The DOJ
Settlement also resolved claims arising from a whistleblower qui tam action

      *   This case is being decided by a quorum. 28 U.S.C. § 46(d).
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                                    No. 19-30190
alleging violations of the False Claims Act (“FCA”). IberiaBank filed a claim
with its primary and excess liability insurance providers, Illinois Union
Insurance Company (“Chubb”) 1 and Travelers Casualty and Surety Company
of America (“Travelers”) (collectively, “the Insurers”), requesting coverage for
the DOJ Settlement. The Insurers denied IberiaBank’s claim, arguing that it
was not covered by IberiaBank’s professional liability insurance policies with
the Insurers (“the Policies”). IberiaBank sued the Insurers for breach of
contract. The district court granted the Insurers’ motions to dismiss, finding
that the Policies provide no plausible claim for relief. IberiaBank appealed. We
AFFIRM.
                             I. FACTUAL BACKGROUND
             A. HUD’s Direct Endorsement Lenders Program
      The Federal Housing Administration (“FHA”), an agency within HUD,
insures approved lenders against defaults on certain mortgage loans for single-
family homes. 12 U.S.C. § 1708. The FHA insures loans only for individuals
who fit its risk profile. Previously, HUD oversaw the “very staff-intensive and
time-consuming” process of ensuring that the FHA insured lower-risk loans,
which involved confirming that the borrowers insured by the FHA had
sufficient credit. Delegation of Insuring Authority to Direct Endorsement
Mortgages, 62 Fed. Reg. 30222-01, 30222 (June 2, 1997). To alleviate HUD of
this burden, Congress authorized HUD to delegate the task of insuring
mortgages using a Direct Endorsement Program (“DE Program”). Id.; 12
U.S.C. § 1715z-21; Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 1997, Pub. L. No.
104-204, § 427, 110 Stat. 2874 (1996). Under the DE Program, Direct

      1  The parties refer to the Illinois Union Insurance Company policy as the “Chubb”
policy because that is the name of the insurer’s parent company.
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Endorsement Lenders (“DE Lenders”) agree to use HUD’s mortgage
underwriting standards when approving borrowers for home loans. DE
Lenders analyze the credit risk of each borrower using HUD’s guidelines, and
then certify to HUD that approved borrowers meet HUD’s underwriting
standards. The FHA then insures the DE Lender in the event the insured
borrower defaults. DE Lenders submit a formal certification to the FHA
declaring   that   the    mortgage    complies    with   all   HUD     underwriting
requirements.
      IberiaBank is a DE Lender. As a DE Lender, IberiaBank collects its
customary fees from borrowers as compensation for originating the loans.
B. The Allegations Against IberiaBank and Settlement with the DOJ
      In 2015, a former IberiaBank employee and a then-current IberiaBank
employee (“the Relators”) brought a whistleblower qui tam action on behalf of
the United States against IberiaBank, alleging that IberiaBank violated the
FCA during its participation in the DE Program. 2 The Relators alleged that
IberiaBank was non-compliant with HUD’s underwriting requirements.
Specifically, the Relators alleged that IberiaBank (1) improperly paid
commissions to underwriters; (2) provided false loan certifications to HUD; (3)
improperly certified compliance with HUD regulations; and (4) failed to report
defective or fraudulent loans. As a result of this conduct, the Relators alleged
that IberiaBank caused the FHA to pay insurance claims that it would not
have paid if IberiaBank had conducted appropriate underwriting due
diligence. The whistleblower qui tam action alerted the DOJ to potential
wrongdoing by IberiaBank and, in April 2017, the DOJ informed IberiaBank
of potential liabilities under the FCA.

      2  One Relator also brought employment-related claims against IberiaBank. These
claims were excluded from the DOJ Settlement and IberiaBank does not seek coverage for
those claims in this action.
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      The DOJ and IberiaBank entered into a Settlement Agreement on
December 12, 2017, under which IberiaBank agreed to pay $11,692,149. In the
Settlement Agreement, IberiaBank acknowledged that it certified certain
mortgages to HUD that were ineligible for FHA insurance under HUD’s
guidelines. IberiaBank also acknowledged that it paid “incentive payments to
underwriters and others who performed underwriting activities.” Further,
IberiaBank acknowledged that it did not disclose the existence of these
incentive payments to HUD, despite certifying that it had ceased paying
incentives to underwriters as of 2010. Finally, IberiaBank acknowledged that
it failed to comply with HUD’s self-reporting requirements when it became
aware of loans that involved possible fraud or serious underwriting violations.
However, IberiaBank did not acknowledge liability and “reserve[d] the right to
contest the use or application of [the Settlement Agreement] in any future
litigation.” As a result of the DOJ Settlement, the FCA counts in the qui tam
action were dismissed and the DOJ waived its right to pursue the remaining
common law claims. After the DOJ Settlement, IberiaBank submitted a claim
under the Chubb policy and, in the event its claim exceeded Chubb’s coverage,
submitted a claim under the excess Travelers policy as well. The Insurers
denied coverage, giving rise to this lawsuit.
           C. The Insurance Policies and IberiaBank’s Claim
      IberiaBank held two banker’s professional liability insurance policies—
a primary policy and an excess policy. First, IberiaBank held a primary policy
with a limit of $10,000,000 from Chubb. IberiaBank also held an excess policy
with a limit of $5,000,000 from Travelers. The excess Travelers policy adopts
the relevant language from the primary Chubb policy and, therefore, the
analysis applicable to the Chubb policy applies to the Travelers policy.
      The Insuring Clause of the Policies states:

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       The Insurer 3 shall pay on behalf of the Insureds 4 Loss 5 which the
       Insureds become legally obligated to pay by reason of any Claim
       first made by a third party client of the Company against the
       Insureds during the Policy Period or any applicable Discovery
       Period for any Wrongful Acts 6 in rendering or failing to render
       Professional Services, if such Wrongful Acts take place prior to the
       end of the Policy Period.

       The Policies define “Professional Services” as:
       [S]ervices performed by or on behalf of [IberiaBank] for a
       policyholder or third party client of [IberiaBank]. The Professional
       Services must be performed pursuant to a written contract with
       such policyholder or client for consideration inuring to the benefit
       of [IberiaBank].

       Based on their interpretation of the terms “Professional Services” and
“client,” the Insurers interpreted the Policies to exclude IberiaBank’s claim
and, therefore, denied it.
       In response to the Insurers’ denial of IberiaBank’s claim, IberiaBank
sued, alleging breach of contract. IberiaBank argued that the DOJ Settlement
“fell squarely within the Policies’ broad insuring agreement for professional
liability coverage because the Policies covered claims by a client for wrongful
acts in rendering ‘Professional Services.’” IberiaBank argued that it provided
“Professional Services” to HUD when it underwrote mortgages as a DE Lender,

       3  The Insurer is Chubb and, to the extent Chubb’s policy limit is exceeded, Travelers.
       4  The Insured is IberiaBank.
        5 “Loss” is defined as “the amount which the Insureds become legally obligated to pay

on account of each claim and for all Claims in the Policy Period . . . made against them for
Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments,
any award of pre-judgment and post-judgment interest, settlements and Defense Costs. Loss
does not include (1) any amount for which the Insureds are absolved from payment, (2) taxes,
fines or penalties imposed by law, (3) the multiple portion of any multiplied damage award,
(4) punitive or exemplary damages, or (5) matters uninsurable under the law pursuant to
which this Policy is construed.”
        6 “Wrongful Act” is defined as “any error, misstatement, misleading statement, act,

omission, neglect or breach of duty actually or allegedly committed or attempted by the
Insured Persons in their capacity as such or by the Company.”
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                                 No. 19-30190
and that the government (acting as IberiaBank’s “third party client”) claimed
IberiaBank committed wrongful acts when rendering those services, bringing
the DOJ Settlement within the Policies’ Insuring Clause. The Insurers moved
to dismiss, arguing that (1) the DOJ Settlement does not relate to “Professional
Services” provided by IberiaBank, and (2) the government is not IberiaBank’s
“client.”
      On February 13, 2019, the district court granted the Insurers’ motions
to dismiss for failure to state a claim because (1) the government is not
IberiaBank’s “client” under the DE Program and (2) IberiaBank did not provide
“Professional Services” to the government in its role as a DE Lender. The
district court then entered an order dismissing IberiaBank’s lawsuit against
the Insurers. We affirm.
                         II. PRELIMINARY ISSUES
                     A. Jurisdiction and Applicable Law
      This court has appellate jurisdiction under 28 U.S.C. § 1291 and
diversity jurisdiction under 28 U.S.C. § 1332. In a diversity case, this court
must apply state substantive law. As Louisiana’s choice-of-law rules dictate
and as the parties agree, Louisiana law applies to the interpretation of the
insurance policies here, which were issued in Louisiana. Am. Int’l Specialty
Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254, 260 (5th Cir. 2003)
(“Louisiana choice of law rules dictate . . . that in [an] action involving the
interpretation of insurance policies issued in Louisiana, Louisiana substantive
law governs.”). When determining Louisiana law, this court first looks to “the
final decisions of the Louisiana Supreme Court” and, absent guidance, we
make an Erie guess to determine “how [the Louisiana Supreme Court] would
resolve the issue if presented with the same case.” In re Katrina Canal
Breaches Litig., 495 F.3d 191, 206 (5th Cir. 2007). “In making an Erie guess,
we must employ Louisiana’s civilian methodology, whereby we first examine
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                                  No. 19-30190
primary sources of law: the constitution, codes, and statutes.” Id. In
Louisiana’s civilian system, jurisprudence and existing caselaw are considered
“a secondary law source.” Id. (quoting Prytania Park Hotel, Ltd. v. Gen. Star
Indem. Co., 179 F.3d 169, 169 (5th Cir. 1999)). Thus, this court is “not strictly
bound” by decisions of Louisiana’s intermediate courts. Id.
                            B. Standard of Review
      This court’s review of a district court’s order granting a motion to dismiss
for failure to state a claim is de novo. Leal v. McHugh, 731 F.3d 405, 410 (5th
Cir. 2013). “This court construes facts in the light most favorable to the
nonmoving party, ‘as a motion to dismiss under 12(b)(6) is viewed with disfavor
and is rarely granted.’” Id. (quoting Turner v. Pleasant, 663 F.3d 770, 775 (5th
Cir. 2011)) (internal quotation marks omitted). “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.’” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A
claim has facial plausibility 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. (citing Twombly, 550 U.S. at 556). Importantly,
“the tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions.” Id.
      “Interpretation of an insurance contract generally involves a question of
law.” Canal Breaches Litig., 495 F.3d at 206. Where an insurance contract
precludes recovery under its very terms, dismissal is proper. Id. at 221. In
evaluating the Insurers’ motion to dismiss, this court can consider the
pleadings, the motion to dismiss, and certain attachments to the motion to
dismiss. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498–99 (5th Cir.
2000) (“[D]ocuments that a defendant attaches to a motion to dismiss are
considered part of the pleadings if they are referred to in the plaintiff’s
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complaint and are central to her claim.”). Neither party challenges reliance on
the DOJ Settlement or qui tam complaint, which were attached to the Insurers’
motion to dismiss and referenced in IberiaBank’s original complaint.
                                III. ANALYSIS
                     A. Louisiana Contract Principles
      “An insurance policy is a contract between the parties and should be
construed by using the general rules of interpretation of contracts set forth in
the Louisiana Civil Code.” Cadwallader v. Allstate Ins. Co., 848 So. 2d 577, 580
(La. 2003). “The words of a contract must be given their generally prevailing
meaning.” La. Civ. Code art. 2047 (2019). “When the words of a contract are
clear and explicit and lead to no absurd consequences, no further
interpretation may be made in search of the parties’ intent.” Id. art. 2046; see
also Cadwallader, 848 So. 2d at 580 (“If the policy wording at issue is clear and
unambiguously expresses the parties’ intent, the insurance contract must be
enforced as written.”). “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.” Cadwallader, 848 So. 2d
at 580. “Courts lack the authority to alter the terms of insurance contracts
under the guise of contractual interpretation when the policy’s provisions are
couched in unambiguous terms.” Id. Courts should not “create an ambiguity
where none exists.” Id.
      However, “[a]mbiguous policy provisions are generally construed against
the insurer and in favor of coverage.” Id.; see also La. Civ. Code art. 2056. This
is known as Louisiana’s “rule of strict construction.” Cadwallader, 848 So. 2d
at 580. The rule applies “only if the ambiguous policy provision is susceptible
to two or more reasonable interpretations,” meaning that “each of the
alternative interpretations must be reasonable.” Id. (citing Carrier v. Reliance
Ins. Co., 759 So. 2d 37, 43–44 (La. 2000)).
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      The burden rests with the insured to prove that an insurance policy
covers a particular claim. Jones v. Estate of Santiago, 870 So. 2d 1002, 1010
(La. 2004). Here, the dispute concerns the scope of the insuring clause, not the
scope of any exclusion. Therefore, IberiaBank bears the burden of proving that
the DOJ Settlement is covered by the Policies. In the context of this case, that
means that IberiaBank must prove that the government is a “third party
client” and that IberiaBank rendered “Professional Services” to the
government in its role as a DE Lender.
                     B. Defining a “Third Party Client”
      The Policies only cover claims “made by a third party client” of
IberiaBank. The district court held that the government is not a “client” of
IberiaBank. The district court concluded that IberiaBank’s clients were the
mortgagees who borrowed money from IberiaBank, not the government.
      On appeal, IberiaBank argues that (1) the district court’s reliance on the
Black’s Law Dictionary definition of “client” was incomplete; (2) both borrowers
and the government can be IberiaBank’s “clients”; (3) payment of consideration
is not necessary for the government to become a “client”; and (4) Louisiana’s
“reasonable expectations” doctrine should apply to bring IberiaBank’s claim
within the scope of the Policies.
      The Insurers respond that (1) the Black’s Law Dictionary definition of
“client” provides sufficient guidance regarding the plain and ordinary meaning
of the term; (2) IberiaBank cannot claim that HUD is its “client” for purposes
of the Insuring Clause and that its borrowers are its “client” for purposes of
determining to whom it provides “Professional Services”; (3) the Insuring
Clause, by incorporating the definition of “Professional Services,” explicitly
requires that the insured services be provided to a client who pays
consideration to IberiaBank under written contract; and (4) the “reasonable
expectations” doctrine is inapplicable because the policy is unambiguous.
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      Black’s Law Dictionary defines “client” as “[a] person or entity that
employs a professional for advice or help in that professional’s line of work.”
Client, BLACK’S LAW DICTIONARY (11th ed. 2014). IberiaBank urges us to
consider the definition of “employ[s],” which includes “[t]o make use of” or “[t]o
use as an agent or substitute in transacting business.” Employ, BLACK’S LAW
DICTIONARY (11th ed. 2014). But IberiaBank’s layered definition disregards a
key restriction on the term “client” that appears on the face of the Policies. The
definition of “Professional Services” makes clear that, to be insurable, services
rendered by IberiaBank must be rendered to a “policyholder or client for
consideration” and “pursuant to a written contract.” HUD cannot be a “client”
under the Policy because the certifications rendered to HUD were not provided
“for consideration.” HUD did not pay IberiaBank to provide the certifications.
      IberiaBank next argues that HUD is the “client” who asserted a covered
claim against IberiaBank, and that the borrowers are the “clients” to whom
IberiaBank rendered its services (for consideration). According to IberiaBank,
the former “client” meets the definition in the Insuring Clause and the latter
“clients” meet the definition in the defined term “Professional Services”
because the borrowers pay fees to IberiaBank.
      IberiaBank’s interpretation contravenes a tenet of Louisiana contract
interpretation principles: “Each provision in a contract must be interpreted in
light of the other provisions so that each is given the meaning suggested by the
contract as a whole.” La. Civ. Code art. 2050; see also La. Ins. Guar. Ass’n v.
Interstate Fire & Cas. Co., 630 So. 2d 759, 763 (La. 1994) (“[O]ne policy
provision is not to be construed separately at the expense of disregarding other
policy provisions.”). IberiaBank incorrectly compartmentalizes the Insuring
Clause. The Insuring Clause incorporates the definition of “Professional
Services”; the two are not separate. Thus, under the terms of the Policies, the
“client for consideration” is the same client toward whom IberiaBank’s
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“Wrongful Acts in rendering or failing to render” its services were directed.
IberiaBank did not, however, engage in “Wrongful Acts” in providing mortgage
loans to borrowers; rather, IberiaBank engaged in “Wrongful Acts” when it
certified certain borrowers’ creditworthiness to HUD when those borrowers did
not meet all HUD requirements.
      In Elliott v. Continental Casualty Co., the Louisiana Supreme Court used
similar reasoning to deny professional liability insurance. 949 So. 2d 1247 (La.
2007). There, an attorney, Elliott, sought malpractice insurance coverage for a
claim brought by another attorney to whom he referred a case. Id. at 1248–49.
Another attorney, Bandaries, sought damages because Elliott failed to inform
him that Elliott had allowed a client’s cause of action to prescribe by failing to
timely file the claim before referring the client to Bandaries. Id. The insurance
policy defined a “Claim” as “a demand received by the Insured for money or
services arising out of an act or omission, including personal injury, in the
rendering of or failure to render legal services.” Id. at 1251 (emphasis omitted).
The Louisiana Supreme Court granted the insurer’s motion for summary
judgment and denied coverage. Id. at 1255. Although Elliott’s underlying act
involved a “failure to render legal services,” the policy was not triggered by
Elliott’s omission when transferring the case to Bandaries. Id. (“Elliott did not
fail to render legal services for Bandaries, but rather, Bandaries alleged that
Elliott failed to render legal services for [the client]. Bandaries’ assertion, that
Elliott ‘malpracticed’ by allowing [the client’s] cause of action to prescribe, is
merely descriptive of the type of information that Elliott allegedly withheld
from Bandaries.”). The rationale in Elliott applies here. Just as Elliott could
not procure coverage for a claim brought by Bandaries on the basis of legal
services rendered to the client, IberiaBank cannot procure coverage for a claim
brought by the government on the basis of professional services rendered to
IberiaBank’s borrowers.
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       IberiaBank also cannot rely on Louisiana’s “reasonable expectations”
doctrine because the terms of the policy are unambiguous. Under Louisiana’s
“reasonable expectations” doctrine, “[a]mbiguity will . . . be resolved by
ascertaining how a reasonable insurance policy purchaser would construe the
clause at the time the insurance contract was entered.” La. Ins. Guar. Ass’n,
630 So. 2d at 764. That doctrine does not apply when “the policy wording at
issue is clear and unambiguously expresses the parties’ intent,” as it does
here. 7 Id.
       IberiaBank’s reliance on First Horizon National Corp. v. Houston
Casualty Co. is misplaced. See No. 15-cv-2235, 2016 WL 1749802, at *2 (W.D.
Tenn. April 21, 2016). There, a bank sought professional liability coverage for
a DOJ settlement that arose from its participation in the DE Program. Id. at
*2. The district court in that case denied the insurer’s motion to dismiss, partly
because it was “undisputed that the DOJ/HUD settlement is the type of loss
covered by the insurance policies at issue.” Id. at *5. Of course, here, the entire
dispute centers on whether the DOJ Settlement should be covered by these
particular Policies. Therefore, First Horizon is inapt.
       This court is entitled to “draw on its judicial experience and common
sense” when interpreting contracts at the motion to dismiss stage. Iqbal, 556
U.S. at 679. Other courts have recognized in the context of medical-related
FCA claims that it makes little sense for a professional liability insurer to be
“on the hook” when a party “receive[s] sums of money for services it never
provided.” Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d 916,
923 (10th Cir. 2008). Similarly, here, IberiaBank’s disgorgement of mortgage
fees arising from loans it might not have offered absent FHA default insurance

       The fact that a policy term is undefined does not render the policy ambiguous. Canal
       7

Breaches Litig., 495 F.3d at 209; Sher v. Lafayette Ins. Co., 988 So. 2d 186, 193 (La. 4/8/08).
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is an expense beyond the scope of the professional liability insurance Policies
at issue. 8
       For these reasons, the government is not IberiaBank’s “client” and did
not become IberiaBank’s “client” as a result of the DE Program. Therefore,
IberiaBank’s DOJ Settlement claim is not covered by the Policies and the
district court properly granted the Insurers’ motions to dismiss. We need not
consider Travelers’ alternative argument that its payment obligation is not
triggered until IberiaBank exhausts its Chubb policy limits.
                                      IV. CONCLUSION
       For these reasons, we AFFIRM the district court’s order granting the
Insurers’ motions to dismiss.

       8 The parties also dispute whether IberiaBank’s underwriting activities constituted
“Professional Services,” as that term is defined in the Policies. Because the government is not
a “client,” we need not consider whether IberiaBank was providing “Professional Services”
when it performed its role as a DE Lender.
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