Utica Mut. Ins. Co. v. Herbert H. Landy Ins. Agency, Inc.

• Decision Date: 19 April 2016
• Docket Number: No. 15–1220.,15–1220.
• Citation: 820 F.3d 36
• Parties: UTICA MUTUAL INSURANCE COMPANY, Plaintiff, Appellant, v. HERBERT H. LANDY INSURANCE AGENCY, INC., Defendant, Appellee, CRES Insurance Services, LLC, Defendant.
• Court: U.S. Court of Appeals — First Circuit

820 F.3d 36

UTICA MUTUAL INSURANCE COMPANY, Plaintiff, Appellant

v. HERBERT H. LANDY INSURANCE AGENCY, INC., Defendant, AppelleeCRES Insurance Services, LLC, Defendant.

No. 15–1220.

United States Court of Appeals, First Circuit.

April 19, 2016.

Erin K. Higgins, with whom Russell F. Conn, Katherine A. Kelter, and Conn Kavanaugh Rosenthal Peisch & Ford LLP were on brief, for appellant.

John A.K. Grunert, with whom Goganian & Associates, P.C. was on brief, for appellee.

Before HOWARD, Chief Judge, LYNCH and LIPEZ, Circuit Judges.

HOWARD, Chief Judge.

Utica Mutual Insurance Company (“Utica”) appeals from a summary judgment order requiring it to defend its insured Herbert H. Landy Insurance Agency (“Landy”) in a California state court lawsuit. Agreeing with the district court that Utica is obligated to defend Landy under its professional liability insurance policy, we affirm.

I. Background

Landy and Utica each are insurance companies. Landy provides insurance to real estate professionals, and Utica insured Landy under a professional liability insurance policy. This policy, which the parties agree is governed by Massachusetts law, contains a “duty to defend” obligation that required Utica to defend Landy in certain lawsuits arising from errors and omissions in Landy's provision of professional services as an insurance broker and agent.

Landy alleges that Utica's duty to defend was triggered when Landy was sued by CRES Insurance Services, LLC (“CRES”). CRES is a competitor of Landy in the California real estate professional liability insurance market. CRES sued Landy in California state court, alleging that Landy had engaged in unfair business practices in violation of California state law.¹

Specifically, CRES alleged that California law divides the relevant insurance market between “admitted” and “surplus” insurers. See generally Cal. Ins.Code § 1763 ; Cal.Code Regs. tit. 10, §§ 2131 –2140 ; 39 Cal. Jur.3d Insurance Companies § 227.² According to CRES's complaint, admitted insurers generally charge higher premiums than surplus insurers. Nevertheless, California law favors the admitted insurers. See Cal.Code Regs. tit. 10, § 2132(a). California permits an insurance broker to offer a surplus insurer's policy only in limited circumstances when the admitted pool is deemed inadequate. See Cal. Ins.Code § 1763(a) ; Cal.Code Regs. tit. 10, § 2132(b). CRES alleged that Landy improperly offered surplus insurers' policies despite the adequacy of the admitted market.

Based on these facts, CRES asserted two causes of action. CRES's first claim was a statutory claim alleging that Landy's violation of the state insurance code constituted unfair business practices. See Cal. Bus. & Prof.Code § 17200, et seq.

CRES's second claim was for negligence, alleging that Landy's conduct negligently interfered with CRES's prospective economic advantage. Specifically, CRES asserted that Landy “failed to act with reasonable care,” including “in the solicitation and placement of [insurance policies].” It further alleged that Landy “failed to conduct a diligent search of the admitted market, filed falsified documentation relating to the search, and evaded scrutiny ... by failing to file required statements.”

Landy demanded that Utica defend it in the CRES lawsuit under the policy. In response, Utica filed this action in Massachusetts federal district court, seeking a declaration that CRES's negligence claim did not trigger its duty to defend.³

The parties dispute the meaning of two policy provisions. First, the policy covers only suits arising from Landy's errors or omissions in “rendering or failing to render professional services” as an insurance broker or insurance agent.⁴ It does not provide comprehensive liability insurance. Utica argues that CRES's negligence claim did not arise from alleged errors in Landy's professional insurance services, but rather from Landy's allegedly unfair business practices. Landy's position is that the two are not mutually exclusive: Landy's allegedly unfair business practices were committed in the course of providing allegedly negligent professional insurance services.

Second, the policy expressly excludes coverage for “unfair competition of any type.” The policy also contains an exclusion for intentional misconduct.⁵ Utica argues that, in order to give independent meaning to both the unfair competition and intentional misconduct exclusions, the unfair competition provision excludes not only intentional unfair competition, but also negligent unfair competition. Utica characterizes CRES's negligence claim as just such a claim of negligent unfair competition.

Landy disagrees for two reasons. It says that under Massachusetts law, “unfair competition” encompasses only conduct that misleads consumers, and the CRES complaint includes no allegations of consumer confusion. Alternatively, Landy argues that the exclusion does not apply to negligent performance of professional services, even if that negligence also harmed a business competitor.

On competing motions for summary judgment, the district court denied Utica's motion and granted summary judgment to Landy. UTICA Mut. Ins. Co. v. Herbert H. Landy Ins. Agency Inc., No. 13–11471, 2014 WL 5475038, at *1 (D.Mass. Oct. 29, 2014). It held that the policy required Utica to defend Landy in the CRES lawsuit because CRES's negligence claim arose out of Landy's allegedly negligent performance of professional services, and because the exclusion for unfair competition did not cover CRES's negligence claim.

II. Analysis

We review summary judgment decisions de novo. Batista v. Cooperativa De Vivienda Jardines De San Ignacio, 776 F.3d 38, 41 (1st Cir.2015). We may affirm a grant of summary judgment on any ground supported by the record, so long as there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Id. at 42. “Where [as here] facts are not in dispute, the interpretation and application of the [insurance] policy language is a question of law. The parties and the district court agree that Massachusetts law governs, and we accept this premise.” Massamont Ins. Agency, Inc. v. Utica Mut. Ins. Co., 489 F.3d 71, 72 (1st Cir.2007) (citation omitted). Generally the insured bears the initial burden of establishing coverage, while the insurer bears the burden on exclusions from coverage. Boazova v. Safety Ins. Co., 462 Mass. 346, 968 N.E.2d 385, 390 (2012).

Three sets of settled principles under Massachusetts decisional law guide our analysis. First, on the duty to defend, the Massachusetts Supreme Judicial Court has stated that

[a]n insurer has a duty to defend an insured when the allegations in a complaint are reasonably susceptible of an interpretation that states or roughly sketches a claim covered by the policy terms.... In order for the duty of defense to arise, the underlying complaint need only show, through general allegations, a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage. However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant. The nature of the claim and not the ultimate judgment against the insured triggers the duty to defend even though the plaintiff may not succeed and the claim may, in fact, be weak or frivolous....

Metropolitan Prop. & Cas. Ins. Co. v. Morrison, 460 Mass. 352, 951 N.E.2d 662, 667 (2011) (citations and internal formatting omitted).

Second, the Massachusetts court construes insurance contracts in the same way as ordinary contracts. Id. at 671.

[W]e must construe the words of the policy in their usual and ordinary sense. Every word must be presumed to have been employed with a purpose and must be given meaning and effect whenever practicable. If in doubt, we consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered. When confronting ambiguous language, we construe the policy in favor of the insured and against the drafter, who is invariably the insurer, unless specific policy language is controlled by statute or prescribed by another authority. This rule of construction applies with particular force to exclusionary provisions.

See id. (citations and internal formatting omitted).

Third, for purposes of professional service insurance policies, Massachusetts defines

[a] professional act or service [a]s 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.... [T]here must be a causal relationship between the alleged harm and the complained-of professional act or service ... not an act or service that requires no professional skill. Common sense, of course, will always provide a useful guide in differentiating covered from uncovered cases.

Roe v. Fed. Ins. Co., 412 Mass. 43, 587 N.E.2d 214, 217 (1992) (internal formatting omitted).

The touchstone for professional services coverage is whether the alleged wrongful act or omission is inherent in the practice of the profession. See id.; see also Massamont, 489 F.3d at 73. Thus, professional liability policies generally do not cover, for example, business management activities, business decisions of a nonprofessional nature, activities not requiring professional expertise, or activities totally unrelated to the profession. See Med. Records Assocs., Inc. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 514–16 (1st Cir.1998). While these other acts may “set the stage” for...