Opinion
Civil No. 02-2767 (JRT/FLN)
September 24, 2003
Bradley Mitchell Jones, MEAGHER GEER, Minneapolis, MN, for plaintiff
Jeffrey M. Thompson, MEAGHER GEER, Minneapolis, MN, for plaintiff
Rikke A. Dierssen-Morice, FAEGRE BENSON, Minneapolis, MN, for defendant
Diana Young Morrissey, FAEGRE BENSON, Minneapolis, MN, for defendant
MEMORANDUM OPINION AND ORDER
In this insurance dispute, the Court determines whether Pacific Insurance Company Limited's ("Pacific") has a duty to defend Burnet Title, Inc. ("Burnet") against a consumer class action lawsuit. Burnet asserts that Pacific has a duty to defend the lawsuit because it is covered by the errors and omissions ("E O") policy purchased from Pacific. Burnet alternately argues that if the E O policy is inapplicable, Pacific is estopped from denying coverage since Pacific initially undertook the defense. Pacific counters that the E O policy is not applicable here for a variety of reasons, and that estoppel does not apply. The parties have cross-moved for summary judgment and seek declaratory judgment. For the reasons discussed below, the Court finds that Pacific has a duty to defend, and therefore grants Burnet's motion for summary judgment.
BACKGROUND
I. The Plan
Burnet had a "professional errors and omissions" ("EO") insurance policy with Pacific. EO policies provide limited coverage, usually as a supplement to a general comprehensive liability policy, for conduct undertaken in performing or rendering professional acts or services. Medical Records Assocs. v. American Empire Surplus Lines Ins. Co., 142 F.3d 512, 513 (1st Cir. 1998) (citations omitted). EO insurance is loosely equivalent to medical malpractice coverage — it usually covers negligent, but not intentional acts, undertaken as part of one's profession.
The EO policy at issue states: "We will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as `damages' because of an `act, error, or omission' to which this policy applies."
"Act, error, or omission" is defined as "a negligent act, error or omission in the rendering of or failure to render `professional services' [listing various `professional services']." (Emphasis added.) Yet another definition is germane, that of "professional services," which is defined as "services performed or advice given in the Insured's capacity as a Title Agent, Title Abstractor and Escrow Agent." Finally, damages under the plan "means the monetary portion of any judgments, awards or settlements which an insured becomes legally obligated to pay. `Damages' does not include . . . the return or reimbursement of fees for `professional services.'"
II. The Complaint
Teresa Boschee refinanced her mortgage through Burnet. She sued Burnet, on her own behalf and that of those similarly situated, essentially alleging that Burnet fraudulently inflated the bills of third-party vendors. Specifically, the complaint alleges that Burnet charged excessive fees for certain services and failed to disclose certain information. For example, the complaint alleges that Burnet routinely charged customers $25 per courier delivery, even though Burnet paid only a fraction of that for each delivery, and provided no additional services. The complaint alleges that Burnet failed to disclose those "mark-ups," and similarly failed to disclose the division and split of fees.
The first cause of action alleges a violation of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607 et seq. RESPA prohibits "kickbacks" and "unearned fees." The class alleges that Burnet charged "marked up" fees in violation of RESPA. The class complains that Burnet did not "fully inform Plaintiff[s] of the overcharges" or that fees were "marked up, split and retained by Defendant."
12 U.S.C. § 2607 provides, in relevant part, that
(a) Business referrals — No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. (b) Splitting charges — No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
The next cause of action is for unfair and deceptive trade practices in violation of state statutes. These statutes prevent "padding" or "marking up" third-party services. The class alleges that Burnet "misrepresented, concealed, suppressed and omitted material facts" regarding the marked up fees, in violation of state statutes. The complaint characterizes these violations as "willful and intentional violations of the rights of mortgagors" and "willful attempts to take advantage of large numbers of unsuspecting consumers, committed in order to enhance Defendant's profits."
The complaint notes that each state in which class members reside has a statute prohibiting unfair and deceptive trade practices ("UDAP statutes"). Minnesota's UDAP statutes are found at Minn. Stat. §§ 325D.43 et seq. and §§ 325F.67 et seq.
The third cause of action is for conversion, and the fourth requests declaratory and injunctive relief. As damages, the class seeks, among other relief, "actual damages, along with prejudgment interest, penalties, treble damages, attorneys fees, costs, expenses and any other remedy available."
III. Post-Complaint Conduct, and Pacific's "Reservation of Rights"
Upon receipt of the complaint, Burnet informed its "Errors and Omissions" insurer, Pacific, of the lawsuit, and provided a copy of the summons and complaint. Burnet suggested Faegre Benson ("Faegre"), with which Burnet had an established relationship, as outside counsel.
The record reflects that Pacific first acknowledged the complaint when it approved Burnet's use of Faegre in a fax dated February 4, 2000. Then on October 26, 2000, Pacific sent a letter which included a reminder that intentional and/or willful conduct was not covered, because such coverage would be against the public policy of the state of Minnesota. This October 26 letter also noted that the policy excluded coverage for acts that are fraudulent, criminal, or involved concealment and intentional misrepresentation. Pacific contends that this letter sufficiently reserves its rights to withdraw its defense of the claims.
Eleven months later, Pacific sent Burnet another letter (dated July 18, 2001). In this letter, Pacific noted that it cannot legally reimburse insureds for any award of punitive damages. This letter also explicitly "reserve[d] the right to deny coverage to Burnet Title and/or its agents should facts become known to us warranting this action in the future." This letter also noted that the defense of this matter was "without prejudice," and was not intended to waive any of Pacific's rights or obligations.
The next relevant correspondence from Pacific was dated February 6, 2002, and noted that "We wish to advise you of First State's and Pacific's position that none of the claims asserted in the Boschee class action fall within the scope of the policy issued by Pacific." The letter included three reasons that the claims were not covered: (1) The class action arose from intentional, not negligent acts; (2) the claims asserted did not seek "damages" as the term was defined in the policy; (3) the class action alleges conversion and conversion is expressly exempted from coverage. The February 6 letter also "reserve[d] the right to seek reimbursement of all attorney's fees, litigation expenses and costs . . . that are incurred in the defense of non-covered claims."
Burnet claims that from the acknowledgment of the request for coverage, until at least the February 6 letter, Pacific controlled the defense. Pacific, in contrast argues that Burnet selected its own counsel, and that Pacific's role was limited to reviewing and paying Faegre's invoices. Pacific and Burnet apparently reached an agreement by which Burnet could hire the counsel of its choice, but Burnet would be responsible for paying the difference between Faegre's rate, and the rate a Pacific-selected attorney would have been paid to defend the matter.
ANALYSIS
I. Standard of Review
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. Only disputes over facts that might affect the outcome of the suit under the governing substantive law will properly preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is not appropriate if the dispute about a material fact is genuine, that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. Summary judgment is to be granted only where the evidence is such that no reasonable jury could return a verdict for the nonmoving party. Id.
The moving party bears the burden of bringing forward sufficient evidence to establish that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The nonmoving party is entitled to the benefit of all reasonable inferences to be drawn from the underlying facts in the record. Vette Co. v. Aetna Casualty Surety Co., 612 F.2d 1076, 1077 (8th Cir. 1980). However, the nonmoving party may not merely rest upon allegations or denials in its pleadings, but it must set forth specific facts by affidavits or otherwise showing that there is a genuine issue for trial. Forrest v. Kraft Foods, Inc., 285 F.3d 688, 691 (8th Cir. 2002).
II. Duty to defend — General Principles
"The duty to defend arises when any part of the claim against the hsured is arguably within the policy's scope." Metropolitan Prop. Cas. Ins. Co. v. Miller, 589 N.W.2d 297, 299 (Minn. 1999). See also Prahm v. Rupp Const., 277 N.W.2d 389, 390 (Minn. 1979) ("If any part of a cause of action is arguably within the scope of coverage, the insurer must defend."). An insurer's duty to defend is distinct from, and broader than, its duty to indemnify. Reinsurance Ass'n of Minnesota v. Timmer, 641 N.W.2d 302, 307 (Minn.Ct.App.), review denied (May 14, 2002).
The insured has the initial burden of establishing a prima facie case of coverage. SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 311 (Minn. 1995). "What constitutes a prima facie showing of coverage depends on the language of the particular policy." Id. Once the insured establishes the prima facie case, the burden shifts to the insurer to demonstrate that all parts of the claim fall clearly outside the scope of policy coverage. United States Liability Ins. Co. v. Johnson Lindberg, P.A., 617 F. Supp. 968, 972 (D. Minn. 1985) ("An insurer who refuses to defend the insured carries the heavy burden of demonstrating that all parts of the claim fall clearly outside the scope of policy coverage."). "If even part of a claim is arguably within the policy's coverage, the insurer is obligated to defend." Id. (citing Prahm v. Rupp Construction Co., 277 N.W.2d 389, 390 (Minn. 1979)). If any portion of the claim is covered, the insurer is obligated to cover the cost of defense of the entire lawsuit; "the cost of defense is not apportioned." Id. (citing Jostens, Inc. v. CNA Insurance, Continental Cas. Co., 336 N.W.2d 544, 545 (Minn. 1983)).
"[T]he insurer's obligation to defend is determined by comparing the allegations of the complaint with the relevant policy language." Garvis v. Employer's Mut. Cas. Co., 497 N.W.2d 254, 256 (Minn. 1993). The insurer "may make an initial determination of whether or not it is obligated to defend from the facts alleged in the complaint against its insured." Id. at 258. The insurer has no duty to investigate beyond the complaint unless the insurer has knowledge of facts indicating that there may be a claim. Id. That knowledge may come from what is said directly or inferentially in the complaint, or the insurer's independent knowledge. However, if any claim is arguably covered under a policy, the insurer must defend and reserve any arguments regarding coverage — ambiguities are resolved in favor of the insured. SCSC Corp., 536 N.W.2d at 316.
The duty to defend exists regardless of the merits of the underlying claims, but does not mandate a defense for claims "that could have been made (for example, are suggested by the fact pattern) but were not." Reinsurance Ass'n of Minn., 641 N.W.2d at 311. The reviewing court is to focus on the claims set forth, not the " conduct being asserted to prove the claim [s]." Meadowbrook, Ins. v. Tower Ins. Co., 559 N.W.2d 411, 420 (Minn. 1997).
Pacific asserts three primary arguments as to why it is not obligated to defend Burnet. First, Pacific argues that the complaint does not implicate professional services; next Pacific argues that the complaint refers only to intentional, not negligent conduct. Finally, Pacific suggests that the "damages" sought are not covered by the policy. If any of these arguments is successful, Pacific does not have a duty to defend. In other words, to find for Burnet, the Court must conclude that the complaint implicates professional services and negligent conduct and that its seeks damages that are covered by the policy.
III. Professional Services
A professional service, within the meaning of an EO policy "`is one calling for specialized skill and knowledge in an occupation . . . [t]he skill required to perform a professional service is predominately intellectual or mental rather than physical.'" Piper Jaffray Co. v. National Union Fire Ins. Co. of Pittsburgh, Penn., 967 F. Supp. 1148, 1156 (D. Minn. 1997) (quoting Ministers Life v. St. Paul Fire Marine Ins. Co, 483 N.W.2d 88, 91 (Minn.Ct.App. 1992)). " Purely ministerial acts requiring no expertise fall without the scope of profession services." Id. (emphasis in original) (citing Alpha Therapeutic Corp. v. St. Paul Fire Marine Ins. Co., 890 F.2d 368, 370 n. 6 (11th Cir. 1989)). In determining whether an act is a "professional service" courts look to the act itself, not the title or character of the person who performs the act. Shelter Ins. Co. v. Hildreth, 255 F.3d 921, 925 (8th Cir. 2001) (citations omitted). Thus, even tasks performed by professionals are not considered "professional services" if they are ordinary activities that can be performed by those lacking the relevant training and expertise. Medical Records Assocs. v. American Empire Surplus Lines Ins. Co., 142 F.3d 512, 514 (1st Cir. 1998).
Whether a particular service is professional is not necessarily an easy determination. The "cases do not paint an unwavering line of demarcation between `professional' and `nonprofessional' activities." Medical Records Assocs., 142 F.3d at 515. The difficulty in making the professional/non-professional distinction is pronounced where, as here, the alleged improper conduct occurs during the performance of tasks that are "inherent in the practice of the insured's profession." Id. In such cases, it is the "unskilled nature of the specific task — not the absence of a professional endeavor — " that can render services "unprofessional." Id. at 515 (collecting and discussing Massachusetts cases) (citations omitted).
The First Circuit recently held that setting fees for copies is not a "professional service." Medical Records Assoc., 142 F.3d at 513. In that case, defendant Medical Records Associates ("MRA"), a medical records processing business — which provided copies of patients' medical records to patients or their attorneys — was presented with a claim alleging it had overcharged for copies. Id. at 513. MRA tendered the claim to its insurer under a claims-made policy providing coverage for "error [s] or omission[s] committed in the rendering or failure to render the Professional Services." Id. Applying Massachusetts law, the Court concluded that professional services were distinguished by the "need for specialized learning or training" and that simply "setting a price for photocopies and producing accurate invoices" did not meet this standard and was merely "an incidental part of the business — but not the profession — of medical records processing." Id. at 515-16. The Court noted, "[w]e fail to see how setting a price for photocopies and producing accurate invoices are other than generic business practices." Id. at 516. The Court also rejected MRA's argument that its billing practices were professional because MRA had to comply with specific and technical law in setting its rates; "[s]imply because it is regulated does not make it professional." Id. at 515.
Pacific argues that the Medical Records case is nearly indistinguishable, and that the same conduct — setting rates and billing — is complained of in this case. Burnet attempts to distinguish Medical Records, arguing that unlike Medical Records, the allegations here involve more than the printing of bills; Burnet also points out that the complaint in this case also alleges a failure to disclose information, as required by RESPA.
The Court finds the Medical Records case instructive as far as that case deals with the "billing" component of the class's complaint. The Court agrees that "[b]illing is most sensibly seen as either a separate service . . . or an incidental part of the business — but not the profession of [a given industry]." Id. at 516. "Setting a price for services and sending bills are functions of every business." Id. at 517. Setting prices and sending bills are not unique to Burnet's business.
Burnet also argues that because real estate service providers are required to comply with RESPA, such compliance is a "professional responsibility." This argument is not persuasive in the "billing" context — in fact a nearly identical argument was properly rejected by the Medical Records Court. Id. at 515. Statutory requirements or limitations on billing practices do not automatically make billing a "professional" activity. If that were true, every regulated industry could declare that all the rate-setting it undertakes is "professional" — a result clearly at odds with the established case law. However, there is no indication in the Medical Records case that the plaintiffs alleged a failure to disclose or inappropriate referrals, as the Boschee plaintiffs claim here.
The class alleges that Burnet failed to follow requirements imposed by RESPA and state statutes, including requirements that Burnet disclose certain relationships with third-party vendors. The referrals, and the appropriate disclosure of those referrals, unlike bill-setting, are "closer to the core" of Burnet's profession than simply setting a price for a commonplace task such as photocopying. See Medical Records Assoc. 142 F.3d at 517 (discussing "continuum of professional services"). Though not a perfect analogy, comparison to the medical profession might better illustrate this proposition. A general practitioner, for example, would doubtless utilize professional judgment in referring a patient with a particular problem to a particular medical specialist. Although Burnet's employees probably utilized less discretion and professional judgment, the principle is applicable here. On the "professional continuum," the Court finds that making referrals is close enough to the "professional" end of the spectrum to be included in the EO policy.
For example, in paragraph 33 of the complaint, plaintiffs note that there are questions of fact and law common to the class, such as whether charging consumers more for services than the services cost, without disclosing the "mark-up," violates UDAP statutes.
Although the question is a close one, given the requirement that the Court construe all ambiguities in favor of the insured, the Court finds that the complaint sufficiently implicates "professional" services. Therefore Pacific is not excused from the duty to defend on this basis.
IV. Intent or Negligence
The parties agree that EO policies typically cover only negligent, not intentional conduct, and that the EO policy at issue here covers only negligent conduct. They vigorously disagree, however, on whether the complaint here includes intentional conduct alone (Pacific's argument) or whether the complaint encompasses negligent conduct as well (Burnet's argument). If the complaint cannot be fairly construed to include negligent conduct, Pacific does not have a duty to defend.
Pacific points out that each of the causes of action includes "intent" language. For example, the first cause of action (for RESPA violations) notes that "[i]n conducting this transaction, defendant acted with intent to overcharge plaintiff for its financial gain." (Emphasis added.) Similarly, in the second cause of action (for unfair and deceptive trade practices) the complaint states that "Defendant's actions were willful and intentional violations." (Emphasis added.) The third cause of action is for conversion, which is not only intentional conduct but is explicitly excluded from coverage.
Burnet counters that the "fundamental nature of Burnet's alleged misconduct includes both intentional and negligent acts." Burnet accurately points out, and Pacific does not disagree, that RESPA violations do not necessarily require "intent" — in other words, it is possible to negligently violate RESPA. Burnet argues that as long as the allegations set forth grounds for liability on the basis of negligence, the insurer's duty to defend is triggered. Burnet also points to language in the complaint that can be construed as either negligent or intentional conduct. For example, the complaint notes that "[d]efendant misrepresented, concealed, suppressed and omitted material facts." Misrepresentations and omissions, Burnet argues, can be negligent, as well as intentional. The complaint also alleges that Burnet engaged in "unfair and deceptive trade practices."
Minnesota courts have held that where the complaint does not distinguish between intentional and unintentional misrepresentation, it is reasonable to include both. Reinsurance Assoc. of Minnesota, 641 N.W.2d at 315. In this case, the allegations that form the basis for the complaint, as incorporated in each of the claims, can fairly be read to be ambiguous. The intentional conduct of, for example, failing to disclose relationships, arguably led to negligent violation of RESPA. Although the failure to disclose might be described as "intentional," the complaint fairly alleges a "negligent" violation. Therefore, Pacific's duty is not discharged on this ground.
V. Damages
Pacific argues that the class action complaint does not seek the type of damages required to trigger coverage. According to the policy, the term "damages" does not include fines, sanctions, or penalties, nor does it include the return or reimbursement of fees for professional services.
The complaint requests "damages" for overcharged fees, trebled pursuant to RESPA, and attorneys' fees. Pacific argues that the attorneys' fees are simply fee-shifting as an award of costs, and therefore are not "damages" as that term is defined in the policy. The trebling of overcharged fees, continues Pacific, constitutes penalties not compensatory damages, and therefore is not included in the definition.
Burnet responds that RESPA defines attorney's fees as "damages" and therefore according to the plain language of the policy, such an award would be covered by the policy. Analogizing to ERISA cases, Burnet suggests that the award of attorneys' fees under RESPA is not a "cost" and is not a "penalty." Pacific argues that the fee-shifting renders attorneys' fees "costs" and not "damages."
It is clear that the return of overcharged fees is not the type of "damages" that triggers coverage under the policy. Also excluded from the covered "damages" is RESPA's trebling of those fees, because that is clearly a penalty.
However, Burnet's argument that attorneys' fees are damages, and not part of the costs, is more persuasive. The attorneys' fees section of RESPA states that "[i]n any private action brought pursuant to this subsection, the court may award to the prevailing party the court costs of the action together with reasonable attorneys fees." 12 U.S.C. § 2607 (d)(5) (emphasis added). Burnet argues that by this language Congress classified attorney's fees as damages, not costs. Burnet analogizes this language to that in the ERISA statutes, which allows courts to award "reasonable attorney's fees and costs." 29 U.S.C. § 1132(g). Courts have found that this language distinguishes attorneys' fees from costs. In contrast, the language of 18 U.S.C. § 1988 puts attorneys' fees squarely in the "cost" category. 18 U.S.C. § 1988 ("the court, in its discretion, may allow the prevailing party . . . a reasonable attorney's fee as part of the costs" (emphasis added)). Although the language in the RESPA statute is not identical to either the ERISA statute, or the § 1988 language, it is closer to that in the ERISA statute. See also Pedraza v. United Guar. Corp., 313 F.3d 1323, 1337 (11th Cir. 2002); (RESPA's fee shifting provision does not define costs to include attorneys' fees); Downey v. Mortgage Guar. Ins. Corp., 313 F.3d 1341, 1344 (11th Cir. 2002) (referencing Pedraza and noting RESPA distinguishes attorney fees from "costs"). Thus, the Court finds that the complaint seeks the appropriate "damages" to implicate coverage under the policy.
VI. Estoppel and Reservation of Rights
Minnesota law provides that where an insurer assumes exclusive control over the defense of claims against an insured, the insurer is estopped from withdrawing and denying liability. General Tire Co. of Minneapolis v. Standard Ace. Ins. Co., 65 F.2d 237, 240 (8* Cir. 1993). Estoppel applies only when the insurer has had total control of the defense. That does not appear to be the situation in this case. Instead, the record indicates that Pacific's role in the defense was limited to reviewing and paying bills. Faegre attorneys might also have been obligated to do a bit more paperwork but these administrative tasks did not dictate how the defense was to be carried out. However, because the Court finds that Pacific has a duty to defend, the Court will not determine whether Pacific would have been estopped from withdrawing the defense.
VII. Plaintiffs Motion to Strike
After the instant motion was fully briefed, plaintiff provided the Court with citation to cases that had been decided after the motion was fully briefed; plaintiff also supplied a supplemental stipulation of facts and fee invoices. In response, defendant filed a pleading entitled "Burnet Title's June 5, 2003 Response to Pacific's May 12, May 21, and May 30, 2003 Supplemental Submission on Cross Motions for Summary Judgment." In that pleading, defendant requested permission, pursuant to Local Rule 7.1(f). to respond to the supplemental submission of plaintiff. Defendant also included its response. The Court denies defendant permission to respond, and therefore strikes the responsive portion of that pleading. The Clerk of Court is ordered to strike from the record Sections I II (preserving the two opening paragraphs and the signature line) of Burnet Title's June 5, 2003 Response to Pacific's May 12, May 21, and May 30, 2003 Supplemental Submission on Cross Motions for Summary Judgment [Docket No. 63].
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that:1. Plaintiffs motion for summary judgment, or in the alternative for partial summary judgment [Docket No. 41] is DENIED.
2. Defendant's motion for partial summary judgment [Docket No. 45] is GRANTED.
3. Plaintiffs motion to strike defendant's surrebuttal briefing with respect to cross motions for summary judgment [Docket No. 64] is GRANTED consistent with the above opinion.