Great American Insurance Company v. Houlihan Lawrence, Inc

Background

Great American issued Houlihan Lawrence a real-estate professional liability policy covering claims first made during the policy period or an extended reporting period. The policy included a duty to defend claims, even if their allegations were false or groundless, and contained exclusions for claims based on dishonest, intentionally wrongful, fraudulent, criminal, or malicious acts, as well as disputes involving fees or commissions.

In the underlying New York state-court class action, the plaintiffs alleged that Houlihan Lawrence mishandled dual-agency real-estate transactions by failing to make adequate disclosures, failing to obtain informed consent, and using financial incentives that steered buyers and sellers into dual-agent transactions. The remaining claims were for breach of fiduciary duty and violation of New York General Business Law § 349. The plaintiffs sought, among other relief, repayment of commissions, statutory damages, attorneys’ fees, and injunctive relief.

Great American initially reserved its rights and later stated that no coverage obligations existed based on the policy exclusions. It also said it would assume control of the defense. Houlihan Lawrence disputed Great American’s position and sought independent counsel.

Motions and standard

Both parties moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). This procedure allows judgment when the pleadings show that no material facts are disputed and a party is entitled to judgment as a matter of law. The court considered the pleadings, policy documents, and certain publicly available state-court materials.

Duty to defend

The court denied Great American’s request for a declaration that it had no duty to defend. Under New York law, the duty to defend is broader than the duty to indemnify. An insurer must defend when the underlying allegations create a reasonable possibility of coverage, and an exclusion defeats that duty only when the allegations fall solely and entirely within the exclusion.

The court rejected Great American’s reliance on the exclusion for intentional conduct. Although the underlying plaintiffs alleged intentional deception, their allegations also could support findings that Houlihan Lawrence negligently failed to disclose material information or obtain informed consent. The court noted that neither breach of fiduciary duty nor a violation of General Business Law § 349 necessarily requires intentional conduct. Because the allegations did not foreclose negligence, Exclusion A did not eliminate the possibility of coverage.

The court also found Exclusion E, concerning fees and commissions, insufficient to defeat the duty to defend. The claims could exist because of alleged misrepresentations and omissions concerning dual agency, not only because of a dispute over commissions. In addition, the underlying plaintiffs sought relief that was not clearly limited to excluded commission payments, including attorneys’ fees and possible statutory damages. A factual dispute also existed about whether the underlying plaintiffs had paid commissions at all. The court therefore held that Great American’s duty to defend was triggered.

Duty to indemnify

The court did not decide whether Great American ultimately had a duty to indemnify Houlihan Lawrence. Because the underlying state-court action was still pending, the facts that would determine indemnification had not yet been established. The court denied Great American’s motion on indemnification as premature.

Independent counsel

The court held that Houlihan Lawrence was entitled to independent counsel at Great American’s expense. A reservation of rights does not automatically create that right, but independent counsel is required when the reservation creates a potential conflict. Here, counsel could have an incentive to establish that Houlihan Lawrence acted intentionally, which would support denying coverage under Exclusion A, while Houlihan Lawrence’s defense could benefit from a finding of negligence instead. The court found that this potential conflict was sufficient and held that Great American must pay the reasonable costs of independent counsel.

The court did not decide whether Great American could recover claim expenses or whether the attorneys’ fees incurred were reasonable. Houlihan Lawrence’s request for a declaration that Great American could not recoup claim expenses was denied without prejudice because Great American had not yet sought recoupment. The court also declined to rule on attorney-fee issues because they had not been fully briefed.

Disposition

The court denied Great American’s motion. It granted in part and denied in part Houlihan Lawrence’s motion, including granting relief concerning the duty to defend and independent counsel while denying without prejudice the request concerning recoupment of claim expenses. The court did not resolve indemnification.