Only Claims Alleging Consumer Confusion Are Barred By “Unfair Competition of Any Type” Exclusion, First Circuit Holds
Professional Liability Policy Covers Claims by Competitors.
In an unusual professional liability coverage case arising out of claims against the insured by a competitor (rather than a client), the First Circuit ruled in favor of the insured.
The Court held that the policy’s exclusion for “unfair competition of any type” did not apply to the competitor’s allegation of “negligent interference with its business interests” because, under Massachusetts law, “unfair competition” refers only to claims that a competitor’s conduct confused consumers.
It also held that, while professional liability policies typically apply to customers’ claims, they can also apply to claims of a competitor who alleges wrongful conduct that requires professional expertise.
The case, Utica Mutual Ins. Co. v. Herbert H. Landy Ins. Agency, Inc., _ F.3d _ (2016), illustrates that professional liability coverage, also known as errors & omissions coverage, can provide broader coverage than just protection from claims by unhappy clients.
Facts: An Agent’s Alleged Failure to Research the Insurance Market as Required by Statute
Landy bought an insurance agents-and-brokers professional liability policy from Utica Mutual. Landy and other insurance agencies were sued in California by CRES Insurance Services, LLC, a California-admitted insurer that writes professional liability insurance for real estate professionals.
The gist of CRES’ lawsuit was that Landy and the other agencies had harmed CRES’s business by failing to comply with California laws regulating the sale of surplus lines policies. Surplus lines insurers are not admitted to write insurance policies in the state, and are not subject to most state insurance laws. Under California law, CRES asserted, an agency can only sell a surplus lines policy after the agency has searched the admitted market for coverage without success and filed a statement documenting that search.
CRES alleged that the agencies failed to conduct a diligent search and filed falsified documentation. In addition to its statutory claim, CRES’ complaint against the agencies contained a count for negligent interference with CRES’ prospective economic advantage.
Utica Mutual provided Landy with a defense to CRES’ suit under a reservation of rights, and filed a coverage action in Massachusetts federal district court seeking a declaration that it had no duty to defend.
Discussion: Did the Alleged Negligent Interference with Business Arise Out Of Professional Services? And Was It “Unfair Competition”?
Utica Mutual made two arguments: that CRES’ negligence count did not arise out of covered professional services, and that it alleged excluded “unfair competition of any type.”
The district court ruled that Utica Mutual had a duty to defend, and the First Circuit affirmed.
Essentially, Utica Mutual argued that professional liability policies are meant to cover customers’ claims that the insured’s services fell below professional standards, not competitors’ claims for unfair business conduct.
The First Circuit agreed with this general observation, but stated that professional liability policies usually do not cover competitors’ suits because they allege business activities that do not require professional expertise. Here, the conduct at issue – research into whether coverage was available in the admitted market – required professional knowledge and skill. Further, the Court stated, the policy did not restrict coverage to claims alleging breach of duties owed to the claimant.
Turning to the exclusion, the Court observed that Massachusetts courts considering the phrase “unfair competition” in an insurance policy have interpreted it to refer to conduct that causes confusion in consumers, such as “palming off” one’s own goods as those of a competitor.
While the phrase “of any type” is expansive, it merely extends the exclusion from the core common law meaning of “unfair competition” – consumer confusion as to the source or origin of goods or services – to other kinds of consumer confusion. Because CRES’ claim for negligent interference with its business interests did not allege any kind of consumer confusion, the First Circuit held, the exclusion did not apply.
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Posted In: Professional Liability