Pmi Mortgage Insurance Co., Plaintiff-appellant, v. American International Specialty Lines Insurance Company, Federal Insurance Company, and Columbia Casualty Company, Defendants-appellees, 394 F.3d 761 (9th Cir. 2005)

PMI is a large financial institution that sells, among other things, mortgage guaranty insurance to residential mortgage lenders who provide loans to homebuyers considered to be at risk of defaulting on their mortgages. This insurance covers a lender for losses incurred when a borrower defaults on the repayment of a mortgage loan and the collateral is not sufficient to make the lender whole. PMI also offers its lender clients underwriting services, claims services, policy administration services, loan underwriting, loss mitigation, pool insurance and captive reinsurance.

In December 1999, a putative class of plaintiffs who had obtained mortgage insurance through PMI's lender clients sued PMI in the Southern District of Georgia (The Baynham action). The Third Amended Class Complaint alleged that PMI was undercharging its lender clients for various insurance products and services in exchange for customer referrals on mortgage insurance. Since the lender clients had not passed these savings on to their customers, plaintiffs claimed that this scheme violated the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA).

The Baynham complaint also alleged that" [n]one of the loan documents or disclosures given to the borrower [s] disclose [s] that part of the charges paid by borrowers are compensation to the Defendant [PMI] for the discounts accorded to the lenders on its various products and services, nor disclose the tainted nature of Defendant's relationship with the lender," also in violation of RESPA.¹  While PMI was formally charged only with violating RESPA's anti-kickback provisions, the complaint also asserts that PMI "acted in concert with its lenders to violate ... [the] duty to disclose." The Baynham lawsuit was settled in June 2001 for $10 million.

When the Baynham action arose, PMI held a Financial Institution Professional Liability Insurance Policy issued by American International Specialty Lines Insurance Company (AISLIC), which required AISLIC to pay PMI up to $10 million for any loss covered by the policy. PMI had also purchased layers of excess coverage from Columbia Casualty Company (Columbia) and Federal Insurance Company (Federal), which obligate these insurers to cover PMI on terms identical to those of the AISLIC policy once the limits of AISLIC liability have been exhausted. These excess policies provide that Columbia will pay 30% and Federal will pay 40% of any losses between $10 million and $20 million.² 

The AISLIC insurance policy provides that AISLIC (and hence Columbia and Federal as well) will indemnify PMI for "the Loss of the Insured arising from a Claim ... for any actual or alleged Wrongful Act of any Insured in the rendering or failure to render Professional Services." (Emphasis added.) The policy defines "Wrongful Act" as "any act, error or omission in the rendering of or failure to render Professional Services." The policy defines "Professional Services" as follows:

[T]hose services of the Company permitted by law or regulation rendered by an Insured ... pursuant to an agreement with the customer or client as long as such service is rendered for or on behalf of a customer or client of the Company: (i) in return for a fee, commission or other compensation ... or (ii) without Compensation as long as such non-compensated services are rendered in conjunction with services rendered for Compensation.

On April 15, 2002, PMI filed a breach of contract and declaratory relief action against AISLIC, Federal and Columbia (the Insurers) alleging that the losses incurred in the Baynham action were covered by the Professional Liability policy issued by AISLIC and, thus, that the Insurers had a legal duty to indemnify PMI for its losses.³  AISLIC denied that PMI's losses arose from the rendering of professional services as required by the policy, and it made a counterclaim seeking repayment of legal defense costs it had previously advanced to PMI (totaling some $1.4 million).

Both parties moved for summary judgment on the question whether PMI's alleged violations of RESPA in the Baynham action were "Wrongful Acts" committed "in the rendering of... Professional Services" as required by the AISLIC policy. In its December 16, 2002 Order, the district court granted AISLIC summary judgment, ruling that PMI's actions giving rise to the Baynham action were fundamentally administrative and thus did not constitute professional malpractice or involve the rendering of "Professional Services" as required by the insurance policy. See PMI Mortgage Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., No. C-02-1774, 2002 WL 32065867 (N.D. Cal. Dec.16, 2002)

On March 19, 2003, the district court dismissed PMI's complaint with prejudice and entered judgment in favor of AISLIC in the amount of $1.445 million. PMI timely filed a Notice of Appeal from the judgment on April 10, 2003.

On May 19, 2003, the district court entered summary judgment in favor of Columbia and Federal as well, dismissing PMI's complaint against both parties with prejudice. On May 21, 2003, PMI filed an appeal from the judgment in favor of Columbia and Federal, as well as an appeal from the earlier judgment in favor of AISLIC. On June 9, 2003, this Court granted PMI's motion to consolidate these appeals. This Court is now called upon to review the district court's grants of summary judgment in favor of AISLIC, Columbia and Federal.

We have jurisdiction over these consolidated appeals pursuant to 28 U.S.C. § 1291, which provides for appellate review of final orders issued by the district courts, including grants of summary judgment. Rulings on motions for summary judgment are reviewed de novo. Suzuki Motor Corp. v. Consumers Union of the United States, Inc., 330 F.3d 1110, 1131 (9th Cir.), cert. denied, 540 U.S. 983, 124 S. Ct. 468, 157 L. Ed. 2d 373 (2003); King Jewelry, Inc. v. Fed. Express Corp., 316 F.3d 961, 963 (9th Cir. 2003). Summary judgment should be granted when "there is no genuine issue as to any material fact" and "the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).

The sole question before us is whether PMI's alleged violations of RESPA, as presented in the Baynham action, were "Wrongful Acts" committed "in the rendering of ... Professional Services" under the AISLIC policy. The district court answered this query in the negative, granting the Insurers' motion for summary judgment. Having reviewed both the text of the contested policy and the relevant case law, we are convinced that this disposition was erroneous. The plain language of the PMI policy and the basic principles of insurance policy interpretation under California law support a finding of coverage, and the implications of prevailing case law on professional malpractice policies — while interesting but only indirectly relevant — do not compel a contrary result. Additionally, the fact that the Baynham claim alleges a RESPA violation, while not determinative, bolsters this conclusion. We therefore reverse.

In resolving this constructional dispute, the lodestar of our analysis must be the mutual intent of the parties as expressed in the provisions of the insurance policy itself. Under California law, which governs this diversity action, courts must construe insurance policy terms so as to give effect to the "mutual intention" of the parties at the time the policy was issued, and this intent should be inferred, to the extent possible, "solely from the written provisions of the [policy] contract." MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 3 Cal. Rptr. 3d 228, 73 P.3d 1205, 1212-13 (2003) (emphasis added) (internal quotation marks omitted); see also Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d 545, 551-52 (1992) (same); AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 274 Cal. Rptr. 820, 799 P.2d 1253, 1264 (1990) (same). Neither party disputes the applicability of this basic directive to the instant case. Accordingly, we begin our inquiry with a consideration of the policy text itself, mindful that the insured party generally bears the initial burden of demonstrating that the claim is "within the basic scope of coverage." Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 44 Cal. Rptr. 2d 370, 900 P.2d 619, 625 (1995) (internal quotation marks omitted).

Turning then to the policy language at issue, the PMI policy defines "Professional Services" simply as "those services of the Company permitted by law or regulation rendered by an Insured... pursuant to an agreement with the customer or client." (Emphasis added.) From a strictly textualist perspective, PMI's alleged kickback scheme and the resulting Baynham action clearly fall within this broad provision, as they resulted directly from PMI's provision of mortgage insurance "services" under various (allegedly improper) "agreements" with lender "clients." The plain meaning of the policy language thus does encompass PMI's alleged misconduct.⁴ 

Of course, one could argue that it may not be appropriate to take this broad policy language at face value. While the bare text of the policy ostensibly covers all"services" rendered "pursuant to an agreement" with a customer or client, the policy's use of the term "Professional Services" (as opposed to merely "services") does invoke a traditional professional malpractice vocabulary, and the policy is actually titled "Financial Institution Professional Liability Insurance Policy." (Emphasis added.) But even assuming, arguendo, that these considerations bear on this case, California law instructs that such interpretive quandaries be resolved in favor of the insured and against the insurer. The California Supreme Court has consistently held that insurance policies are to be "interpreted broadly so as to afford the greatest possible protection to the insured."⁵  MacKinnon, 3 Cal. Rptr. 3d 228, 73 P.3d at 1213 (internal quotation marks omitted); see also White v. W. Title Ins. Co., 40 Cal. 3d 870, 221 Cal. Rptr. 509, 710 P.2d 309, 313 (1985) ("Any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer....") (internal quotation marks omitted). The California Supreme Court has explained this constructional policy as follows: "The purpose of this canon of construction is to protect the insured's reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy." Id. at 313, 221 Cal. Rptr. 509.⁶ 

The plain meaning of the policy text and the applicable canons of construction under California law thus point us in the same direction — they both militate in favor of finding coverage for PMI.

B. The Case Law on Professional Malpractice Insurance

Since our primary analytical considerations under California law — the plain language of the PMI policy and the canons of interpretation applicable to insurance policy contracts — both demand a finding of coverage, we need proceed no further. However, since the district court ultimately arrived at the opposite conclusion via a different analysis, it is appropriate to address the disposition below on its own terms.

Confronted with the PMI policy's strikingly broad definition of "Professional Services," the district court turned to leading judicial constructions of that term in traditional professional malpractice policies. 2002 WL 32065867, at *1. The most authoritative construction of the term "professional services" as used in the malpractice insurance setting was made by the Ninth Circuit in Bank of California, N.A. v. Opie:

"Something more than an act flowing from mere employment or vocation is essential.... A `professional' act or service is 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."

663 F.2d 977, 981 (9th Cir. 1981) (quoting Marx v. Hartford Accident & Indem. Co., 183 Neb. 12, 157 N.W.2d 870, 871-72 (1968)). To be considered a "professional service" for insurance purposes, a liability "must arise out of the special risks inherent in the practice of the profession." Id. This standard has been cited with approval by several courts across the country, including a California federal district court applying California law. See, e.g., Pac. Ins. Co. v. Burnet Title, Inc., 380 F.3d 1061, 1064-65 (8th Cir. 2004) (applying a similar standard); Med. Records Assocs., Inc. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 514 (1st Cir. 1998) (applying the same standard); Horizon W., Inc. v. St. Paul Fire & Marine Ins. Co., 214 F. Supp. 2d 1074, 1078 (E.D. Cal. 2002) (applying California law and adopting the Opie standard).

In keeping with this general rule, California state courts have uniformly held that insurance policies covering "professional services" reach only those acts committed by the insured in his or her capacity as a professional — they do not cover general administrative activities that occur in all types of businesses. For example, Inglewood Radiology Medical Group, Inc. v. Hospital Shared Services, Inc., held that professional malpractice insurance does not cover a lawsuit concerning a physician's decision to fire an employee, even though the physician's professional medical knowledge was required to make employment evaluations. 217 Cal. App. 3d 1366, 266 Cal. Rptr. 501, 503 (Ct.App.1989) (" [T]he decision to terminate employment is a business or administrative decision. In making such a decision, the physician is acting as an employer and not as a `physician rendering services.'"). Similarly, Blumberg v. Guarantee Insurance Co. held that professional malpractice insurance does not cover a lawsuit between attorneys over an alleged breach of their partnership agreement since, in bringing the suit, the plaintiff was acting in his capacity as a law partner, not as an attorney rendering services. 192 Cal. App. 3d 1286, 238 Cal. Rptr. 36, 39 (Ct.App.1987). Transamerica Insurance Co. v. Sayble held that professional malpractice insurance did not cover litigation expenses arising from an attorney's alleged mismanagement of a law firm. 193 Cal. App. 3d 1562, 239 Cal. Rptr. 201, 205 (Ct.App.1987). Since the case was held to concern essentially a business dispute, it did not implicate the defendant's professional activities as an attorney. At least one California court has held that, in such cases, the dispositive question is whether the alleged injuries occurred "during the performance of professional services." Tradewinds Escrow, Inc. v. Truck Ins. Exch., 97 Cal. App. 4th 704, 118 Cal. Rptr. 2d 561, 568 (Ct.App.2002).

In applying these precedents to the case at bar, the district court characterized PMI's alleged kickback scheme and disclosure failures as a " [b]illing" matter involving "undercharging its clients for ... products and services." 2002 WL 32065867, at *2. It cites Medical Records for the proposition that "the bill is an effect of the service provided, not part of the service itself." 142 F.3d at 516. Insurers also cite several cases that establish the general proposition that "claims regarding the amount of fees charged for professional services are not covered under professional liability policies."⁷  This conclusion, anchored in an unqualified analogy between the PMI policy and traditional professional malpractice policies, is flawed.

It should be observed, first, that PMI is a major financial institution whose core lines of business include, among other things, the sale of mortgage insurance. PMI is not engaged in one of the traditional "professions" as that term is commonly understood, and it does not render the physical or intellectual acts of service one commonly associates with doctors or lawyers. Additionally, it is important to note that the PMI policy language is significantly broader than the language at issue in any of the aforementioned professional malpractice insurance cases. The professional malpractice policies in virtually all of those cases define "professional services" narrowly, explicitly limiting coverage to acts performed by the insured in its professional capacity. See, e.g., Johnson v. First State Ins. Co., 27 Cal. App. 4th 1079, 33 Cal. Rptr. 2d 163, 165 (Ct.App.1994) ("Professional Services" defined as "all services rendered or which should have been rendered for others: 1. by the Insured in the Insured's capacity as a lawyer, notary administrator of an estate....") (emphasis added); Sayble, 239 Cal. Rptr. at 203 n. 2 ("Professional Services" defined as "all services rendered or which should have been rendered for others: 1. By the Insured in the Insured's capacity as a lawyer....") (underscore emphasis added); Inglewood Radiology, 266 Cal. Rptr. at 502 ("professional services" defined as those "services performed in the practice of the profession of a physician") (emphasis added); Blumberg, 238 Cal. Rptr. at 37 (policy covers claims "arising out of ... any acts or omissions of the Insured in rendering or failing to render professional services for others ... in the Insured's capacity as a lawyer") (emphasis in original). The PMI policy does not contain any such explicit restriction and thus is distinguishable from the policies analyzed in these cases. A policy that uses the buzzwords "professional services," but then proceeds to define them more broadly than most standard malpractice policies, should certainly be read differently than policies containing narrower language.

But even to the extent that the aforementioned "malpractice" precedents are indirectly relevant here — PMI's core business does, after all, involve "specialized knowledge" and expertise — it is not clear that they favor the Insurers. PMI was acting in its professional capacity as a mortgage lender, and within the context of its specialized relationships with its lender-clients, when the alleged improper conduct occurred. While the kickback scheme at issue does involve the valuation or pricing of services, PMI has not been charged merely with sending customers inflated invoices. It has been accused of participating in an ongoing collusive scheme under which it received customer referrals in exchange for undercharging lender clients for its services. And while PMI was not formally charged with disclosure violations under RESPA, the Baynham plaintiffs alleged that PMI "acted in concert with its lenders to violate Regulation X [of RESPA] which specifically imposes a duty to disclose ... the nature of the relationship between the lender and a required service provider."⁸  This alleged kickback scheme goes to the heart of PMI's business. It implicates the way in which it finds and serves its customers, the business opportunities that it enjoys and the network of professional relationships through which it operates.⁹  This alleged behavior is a far cry from more conventional administrative "pricing" decisions or improper "billing" practices.

In short, even assuming, arguendo, that we may look beyond the text of the PMI policy in resolving this case, Insurers find little support in California case law on professional malpractice policies, which apply narrower policy language to professional conduct fundamentally different from that at issue here. The district court's invocation of these precedents to characterize PMI's alleged kickback scheme as merely an administrative or "billing" matter was erroneous.

One additional factor militates in favor of finding coverage in this case — the fact that the losses at issue stem from a claim under the Real Estate Settlement Procedures Act (RESPA). Section 2607 of RESPA places certain requirements on parties who make referrals or provide certain services in connection with real estate transactions. 12 U.S.C. § 2607(c). Among other things, RESPA requires that parties making referrals disclose their relationship with the entity receiving the referral, and that parties involved in real estate transactions price their services properly. Id. Entities involved in real estate transactions can be exposed to liability under RESPA for failure to meet these requirements, even if such failure is innocent or unintentional. Id. To invoke the terminology of the Opie court, RESPA's liability provisions undoubtedly represent one of the "special risks inherent in the practice of" the mortgage insurance business or profession. See Opie, 663 F.2d at 981.

Insurers challenge the notion that professional liability policies must be interpreted to cover RESPA claims, and the district court asserts that the mere fact of federal regulation cannot transform all activities in a regulated industry into insurable "professional services." 2002 WL 32065867, at *2. PMI counters by claiming that "RESPA uniquely applies to those in the residential real estate business, requires specific actions and uniquely exposes such a business to possible suit, however unfounded, should it fail to make all disclosures required or should it allegedly misvalue its services." Based on this contention, PMI argues that, as a unique risk inherent to its specific professional industry, RESPA suits should be presumptively covered by general professional liability policies. PMI goes on to assert that excluding RESPA claims from its policy coverage would both violate its expectations in purchasing the insurance and remove one of its major motivations in seeking professional liability insurance in the first place.

This characterization might be dismissed as partisan and self-serving except that two federal courts recently have endorsed this very position. The first such case is Nowacki v. Federated Realty Group, Inc., which holds that a professional liability policy covering "any negligent act, error or omission in the rendering or failure to render, professional services" covers losses stemming from a RESPA action that alleged the insured (a real estate broker) participated with a title insurance company in an illegal referral scheme. 36 F. Supp. 2d 1099, 1105 (E.D. Wis. 1999). This case is doubly on point because it involves not only the construction of a professional liability policy with respect to a RESPA claim, but also an alleged illegal referral scheme and a failure to make required disclosures.

Insurers attempt to distinguish Nowacki by observing that the insurance broker in that case was sued by its own clients for misconduct in the rendering of services directly to those clients. Yet this argument is easily dealt with. The PMI policy's coverage does not depend on the status of the Baynham plaintiffs, or their relationship to PMI — the policy merely requires that losses stem from a rendering of "Professional Services" to some "customer or client" pursuant to an "agreement." The Baynham action resulted directly from PMI's rendering of services to its lender clients pursuant to specific business agreements. The exact relationship of the ultimate plaintiffs with PMI is not relevant.

More recently, the court in Pacific Insurance Co. v. Burnet Title, 380 F.3d 1061 (8th Cir. 2004), likewise held that RESPA violations fall within the ambit of professional liability policies. In Burnet Title, the court held that a class action complaint against a real estate firm accused of overcharging clients and failing to disclose material information in violation of RESPA did implicate "professional services" and thus was covered by the firm's professional liability policy. Id. Again, the similarities to the case at bar are striking, both in the centrality of the RESPA violation and in the specific allegations of wrongful "pricing" and failure to make required disclosures.

More important for the purposes of our analysis, the Burnet Title decision appears to turn on the presence of disclosure violations in addition to allegations of mere overcharging. The Burnet Title court distinguishes Medical Records on this ground and states that " [t]he statutory obligation imposed upon real estate service providers to provide accurate information in settlement statements is distinct from the mere act of overcharging for services." Id. at 1065. This statement is equally pertinent to the case at bar. The Baynham complaint makes it clear that PMI's alleged sins are not limited to mere pricing decisions. PMI purportedly "acted in concert with its lenders" to violate disclosure duties and deceive the Baynham plaintiffs. The Burnet Title court also observes that, under Haug v. Bank of America, 317 F.3d 832, 838 (8th Cir. 2003), "RESPA does not directly target overcharging, but was intended to regulate the underlying business relationships and procedures of real estate service providers of which the costs are a function." 380 F.3d at 1065 (internal quotation marks omitted). Whatever else can be said about the alleged kickback scheme at issue here, it certainly concerns the "business relationships and procedures of real estate service providers," and thus implicates the core RESPA policy values vindicated in Burnet Title.

One superficially contrary precedent is presented by Gregg & Valby L.L.P. v. Great American Ins. Co., 316 F. Supp. 2d 505 (S.D. Tex. 2004), which holds that claims against a lawyer alleging a fee splitting and kickback scheme in violation of RESPA did not qualify as claims stemming from "professional services" under the lawyer's professional malpractice policy. The significance of this case is limited, however, since (1) the insurance policy in Gregg featured a narrower definition of "professional services" (specifically limiting coverage to conduct committed in the insured's capacity as a lawyer) than the one at issue in the PMI case, (2) the court in Gregg was concerned exclusively with fee setting rather than disclosure violations or other non-pricing conduct, id. at 515 ("all claims in the underlying suits arose out of Plaintiff's billing and/or fee-setting"), and (3) the insured in Gregg was a lawyer holding a typical legal malpractice insurance policy rather than a mortgage insurer holding a more general professional services policy, with a consequent difference in expectations. The presence of a RESPA claim implicates the legitimate expectations of a mortgage insurer in purchasing professional liability insurance to a far greater extent than it would implicate the expectations of a lawyer purchasing malpractice insurance. While a mortgage insurer probably sees RESPA claims as one of the paradigmatic liabilities to be covered by the insurance, a lawyer has a very different core set of potential liabilities in mind. In short, Gregg's ultimate implications for the case at bar are little different than the other professional malpractice insurance cases discussed above, notwithstanding the fact that the case happens to involve a RESPA claim.

The presence of a RESPA claim in the instant case does not automatically resolve the interpretive question before us. We do not go so far as to espouse a general rule that all professional liability policies presumptively cover damages arising from RESPA claims. Nonetheless, the fact that the Baynham action presented a RESPA claim adds support to PMI's contention that its losses should be covered. While the jurisprudence on this point is not controlling authority in this circuit, the federal courts have shown a tendency to favor coverage for RESPA claims under professional liability policies where, as here, significant non-billing conduct is at issue. Moreover, the centrality of RESPA to the real estate industry in general (and the mortgage insurance industry in particular) supports PMI's claim as to its expectations in purchasing the insurance, and it suggests that, at least in this case, given the otherwise broad language of the PMI policy, any exclusion of RESPA claims from coverage should have been explicitly articulated. This pro-coverage bias seems all the more appropriate in the instant case since it is in line with California's general policy of interpreting all policy ambiguities in favor of the insured.

The plain text of the PMI policy and the basic principles of insurance policy interpretation under California law support a finding of coverage; and the implications of prevailing case law on professional malpractice policies — while only indirectly relevant — do not compel a contrary result. We therefore hold that PMI's losses stemming from the Baynham action are covered by the policy as arising from alleged Wrongful Acts in the rendering of Professional Services as those terms are defined in the policy. The fact that the Baynham claim alleges a RESPA violation, while not determinative, bolsters this conclusion. The rulings of the district court are therefore REVERSED and the case REMANDED with instructions to enter summary judgment in favor of PMI.