by Chris Graham and Joseph Kelly

Western Heritage Bank f/k/a Mesilla Valley Bank, et al v. Federal Ins. Co., Case No. CV 11-0630 MV/WPL (D. N.M. March 21, 2013)

D&O insurer, Federal, received a summary judgment; Federal had no duty to defend Bank in suit against Bank for fraudulently placing deeds of trust and liens on property to secure Bank loans and wrongfully refusing to release the liens.

The policy’s Lending Services exclusion provided that Federal “shall not be liable for Loss on account of any Claim: . . . based upon, arising from, or in consequence of the performing or failure to perform . . . Lending Services.”

“Lending Services” were defined as: “any act performed by an Insured for a Lending Customer of the Organization in the course of extending or refusing to extend credit or granting or refusing to grant a loan or any transaction in the nature of a loan, including any act of restructure, termination, transfer, repossession or foreclosure.”

Under New Mexico law interpreting exclusions “arising out of” is broad and means “originating from,” “having its origin in,” “growing out of” or “flowing from.” Here, the Bank’s placing of liens on the property and its subsequent refusal to remove them was a direct result of the Bank’s lending services and activities, and coverage thus was excluded.

by Chris Graham and Joseph Kelly

Zayed v. Arch Ins. Co., Case No. 11-CV-1319 (PJS/TNL) (D. Minn. March 20, 2013)

Right before being shut down by the government for ponzi schemes, Trevor Cook sued Edward Baker and several Baker-affiliated companies, including Mesa Holdings, Inc. for fraud. Cook’s court-appointed receiver pursued the suit against Baker and Mesa. D&O insurer Arch refused to defend or indemnify Baker or Mesa for that suit. The case resulted in a Miller-Shugart settlement under which $1 million and $500,000 judgments were entered against Baker and Mesa, respectively, and Baker and Mesa assigned any claims against Arch to Receiver. Receiver sued Arch for the $1.5 million in judgments and about $70,000 in attorneys’ fees incurred by Baker and Mesa in defending Receiver’s suit.

Court granted Arch’s motion for summary judgment that Arch had no duty to indemnify Baker or Mesa because the amounts sought were “uninsurable” as a matter of law. The Policy defines “Loss” as “the amount the Insureds are legally obligated to pay resulting from a Claim”; but that definition also excludes “matters that are uninsurable under the law pursuant to which this Policy shall be construed.” When deciding whether a Minnesota claim is insurable, courts first look to the substance of the claim rather than labels; and then look to moral hazard and whether if a particular type of wrongdoing is insured, people will engage in more of that wrongdoing. Court found this suit uninsurable because Baker and Mesa’s conduct was fraudulent and insuring such conduct would lead to more fraud.

Arch unsuccessfully argued that the contractual liability exclusion excluded coverage. The policy excluded coverage for “Loss for any claim . . . arising from, based upon, or attributable to any liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.” Arch argued that “but for” the contracts between Cook and Mesa, Mesa (and Baker) wouldn’t be liable for fraud. Court found that the Policy doesn’t exclude coverage for claims that wouldn’t exist “but for” a contract; rather, the Policy excludes coverage for claims that wouldn’t exist but for contractual liability (breach of contract).