Pmi Mortgage Insurance Co. v. American International Specialty Lines Insurance ( 2005 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PMI MORTGAGE INSURANCE CO.,  Nos. 03-15728
Plaintiff-Appellant, 03-16007
v. D.C. No.
AMERICAN INTERNATIONAL CV-02-1774 PJH
SPECIALTY LINES INSURANCE ORDER
COMPANY; FEDERAL INSURANCE  AMENDING
COMPANY; and COLUMBIA CASUALTY OPINION AND
COMPANY, DENYING
Defendants-Appellees. PETITIONS FOR
REHEARING AND
AMENDED
 OPINION
Appeal from the United States District Court
for the Northern District of California
Phyllis J. Hamilton, District Judge, Presiding
Argued and Submitted
October 5, 2004—San Francisco, California
Filed January 14, 2005
Amended March 10, 2005
Before: Richard D. Cudahy,* Susan P. Graber and
Raymond C. Fisher, Circuit Judges.
Opinion by Judge Cudahy
*The Honorable Richard D. Cudahy, Senior Circuit Judge for the
United States Court of Appeals for the Seventh Circuit, sitting by designa-
tion.
3093
3096 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
COUNSEL
David B. Goodwin and Warrington S. Parker III, Heller Ehr-
man White & McAuliffe LLP, San Francisco, California, for
the plaintiff-appellant.
Mark G. Bonino, Ropers, Majeski, Kohn & Bentley, San
Francisco, California, and H. Paul Breslin, Archer Norris,
Walnut Creek, California, for the defendants-appellees.
ORDER
The opinion filed on January 14, 2005, is amended as fol-
lows:
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3097
On slip opinion page 703, last line, insert “partial” between
“enter” and “summary judgment.”
With this amendment, Appellee American International
Specialty Lines Insurance Company’s Petition for Rehearing
or, in the Alternative, for Certification of the Controlling
Issue to the California Supreme Court and Appellees Colum-
bia Casualty Company and Federal Insurance Company’s
Petition for Panel Rehearing are DENIED. No further peti-
tions for rehearing may be filed.
OPINION
CUDAHY, Circuit Judge:
I. BACKGROUND
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 suffi-
cient to make the lender whole. PMI also offers its lender cli-
ents 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 insur-
ance 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
3098 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
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] dis-
close[s] that part of the charges paid by borrowers are com-
pensation to the Defendant [PMI] for the discounts accorded
to the lenders on its various products and services, nor dis-
close the tainted nature of Defendant’s relationship with the
lender,” also in violation of RESPA.1 While PMI was for-
mally charged only with violating RESPA’s anti-kickback
provisions, the complaint also asserts that PMI “acted in con-
cert 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 mil-
lion for any loss covered by the policy. PMI had also pur-
chased layers of excess coverage from Columbia Casualty
Company (Columbia) and Federal Insurance Company (Fed-
eral), 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
1
Section 2607 of RESPA prohibits the transfer of a “fee, kickback, or
thing of value” in exchange for referrals in connection with real estate set-
tlement services, unless the fee or “thing of value” is given for bona fide
services actually performed and this fee-for-services arrangement is fully
disclosed. 12 U.S.C. § 2607.
2
As PMI notes, a third insurer, Reliance, also issued PMI an excess cov-
erage policy and was to cover the final 30% of all losses between $10 mil-
lion and $20 million. However, Reliance has since become insolvent and
thus is not a party to this case.
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3099
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 render-
ing 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 Profes-
sional 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 cus-
tomer 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 Colum-
bia (the Insurers) alleging that the losses incurred in the Bayn-
ham 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
3
Since PMI’s total losses in connection with the Baynham suit exceeded
$10 million, PMI alleged that Columbia and Federal each had a duty to
indemnify PMI as well.
3100 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
. . . 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 Spe-
cialty 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 judg-
ment 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 Fed-
eral.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over these consolidated appeals pur-
suant 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 sum-
mary judgment are reviewed de novo. Suzuki Motor Corp. v.
Consumers Union of the United States, Inc., 330 F.3d 1127,
1131 (9th Cir.), cert. denied, 540 U.S. 983 (2003); King Jew-
elry, 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
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3101
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 (1986).
III. DISCUSSION
The sole question before us is whether PMI’s alleged viola-
tions of RESPA, as presented in the Baynham action, were
“Wrongful Acts” committed “in the rendering of . . . Profes-
sional 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 con-
vinced 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 cover-
age, and the implications of prevailing case law on profes-
sional malpractice policies — while interesting but only
indirectly relevant — do not compel a contrary result. Addi-
tionally, the fact that the Baynham claim alleges a RESPA
violation, while not determinative, bolsters this conclusion.
We therefore reverse.
A. Interpretation of the Policy Text
[1] 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., 73 P.3d
1205, 1212-13 (Cal. 2003) (emphasis added) (internal quota-
tion marks omitted); see also Bank of the W. v. Superior
Court, 833 P.2d 545, 551-52 (Cal. 1992) (same); AIU Ins. Co.
v. Superior Court, 799 P.2d 1253, 1264 (Cal. 1990) (same).
3102 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
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., 900 P.2d 619, 625 (Cal. 1995) (internal
quotation marks omitted).
[2] Turning then to the policy language at issue, the PMI
policy defines “Professional Services” simply as “those ser-
vices 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 per-
spective, 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 miscon-
duct.4
[3] Of course, one could argue that it may not be appropri-
ate to take this broad policy language at face value. While the
bare text of the policy ostensibly covers all “services” ren-
dered “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 pro-
fessional 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
4
Insurers note that “ambiguous language is construed against the party
who caused the uncertainty to exist.” See AIU Ins. Co. v. Superior Court,
799 P.2d 1253, 1264 (Cal. 1990). Yet even conceding that this principle
applies here, it actually cuts against the Insurers. The Insurers drafted the
policy, and so to the extent that it is found to be ambiguous, responsibility
for the ambiguity lies with them, not with PMI.
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3103
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 pro-
tection to the insured.”5 MacKinnon, 73 P.3d at 1213 (internal
quotation marks omitted); see also White v. W. Title Ins. Co.,
710 P.2d 309, 313 (Cal. 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 fol-
lows: “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 313.6
5
PMI cites another passage from MacKinnon which states the rule gov-
erning exclusionary terms:
[W]e are not required . . . to select one “correct” interpretation
from the variety of suggested readings. . . . [W]e need not deter-
mine that the two interpretations proposed by the insurer are not
possible, or even reasonable, interpretations of the clause in ques-
tion. . . . Instead, even assuming that the insurer’s suggestions are
reasonable interpretations which would bar recovery by the
claimants, we must nonetheless . . . find[ ] . . . coverage so long
as there is any other reasonable interpretation under which recov-
ery would be permitted in the instant cases.
MacKinnon, 73 P.2d at 1218 (internal quotation marks omitted). PMI
seems to rely on this passage for its arguments about California interpre-
tive rules, but this reliance is misplaced. This passage in MacKinnon
addresses exclusionary clauses specifically. While the prevailing rule as to
ordinary coverage provisions also favors the insured over the insurer, it is
substantially less stringent than the rule cited here, which is specific to
exclusionary clauses.
6
This interpretive approach applies with special force when the insur-
ance company’s duty to defend the insured against a lawsuit is at issue.
A federal district court applying California law has recently ruled that
“ ‘[u]nder California law, the duty to defend is so broad that as long as the
complaint contains language creating the potential of liability under an
insurance policy, the insurer must defend an action against its insured.’ ”
Horizon W., Inc. v. St. Paul Fire & Marine Ins. Co., 214 F. Supp. 2d 1074,
3104 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
[4] 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 Califor-
nia law — the plain language of the PMI policy and the can-
ons 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 appropri-
ate to address the disposition below on its own terms.
[5] Confronted with the PMI policy’s strikingly broad defi-
nition of “Professional Services,” the district court turned to
leading judicial constructions of that term in traditional pro-
fessional malpractice policies. 2002 WL 32065867, at *1. The
most authoritative construction of the term “professional ser-
vices” 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 ‘profes-
sional’ act or service is one arising out of a vocation,
calling, occupation, or employment involving spe-
cialized knowledge, labor, or skill, and the labor or
skill involved is predominantly mental or intellec-
tual, rather than physical or manual . . . . In deter-
1076 (E.D. Cal. 2002) (quoting Zurich Ins. Co. v. Killer Music, Inc., 998
F.2d 674, 678 (9th Cir. 1993)). Under this rule “[a]ny doubt as to whether
the facts give rise to a duty to defend is resolved in the insured’s favor”
such that, an insured seeking legal defense coverage “need only show that
the underlying claim may fall within policy coverage.” Id. (internal quota-
tions marks omitted).
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3105
mining 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., 157 N.W.2d 870, 871-72 (Neb.
1968)). To be considered a “professional service” for insur-
ance 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).
[6] In keeping with this general rule, California state courts
have uniformly held that insurance policies covering “profes-
sional 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 pro-
fessional malpractice insurance does not cover a lawsuit con-
cerning a physician’s decision to fire an employee, even
though the physician’s professional medical knowledge was
required to make employment evaluations. 266 Cal. Rptr. 501,
503 (Ct. App. 1989) (“[T]he decision to terminate employ-
ment 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 bring-
3106 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
ing the suit, the plaintiff was acting in his capacity as a law
partner, not as an attorney rendering services. 238 Cal. Rptr.
36, 39 (Ct. App. 1987). TransAmerica Insurance Co. v. Say-
ble held that professional malpractice insurance did not cover
litigation expenses arising from an attorney’s alleged misman-
agement of a law firm. 239 Cal. Rptr. 201, 205 (Ct. App.
1987). Since the case was held to concern essentially a busi-
ness 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 profes-
sional services.” Tradewinds Escrow, Inc. v. Truck Ins. Exch.,
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 dis-
closure failures as a “[b]illing” matter involving “undercharg-
ing 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.
7
In addition to Medical Records, 142 F.3d at 515-16 (“we fail to see
how setting a price for photocopies and producing accurate invoices are
other than generic business practices”), Insurers also cite Cohen v. Empire
Casualty Co., where the Colorado Supreme Court held that one attorney’s
failure to pay another for services rendered was not covered by a profes-
sional liability policy. 771 P.2d 29 (Colo. Ct. App. 1989). Insurers also
cite National Union Fire Ins. Co. v. Shane & Shane Co., in which an Ohio
appeals court ruled that an attorney’s alleged overcharging of a personal
injury client, beyond what was provided for in his contingency fee con-
tract, was also not covered by the attorney’s professional liability policy.
605 N.E.2d 1325 (Ohio Ct. App. 1992).
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3107
[7] It should be observed, first, that PMI is a major finan-
cial 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 doc-
tors or lawyers. Additionally, it is important to note that the
PMI policy language is significantly broader than the lan-
guage at issue in any of the aforementioned professional mal-
practice insurance cases. The professional malpractice
policies in virtually all of those cases define “professional ser-
vices” narrowly, explicitly limiting coverage to acts per-
formed by the insured in its professional capacity. See, e.g.,
Johnson v. First State Ins. Co., 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 phy-
sician”) (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 buzz-
words “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 “malprac-
tice” precedents are indirectly relevant here — PMI’s core
3108 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
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 valua-
tion 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 for-
mally 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 specifi-
cally imposes a duty to disclose . . . the nature of the relation-
ship between the lender and a required service provider.”8
This alleged kickback scheme goes to the heart of PMI’s busi-
ness. It implicates the way in which it finds and serves its cus-
tomers, 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” prac-
tices.
[8] In short, even assuming, arguendo, that we may look
8
It bears repeating that such alleged misconduct is sufficient to trigger
coverage under the policy, which indemnified PMI for losses “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.)
9
While we agree that an elaborate kickback scheme such as the one
alleged here is fundamentally different from merely issuing inflated
invoices, we disagree with PMI’s broader assertion that the issue of valua-
tion can never be separated from the rendering of insurance services. Sev-
eral courts have convincingly distinguished between billing practices and
professional services in other industries, and we see no reason why this
distinction might not apply to the insurance industry under a different set
of facts.
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3109
beyond the text of the PMI policy in resolving this case,
Insurers find little support in California case law on profes-
sional malpractice policies, which apply narrower policy lan-
guage to professional conduct fundamentally different from
that at issue here. The district court’s invocation of these pre-
cedents to characterize PMI’s alleged kickback scheme as
merely an administrative or “billing” matter was erroneous.
C. The Implications of RESPA
[9] One additional factor militates in favor of finding cov-
erage 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 require-
ments on parties who make referrals or provide certain ser-
vices 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 termi-
nology 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.3d at 981.
Insurers challenge the notion that professional liability poli-
cies must be interpreted to cover RESPA claims, and the dis-
trict 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
3110 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
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 poli-
cies. 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 moti-
vations 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 insur-
ance 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 poli-
cy’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 “agree-
ment.” The Baynham action resulted directly from PMI’s ren-
dering 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
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3111
RESPA violations fall within the ambit of professional liabil-
ity 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 cen-
trality of the RESPA violation and in the specific allegations
of wrongful “pricing” and failure to make required disclo-
sures.
[10] More important for the purposes of our analysis, the
Burnet Title decision appears to turn on the presence of dis-
closure violations in addition to allegations of mere over-
charging. The Burnet Title court distinguishes Medical
Records on this ground and states that “[t]he statutory obliga-
tion 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 lim-
ited to mere pricing decisions. PMI purportedly “acted in con-
cert 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 “busi-
ness relationships and procedures of real estate service pro-
viders,” 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 law-
3112 PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY
yer alleging a fee splitting and kickback scheme in violation
of RESPA did not qualify as claims stemming from “profes-
sional 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 defini-
tion 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 disclo-
sure 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 law-
yer 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 impli-
cate 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 poten-
tial liabilities in mind. In short, Gregg’s ultimate implications
for the case at bar are little different than the other profes-
sional malpractice insurance cases discussed above, notwith-
standing 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 profes-
sional 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 con-
tention that its losses should be covered. While the jurispru-
dence 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,
PMI MORTGAGE INS. v. AMERICAN INT’L SPECIALTY 3113
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.
IV. CONCLUSION
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 indi-
rectly relevant — do not compel a contrary result. We there-
fore 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 Bayn-
ham claim alleges a RESPA violation, while not determina-
tive, bolsters this conclusion. The rulings of the district court
are therefore REVERSED and the case REMANDED with
instructions to enter partial summary judgment in favor of
PMI.