LEGROME D. DAVIS, District Judge.
Plaintiff Cincinnati Insurance Company seeks a declaration that no coverage exists for an underlying suit against its former insureds, Defendants Stonebridge Bank, Joseph Spada, and David Keller. Presently before the Court are the parties' cross-motions for summary judgment (Docs. No. 23 & 24), and responses in opposition (Docs. No. 33 & 34). Upon careful consideration of the parties' briefs and applicable case law, the Court DENIES Plaintiff's Motion and GRANTS Defendants'.
We are asked to determine whether an errors-and-omissions insurance policy provides coverage for a lawsuit brought against a bank for its alleged wrongful failure to extend credit. Stonebridge Bank ("Stonebridge") entered into an agreement to extend credit to Engel Group, LLC ("Engel") but failed to honor that agreement, asserting that it believed the agreement had expired. Engel brought action against Stonebridge, claiming it suffered damages and lost profits due to Stonebridge's breach of contract. Stonebridge, in turn, sought coverage for the lawsuit from Cincinnati Insurance Company ("Cincinnati"), its errors-and omissions ("E & O") insurer. Cincinnati initially recognized a defense obligation, but reserved its right to disclaim coverage at a later date. On August 16, 2010, Cincinnati filed this action, seeking a declaration that the insurance policy it issued to Stonebridge does not provide coverage for Engel's claims against Stonebridge. Stonebridge filed a counterclaim, seeking a declaration that coverage exists. Both parties now seek summary judgment.
In 2007, Cincinnati issued an errors-and-omissions insurance policy—the Financial Institutions Blue Chip Policy (the "Policy")—to Stonebridge, covering the period March 25, 2007 to March 25, 2010. Cincinnati undertook to pay all monetary damages that Stonebridge "become[s] legally
The policy also features a contractual liability exclusion and an endorsement—two provisions that are at the heart of the parties' disagreement. Part V, Section I.I of the Policy (the "Exclusion") provides that Cincinnati is not liable to pay, indemnify, or defend any claim:
(Doc. No. 3, Ex. A-2, p. 9.) And, the Financial Institution Coverage Amendatory Endorsement (the "Endorsement") adds the following language to the Policy:
(Doc. No. 3, Ex. A-3, p. 11.)
On May 7, 2007, Stonebridge issued two loan commitment agreements (the "Commitments") to Engel, a small home builder. The Commitments, originally set to expire on September 30, 2008, expressed Stonebridge's promise to extend credit to Engel in the total amount of $5,145,000, in exchange for Engel's compliance with certain conditions. On September 24, 2008, Stonebridge and Engel agreed, in writing, to extend the end date to October 31, 2008. (Engel Group, LLC v. Stonebridge Bank, et al., No. 08-cv-6020, Compl. ¶ 13.) According to Engel, Stonebridge later orally modified the Commitments to further extend them to November 20, 2008, but then failed to appear at closing on that day. (Id. at ¶¶ 14-21.) Engel then filed suit in this Court (the "Lawsuit"), (see Engel Group, LLC v. Stonebridge Bank, et al., No. 08-cv-6020), alleging that the Commitments
Stonebridge submitted the Lawsuit to Cincinnati for coverage, asserting that: (1) Engel was a "borrower" as defined in the Policy; and (2) Engel accuses Stonebridge of committing "wrongful lending acts" related to "an extension of credit" as required by the Policy's Endorsement. (See Defs.' Ans. & Countercl., Doc. No. 10.) Cincinnati counters that because the Lawsuit arises out of liability "assumed" by Stonebridge under the Commitments, the Policy's Exclusion precludes coverage. (Compl. ¶ 47.) Cincinnati filed this action on August 16, 2010 pursuant to 28 U.S.C. §§ 2201 & 2202, seeking a declaratory judgment
We must determine whether Engel's claim is within the Policy's coverage or is barred by an exclusion. See Snyder Heating Co. Inc. v. Pa. Mfrs.' Ass'n. Ins. Co., 715 A.2d 483, 484 (Pa.Super.Ct.1998) ("A court's first step in a declaratory judgment action concerning insurance coverage is to determine the scope of the policy's coverage."). First, we resolve the parties' central dispute—the applicability of the Policy's provision excluding coverage for "liability assumed under contract." Next, we determine the scope of the Policy's coverage for errors, misstatements, acts, or omissions committed in the performance of professional services. Then, once we have ascertained the scope of coverage, we address Cincinnati's contention that Stonebridge cannot obtain a declaratory judgment on the existence of coverage and the duty to indemnify.
In analyzing the Policy at issue, the Court abides by Pennsylvania case law which instructs courts to: (1) construe ambiguous policy provisions in favor of the insured, see Medical Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir.1999) (applying Pennsylvania law)
Cincinnati's primary contention is that its duties under the Policy are limited by the Exclusion, a provision that excludes coverage for claims based upon, or arising out of, "liability assumed under contract." (See Doc. No. 3, Ex. A, p. 10.) Cincinnati essentially argues, and Stonebridge concedes, that this phrase excludes coverage for all liability stemming from a contract— regardless of whether the insured actually assumed such liability in the contract, or merely incurred a liability pursuant to the contract.
Cincinnati relies on a line of Pennsylvania and Third Circuit cases denying coverage for breach of contract claims under comprehensive general liability ("CGL") policies. See Specialty Surfaces Int'l v. Continential Cas. Co., 609 F.3d 223 (3d Cir.2010); Nationwide Mut. Ins. Co. v. CPB Int'l, Inc., 562 F.3d 591 (3d Cir.2009); Kvaerner Metals, 908 A.2d at 897; Snyder Heating Co. Inc. v. Pa. Mfrs.' Ass'n. Ins. Co., 715 A.2d 483, 484 (Pa.Super.Ct.1998); Redevelopment Auth. of Cambria Cnty. v. Int'l Ins. Co., 454 Pa.Super. 374, 685 A.2d 581 (1996). CGL policies provide coverage for personal injury or property damage resulting from an "occurrence," which is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." See Specialty, 609 F.3d at 227; Nationwide, 562 F.3d at 594; Snyder, 715 A.2d at 485; see also Redevelopment Auth., 685 A.2d at 589 ("The purpose and intent of [a CGL] policy is to protect the insured from liability for essentially accidental injury to the person or property of another ....")
This line of cases found that CGL policies did not provide coverage for breach of contract claims because such claims were not "occurrences" or "accidents." See, e.g., Redevelopment Auth., 685 A.2d at 589 (holding that insurer had no duty to defend or indemnify because "the underlying suit arises out of a breach of contract which is not an accident or occurrence contemplated or covered by the provisions of a general liability insurance policy"); Nationwide, 562 F.3d at 598 (upholding the district court's finding that a breach of contract did not trigger coverage under a CGL policy because it "do[es] not arise from a covered `occurrence[]'") None of these courts based their decisions on a contractual liability exclusion like the one Cincinnati relies on here.
Unlike the policies addressed in these cases, Cincinnati's policy provides errors-and
We also reject Cincinnati's related suggestion that public policy considerations prohibit construing insurance policies to provide coverage for breach of contract claims. To support this position, Cincinnati relies on another inapposite line of cases. See HK Systems, Inc. v. Eaton Corp., 553 F.3d 1086, 1091 (7th Cir.2009) (finding that "without express language[,] an indemnitor will not be found to have agreed to indemnify an indemnitee against the consequences of the breach of a contract that the latter signs after the indemnity contract or the formal insurance contract goes into effect") (emphasis in original); Waste Corp. of Am. v. Genesis Ins. Co., 382 F.Supp.2d 1349 (S.D.Florida 2005) (concluding that a directors-and-officers policy did not cover liability for intentional misconduct by the insured company); Jerry Davis, Inc. v. Md. Ins. Co., 38 F.Supp.2d 387 (E.D.Pa.1999) (CGL policy precluded coverage for damages arising from a "delay or failure [by the insured] to perform a contract or agreement in accordance with its terms"). None of these cases pronounce a policy rule barring any type of insurance coverage for breach of contract claims. Indeed, these cases implicitly recognize that insurance policies could cover breach-of-contract claims. See, e.g. Waste Corp., 382 F.Supp.2d at 1356 (acknowledging that "notwithstanding the foregoing [public policy considerations], the question of coverage must still be decided on the basis of the [particular] policy provisions"). Thus, while we agree with Cincinnati that policy considerations may sometimes counsel
Moreover, courts have consistently interpreted the contractual liability exclusion at issue here—a preclusion of coverage for "liability assumed under contract"—to apply only to instances where the insured agrees to "assume" the tort liability of a third party, such as in indemnification and hold harmless agreements. See 1 HANDBOOK ON INSURANCE COVERAGE DISPUTES § 7.05 (Barry R. Ostrager & Thomas R. Newman eds., Aspen Publishers 14th ed. 2008) ("This phrase does not refer to the insured's breaches of its own contracts."); Homeowners Mgmt. Enters., Inc. v. Mid-Continent Cas. Co., 294 Fed.Appx. 814, 820, n. 21 (5th Cir.2008) (noting that the exclusion for liability "assumed in a contract or agreement" denies coverage where "the insured assumes responsibility for the conduct of a third party"); Provident Bank of Md. v. Travelers Prop. Cas. Corp., 236 F.3d 138, 147 (4th Cir.2000) (finding that the phrase "liability assumed by the insured under any agreement" applies "only if [the insured's] liability arises secondarily from an agreement to be responsible for a third party's primary liability"); Musgrove v. Southland Corp., 898 F.2d 1041, 1044 (5th Cir.1990) ("The assumption by contract of the liability of another is distinct conceptually from the breach of one's contract with another. Liability on the part of the insured for the former is triggered by contractual performance; for the latter[,] liability is triggered by contractual breach."); Dreis & Krump Mfg. Co. v. Phoenix Ins. Co., 548 F.2d 681 (7th Cir.1977) (noting that "liability assumed [by the insured] under any written contract" means "a specific written agreement between the insured and some third party whereby the insured agrees to indemnify the third party").
We find this interpretation compelling, particularly in the context of an E & O policy designed to insure against the special risks inherent in the lending business. Here, the Policy not only insures errors, omissions, or acts committed by Stonebridge in the performance of professional services—defined to encompass all of Stonebridge's activities on behalf of its clients—it also specifically covers "claims arising out of any `wrongful lending act' related to an extension of credit or refused extension of credit to a `borrower.'" (See Doc. No. 3, Ex. A-3, p. 14). Stonebridge points out that as "all lender liability actions arise out of a contractual relationship" (Doc. No. 25, p. 18), it reasonably expected the Policy to cover "all lender liability practices," whether asserted in negligence or breach of contract.
Having concluded that the Exclusion does not apply in this case, we move on to determine whether Stonebridge's conduct falls within the Policy's definition of "professional services."
The conduct at issue here—Stonebridge's failure to extend credit pursuant to an agreement it believed had expired— falls into all three of these categories. As a financial institution engaged in lending activities, extending or failing to extend credit is part of Stonebridge's usual day-to-day business operations. See Opie, 663 F.2d at 977 (finding that a mortgage broker's misapplication of loan proceeds in breach of its contract with a commercial bank was part of broker's "day-to-day business operations" and thus constituted a professional service). Stonebridge's actions—negotiating a conditional agreement to extend credit to a borrower, determining whether those conditions were met, and deciding whether to extend the end date for that agreement—also involve specialized knowledge and skill. Contra Massamont Ins. Agency, Inc. v. Utica Mut. Ins. Co., 489 F.3d 71 (1st Cir.2007) (finding that an insurance agency's diversion of its business in breach of an exclusivity agreement did not constitute professional service but was merely a business decision); Zurich Am. Ins. Co. v. O'Hara Reg'l Cntr. for Rehab., 529 F.3d 916 (10th Cir.2008) (concluding that a health facility's billing practices for medicare and medicaid claims did not qualify as "professional services"). Finally, liability for ultimately refusing to extend credit is clearly a "special risk" inherent in the lending business. Thus, Stonebridge's conduct qualifies as a "professional service" within the meaning of the Policy.
Next, we determine the meaning and effect of the Endorsement on the scope of the Policy's coverage for errors, misstatements, acts, or omissions. The Endorsement adds coverage for claims arising out of "any negligent act or omission, error, misstatement, or neglect or breach of
We note that Pennsylvania's reasonable expectations doctrine bolsters our interpretation of the Policy and Endorsement. See UPMC Health System v. Metro. Life Ins. Co., 391 F.3d 497, 502 (3d Cir.2004) ("[T]he reasonable expectations of the insured is the focal point of the insurance transaction ... regardless of the ambiguity, or lack thereof, inherent in a given set of documents."). This doctrine "is intended to protect against the inherent danger, created by the nature of the insurance industry, that an insurer will agree to certain coverage when receiving the insured's application, and then unilaterally change those terms when it later issues a policy." Id. The record here supports Stonebridge's contention that it reasonably expected the Policy to cover "all lender liability practices," whether asserted in negligence or breach of contract. (See Doc. No. 25, p. 18.) Specifically, Stonebridge attached a needs-checklist to its application for insurance. That checklist noted Stonebridge's desire for "coverage for all professional services provided to a third party for a fee, whether such service is provided in accordance with a contract or not." (Doc. No 28, p. 25.) (emphasis in original). Ted Doughman,
Finally, Cincinnati contends that Stonebridge cannot obtain a declaratory judgment on the existence of coverage and the duty to indemnify because the Bank's ultimate liability on the underlying Lawsuit, if any, has yet to be undetermined. This argument, too, fails. Pennsylvania does distinguish between the duty to defend and the duty to indemnify: an insurer is obligated to defend an insured if the claim is potentially covered by the insurance policy, but is only required to indemnify after the insured has been found liable for a claim actually covered by the policy. See Gen. Acc. Ins. Co. of Am. v. Allen, 547 Pa. 693, 692 A.2d 1089, 1095-6 (1997). But Pennsylvania allows courts to resolve both the duty to defend and the duty to indemnify in a single declaratory judgment action. See id., 692 A.2d at 1095-6 (noting that the question before a court in a declaratory action is not whether the insurer owes a specified amount—which would be a premature inquiry absent full resolution on the underlying action—but whether the insurer has a duty to indemnify in the event of liability on the underlying action); Kvaerner Metals, 908 A.2d at 896 n. 7 (acknowledging that both the duty to defend and the duty to indemnify flow from a determination that coverage exists). Because we find that the Policy provides coverage for the Lawsuit, Cincinnati is obligated to defend Stonebridge in that action. Cincinnati must also indemnify Stonebridge—in accordance with the Policy's terms—in the event Stonebridge is ultimately found liable.
Accordingly, we GRANT judgment in Stonebridge's favor and against Cincinnati. The Clerk shall mark this matter statistically closed.
Section II, titled "Definitions," indicates that "loss" means:
and the term "borrower" is defined as:
