Ninth Circuit: Deceptive Business Practices Exclusion Does Not Bar Coverage for Kickback Suit

Applying California law, the United States Court of Appeals for the Ninth Circuit affirmed a federal district court decision which held that a deceptive business practices exclusion in an errors and omissions policy did not bar coverage for a suit alleging the insured real estate broker received kickbacks, because two of the causes of action did not require a finding of deception or fraud.  Hanover Ins. Co. v. Paul M. Zagaris, Inc., 2018 WL 1126670 (9th Cir. Mar. 2, 2018).

The insured real estate broker allegedly received kickbacks from selling natural-hazard disclosure reports purchased from a shell corporation.  A class action by the broker’s clients alleged that the broker improperly shared the shell corporation’s profits without disclosure, in breach of its fiduciary duties to the clients.  The complaint also asserted causes of action for violation of California’s Unfair Competition Law, constructive fraud, unjust enrichment, and civil conspiracy.

The insurer sought a declaratory judgment that it had no duty to defend, citing the policy’s exclusion for claims “arising out of false advertising, misrepresentation in advertising, antitrust, unfair competition, restraint of trade, unfair or deceptive business practices, including but not limited to, violations of any local, state or federal consumer protection laws.”  The insurer argued that, under Vandenberg v. Superior Court, 21 Cal. 4th 815 (Cal. 1999), the “fortuity of the form of action chosen by the injured party” should not determine coverage, and thus if the action “as a whole” arose out of deceptive business practices the exclusion should apply.  The district court rejected this argument and denied the insurer’s motion for summary judgment, opining that Vandenberg did not stand for such a sweeping proposition and that the insured’s “alleged deception is not necessarily at the heart of” all of the causes of action (emphasis in original).

On appeal, the Ninth Circuit affirmed, concluding that the district court was correct to find a duty to defend where there were causes of action asserted (breach of fiduciary duty and constructive fraud) that did not necessarily involve deceptive business practices.  In doing so, the appellate court characterized the insurer’s burden regarding the duty to defend to be to “demonstrate that there is no possible scenario in which the claims . . . fall within the Policy.”