Lending Exclusion in Bankers Professional Liability Policy Bars Coverage For Claim Alleging Financing a Ponzi Scheme

The United States District Court for the Central District of California, applying California law, has held that a lending exclusion in a bankers professional liability policy barred coverage for underlying lawsuits alleging that the insured funded an entity operating a Ponzi scheme. Pacific Premier Bancorp, Inc. v. Zurich Am. Ins. Co., No. CV 22-842 PA (C.D. Cal. Nov. 25, 2024). The court found this to be the case regardless of which of two endorsements applied to modify the exclusion.

The insured financial institution was named as a defendant in three lawsuits seeking to hold it liable in connection with a Ponzi scheme operated by non-insured co-defendants. The actions alleged that two entities that subsequently merged with the insured originated loans or extended lines of credit to the perpetrators of the scheme, thereby furthering the fraud. The insured’s bankers professional liability policy contained a lending exclusion, which was modified by two potentially conflicting endorsements—nos. 6 and 15. If endorsement no. 15 controlled, the lending exclusion would bar coverage for Claims “based upon or arising out of any actual or alleged purchase, sale, origination, participation, grant, commitment, restructuring, termination, transfer, repossession or foreclosure of any loan, lease, extension of credit (including overdraft protection), or the failure to do any of the foregoing, or the rendering of advice in connection with any loan, lease, extension of credit (including overdraft protection), except that this exclusion does not apply to [. . .] Loan Servicing.” Loan Servicing was defined as “administrative services in connection with loan, lease or extension of credit.” If endorsement no. 6 controlled, the lending exclusion would bar coverage for Loss in connection with any Claim “based upon directly or indirectly arising out of, or in any way involving: … any participation in any extension of credit not originated by an Insured Entity.” Coverage litigation ensued, and the insured argued that the underlying lawsuits fell within the carve-back for Loan Servicing contained in endorsement no. 15.

The court granted the insurer’s motion for summary judgment, concluding that the lending exclusion barred coverage for the underlying lawsuits regardless of which endorsement controlled. The court determined that the lawsuits would not fall within the carve-back for Loan Servicing under endorsement no. 15. The court reasoned that it could not “construe Loan Servicing so broadly as to include all subsequent activity after [the insured] extended loans or lines of credit.” The court further determined that under endorsement no. 6, the lending exclusion barred coverage because the loans and lines of credit at issue in the underlying litigation predated the insured’s merger with the originating financial institution and were therefore “not originated by an Insured Entity.”