An errors and omissions insurance provider filed suit seeking a declaration of its rights and obligations with respect to providing defense and indemnification for its insureds in an action brought against the insured settlement firm by its underwriter. The underwriter eventually moved for summary judgment or dismissal in the E&O provider’s coverage suit.
The case is Houston Specialty Insurance Co. v. Daniela Fontecilla; Law Offices of Daniela Fontecilla P.A., and Old Republic National Title Insurance Co. (U.S. District Court for the Southern District of Florida, No. 20-20725-Civ-COOKE/GOODMAN).
Houston Specialty Insurance Co. filed an action against Daniela Fontecilla, and the Law Offices of Daniela Fontecilla P.A. seeking a declaration of its rights and obligations with respect to providing defense and indemnification for them in a separate state court action. It issued an errors and omissions liability insurance policy to them, which had a policy period from Jan. 5, 2018, to Jan. 5, 2019.
Houston Specialty Insurance Co. attached the complaint filed in the underlying lawsuit to its complaint in this action. Old Republic National Title Insurance Co. filed suit in Florida state court on Oct. 25, 2019, against Daniela Fontecilla and her firm, seeking recovery of damages arising out of closings on two loans on Feb. 15, 2018, and March 13, 2018, for which Fontecilla and her firm acted as the closing and escrow agent, as well as the title policy issuing agent for Old Republic.
In the underlying complaint, Old Republic stated Fontecilla and the firm served as the closing agent for the two loans with private Lender TCM PPI LLC to be secured by property in Florida, the Bacon loan and the V&H loan. It alleges that TCM approved the loans and wired the funds to Foncecilla and the firm to be held in trust pending further disbursement to the borrower and others. Old Republic alleges Fontecilla and the firm sent the net borrower proceeds by wire transfers for both transactions using wire instructions the purported borrowers provided to them. Old Republic then issued title policies for the properties.
They later discovered impostors purporting to act on behalf of the property owners executed the loan documents but were not associated with and did not have authority to act on behalf of Bacon and V&H. The real Bacon and V&H never authorized the loans or received any of the loan proceeds. Old Republic alleged the Broward County public records contained recorded information that would have revealed Thomas Bacon and Benjamin Getler were both imposters having no authority to act for Bacon or V&H respectively.
Old Republic also alleged Fontecilla and the firm allowed the loan documents to leave their possession and be executed outside of their presence. The complaint also states that with respect to the V&H loan, Fontecilla issued a mortgage policy in favor of V&H for $1.3 million, which exceeded the authorized limit under their agency agreement, without getting prior approval from Old Republic.
Old Republic paid TCM $700,607.50 to settle its claim with respect to the Bacon loan. It paid $1,088,025.85 to settle the V&H loan claim. TCM then assigned all its rights and claims against Fontecilla to Old Republic.
In Houston Specialty insurance’s case against Fontecilla, Old Republic sought summary judgment based on its interpretation of the terms of the policy between Houston Specialty Insurance and Fontecilla, and alternatively, it requests the court use its discretionary authority to dismiss the action in favor of the underlying lawsuit.
U.S. District Judge Marcia Cooke granted in part and denied in part Old Republic’s motion for summary judgment, first addressing Old Republic’s request for dismissal.
“Considering all relevant aspects of this federal action and the underling lawsuit, the court concludes that the actions are not parallel,” Cooke said. “While some courts have found ‘it is not necessary for an insurer to be a party to the underlying action in order to conclude the parties involved in both actions are similar,’ the fact that the plaintiff is not a party to the underlying suit, coupled with the fact that insurance coverage is not an issue before the state court, support the conclusion that the two cases are not parallel.”
She further stated, “While the court agrees with Old Republic that the Florida state courts have an interest in determining the issues involved in the underlying lawsuit (i.e. the Fontecilla defendants’ alleged negligence, breach of contract, and failure to follow proper underwriting procedures), those issues are not before the court in this federal declaratory judgment action. As previously mentioned, in this declaratory judgment action, the plaintiff seeks a determination as to its obligations to defend and indemnify the Fontecilla defendants in the underlying lawsuit. Furthermore, according to the terms of the insurance policy between the plaintiff and the Fontecilla defendants, which was attached as exhibit A to the complaint in this action, ‘all matters arising under the policy including questions related to the validity, interpretation, performance and enforcement of the policy are to be determined in accordance with the law and practice of the state of New York.’ Thus, the policy coverage issues between the plaintiff and the Fontecilla defendants—which are plainly in dispute through this action—do not implicate Florida law. But even if this insurance coverage action solely involved Florida law, and there were public policy implications for Florida insurance contracts, these considerations do not mean Florida courts have a particularly strong interest in deciding the coverage issues properly and exclusively before a federal court. Furthermore, a decision on the plaintiff’s duty to defend would not impinge on the state court’s jurisdiction as that issue is not before the state court. Accordingly, the court finds that the state’s interest in having the issues raised in this declaratory action decided in Florida state courts is weak.”
In the summary judgment portion of its motion, Old Republic argued the complaint in the underlying lawsuit fairly and potentially brings it under the policy. Houston Specialty Insurance countered, arguing “all of the claims made and damages alleged in the underlying lawsuit arise out of the theft, conversion or misappropriation of the loan proceeds by persons with no authority to act on behalf of the subject property owners. Had the imposters not stolen the loan proceeds, Old Republic would have no damages or a cause of action against the insureds. Thus, any allegations involving the insureds’ alleged actions prior to disbursing the funds still involve alleged damages resulting from theft, conversion or misappropriation of funds.” Cooke said Houston Specialty Insurance’s arguments miss the mark.
“The theft or conversion of funds exclusion excludes from coverage claims arising out of or related to theft or conversion of funds,” she said. “Furthermore, policy limits in Section 1, Paragraph C, subparagraph 6 (the Coverage 6 Extension) are invoked if claims and expenses arise out of the loss of the funds or others in the insured’s care due to theft, stealing, conversion, or misappropriation (by parties other than the insureds). Thus, the common theme in these two exclusion provisions is theft, embezzlement, improper use, or conversion of funds. Unfortunately for the plaintiff, however, the complaint in the underlying lawsuit asserts allegations that are not limited to the loss of funds due to theft, stealing, conversion, misuse or misappropriation. For instance, in the underlying lawsuit, Old Republic alleges Fontecilla and Fontecilla P.A. were not authorized to commit the company to risk in excess of $1 million by issuing policies over that amount without prior authorization from Old Republic.
“Under these allegations, there is a possible factual or legal basis on which the Fontecilla defendants might be held liable for purportedly exceeding their authority with respect to the V&H loans—irrespective of whether there was a scheme involving theft, stealing, conversion, misuse, or misappropriation of funds,” Cook continued. “Meaning had the purported theft, stealing, conversion, misuse, or misappropriation of funds never occurred, under the allegations set forth in the underlying lawsuit’s complaint, Old Republic would still potentially have claims against the Fontecilla defendants for their alleged actions in exceeding their $1 million authority in relation to the V&H loan. As a result, the court cannot conclude that Old Republic’s allegations in the underlying lawsuit casts the pleadings wholly within the exclusion set forth in the policy. The court, therefore, finds that the plaintiff has a duty to defend the Fontecilla defendants in the underlying lawsuit.”