St. Paul Fire & Marine Ins. v. Holland Realty, Inc.: Broker Denied Insurance Coverage

An Idaho federal court has decided that a lawsuit’s allegations fell into insurance policy’s exclusion section.

Holland Realty, Inc. (“Brokerage”) was one of four real estate brokerage firms named in a class action brought by purchasers alleging violations of the federal antitrust laws for an illegal tying arrangement. The lawsuit alleged that when purchasers would acquire undeveloped lots from a builder, they would agree to build a house on the lot. Brokerages would receive a commission from the sale based on a percentage of the projected value of the property as developed, not the actual sale price for the undeveloped lot. The court eventually dismissed the class action lawsuits.

Prior to dismissing the class action lawsuit, the trial court severed Curtis and Gwendolyn Blough’s (“Buyers”) lawsuit against the Brokerage and allowed it to proceed as a stand-alone lawsuit. Prior to severing, the court dismissed some of the Buyers’ allegations, and so the only remaining allegations against the Brokerage were antitrust allegations (federal and state) and violations of the state’s consumer protection act.

St. Paul Fire & Marine Insurance Company (“Company”) filed a separate action seeking a declaratory judgment that it had no duty provide insurance coverage to the Brokerage in the Buyers’ lawsuit. The Brokerage had purchased a real estate liability insurance policy (“Policy”) from the Company, which was in effect when the Buyers filed their initial lawsuit against the Brokerage.

The Company argued that it had no duty to provide coverage to the Brokerage, as the policy excluded claims based on antitrust violations and improperly charged commissions. The Company also argued that it was entitled to reimbursement for its costs in defending the Brokerage in the initial lawsuit because the court had dismissed all of the covered claims. The Company had issued a “reservation of rights” letter at the outset of that lawsuit, informing the Brokerage that would provide the Brokerage a defense but was reserving certain rights.

The United States District Court for the District of Idaho ruled that the Company did not have a duty to provide a defense or indemnify the Brokerage in the current lawsuit but the Brokerage did not need to reimburse the Company for the earlier defense. The court first considered whether the exclusions eliminated the Company’s duty to provide a defense in the current lawsuit.

The Policy excludes all losses that result “from any actual or alleged violation of any securities, anti-trust, or restraint of trade laws.” While the Brokerage conceded that the exclusion covered the federal and state antitrust allegations, the Brokerage argued that this exclusion did not cover allegations made under the state’s consumer protection act. The Brokerage based its argument on the fact that this exclusion used to contain language specifically excluding claims involving consumer protection laws, but the Policy had dropped this language and so now these claims were no longer covered by this exclusion. The court disagreed with the Brokerage, finding that consumer protection laws are designed to punish those who violate trade laws. Thus, the court ruled that the exclusion covered the consumer protection allegations.

The court also found that another exclusion removed the Company’s duty to provide coverage to the Brokerage. The policy excluded all losses for “fees, deposits, commissions or other charges to your real estate professional services.” The Company argued that this exclusion applied here because all of the Buyers’ allegations revolved around an allegedly improper commission charged by the Brokerage. Since return of the commission was the relief sought in the consumer protection allegations, the Company argued that there should be no coverage for these allegations.

The Brokerage argued that the consumer protection act provided additional damages to a successful litigant, such as attorney’s fees and other costs, and so there were other potential “losses”. The court agreed with the Company that the Policy excluded any losses from improperly charged commissions because that was the triggering “loss” in the Policy, and so this exclusion also removed the Company’s duty to provide coverage to the Brokerage.

Next, the court considered the Company’s request for reimbursement of the money expended defending the original lawsuit. While courts generally allow insurance companies to seek reimbursement, they impose specific requirements on what the insurance company must do to recover their costs, such as specific language in the policy or in the reservation of rights letter. Neither the Company’s reservation of rights letter nor the Policy contained any language about seeking reimbursement of defense costs, and so the court ruled that the Company was not able to recover its costs from the Brokerage for its defense of the earlier lawsuit.

St. Paul Fire & Marine Ins. v. Holland Realty, Inc., No. CV07-390-S-EJL, 2008 WL 3255645 (D. Idaho Aug. 6, 2008). ). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].


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