Troutman Sanders Secures Ninth Circuit Victory for Houston Casualty Company
On February 8, 2016, a unanimous panel of the United States Court of Appeals for the Ninth Circuit affirmed a decision granting summary judgment to Houston Casualty Company (HCC) and ruled that HCC had no obligation under its directors and officers liability (D&O) policy to advance defense costs for several claims arising out of an insured’s business of securitizing mortgages. Impac Mortgage Holdings, Inc. v. Houston Casualty Co., No. 14-55071 (9th Cir. Feb. 8, 2016). Troutman Sanders successfully represented HCC both in the trial court and on appeal.
Part of the legal fallout from the home mortgage crisis has been a series of lawsuits alleging that companies that were in the business of using trusts to securitize home mortgages misrepresented either the quality of the loans they were securitizing or the “waterfall” of tranches by which collateralized mortgage obligations would make payment. As collateralized mortgage obligations from home loans involve very large investments, many of these cases seek damages in the hundreds of millions of dollars.
Some of the defendants in these cases have, in turn, sought entity coverage for these lawsuits from their D&O insurers. Ordinarily, D&O insurance does not cover companies for errors and omissions that arise in their business. But many D&O policies do insure entities for lawsuits involving “securities of” the company or organization. And some insureds have argued that this language applies not only to securities claims from stock- or bondholders who invest in the company itself, but also from those who buy securities that the company sells through a trust as part of its securitization business.
One of these insureds was Impac Mortgage Holdings, Inc. (“Impac”). Until mid-2007, Impac funded, sold, and securitized non-conforming residential mortgages. HCC issued successive D&O policies to Impac beginning in 2008. Impac was named as a defendant in a number of lawsuits alleging, among other things, that Impac made false and misleading statements in offering documents for Impac’s mortgage-backed securities, including misrepresentations regarding Impac’s adherence to underwriting guidelines. Impac also faced liability related to an error in the Pooling and Service Agreement (PSA) for a mortgage-backed security. Impac filed a corrected PSA that changed how the distributions under the security would be paid, and Impac was then sued by a buyer of the security who allegedly lost millions of dollars due to the change.
Impac submitted these matters for coverage under its D&O policies. HCC denied coverage, and the dispute proceeded to litigation, with the parties filing cross-motions for summary adjudication. And, in on February 26, 2013, Federal District Court Judge Josephine Staton issued the first trial court opinion that addressed this insurance argument. In Impac Mortgage Holdings, Inc., et al. v. Houston Casualty Company, et al., No. SACV 11-1845-JST (JCGx) (C.D. Cal.), Judge Tucker granted partial summary judgment to HCC, finding, among other things, that D&O coverage does not apply to liability arising out of a mortgage banker/broker’s securitization of mortgages and that coverage is barred by the policy’s professional services exclusion.
In this week’s decision, the Ninth Circuit affirmed on both points. The appeals court ruled that the claims do not fall within the policy’s entity coverage because they do not involve “securities of” the company. The court reasoned that the term “securities of” the company is ordinarily understood to mean “shares in,” and that any other reading “flies in the face” of the California Supreme Court’s admonition not to elevate dictionary meanings over context in interpreting language in insurance policies. Also the court agreed with HCC, that having the entity coverage in D&O insurance apply to a company’s business of securitizing mortgages, would mean that the policy provided coverage that duplicated Impac’s errors and omissions coverage. The court quoted its 1993 decision in Olympic Club v. Those Interested Underwriters at Lloyd’s London, 991 F.2d 497, 500 (9th Cir. 1993): “The policy, after all, is a Directors’ and Officers’ liability policy with an endorsement protecting the Club; it is not an expanded comprehensive liability policy insuring the Club against liability for everything it does.”
The Ninth Circuit also affirmed Judge Staton’s ruling that HCC’s Professional Services exclusion would also bar coverage, as securitizing mortgages “plainly involves professional skill.”
Merril Hirsh, Daniel C. Streeter and Richard C. Ambrow of Troutman Sanders LLP represented HCC.
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