LENDERS EDGE SETTLEMENT SERVICES, LLC et al v. MAXUM INDEMNITY COMPANY et al

Filing 66

MEMORANDUM AND OPINION. SIGNED BY HONORABLE ROBERT F. KELLY ON 9/12/17. 9/12/17 ENTERED & E-MAILED.(fdc)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

FIDELITY NATIONAL TITLE
INSURANCE CO., as assignee of and
successor in interest to LENDERS EDGE
SETTLEMENT SERVICES, LLC and
INTEGRITY ASSURANCE, INC.,
Plaintiff,
v.
MAXUM INDEMNITY COMPANY a/k/a
MAXUM SPECIALTY INSURANCE
GROUP and AMERICAN SAFETY
INDEMNITY COMPANY,
Defendants.

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CIVIL ACTION

No. 16-1360

MEMORANDUM
ROBERT F. KELLY, Sr. J.

SEPTEMBER 12, 2017

Presently before the Court is Defendant TIG Insurance Company’s (“TIG”) Motion for
Judgment on the Pleadings and/or Motion for Summary Judgment and Plaintiff Fidelity National
Title Insurance Co.’s (“Fidelity”) Response in Opposition. Also before the Court is Fidelity’s
Cross-Motion for Summary Judgment, TIG’s Response in Opposition, Fidelity’s Reply Brief,
and TIG’s Sur-reply. For the reasons noted below, TIG’s Motion for Judgment on the Pleadings
and/or Motion for Summary Judgment is granted, and Fidelity’s Motion for Summary Judgment
is denied. 1

1

TIG Insurance Company is the successor by merger to American Safety Indemnity Company (“ASIC”), one of the
originally named Defendants in this matter. For purposes of simplicity, we will refer to ASIC throughout the
remainder of this Opinion.

I.

BACKGROUND
This is a breach of contract action regarding a professional liability insurance policy (“the

Policy” or “ASIC Policy”) ASIC issued to Integrity Assurance, Inc. (“Integrity”). (See Compl. ¶
1; see also Def.’s Mot. J. on Pleadings/Summ. J., Ex. A (“ASIC Policy”).) Specifically, Fidelity,
an assignee and successor in interest to Integrity’s cause of action, claims that ASIC breached its
obligation to defend Integrity in a matter filed in the Court of Common Pleas of Philadelphia
County known as Fid. Nat’l Title Ins. Co. v. Integrity Assurance, Inc., et al., No. 130902562
(“the Underlying Matter”). ASIC denied a defense and coverage to Integrity for the Underlying
Matter via correspondence dated January 31, 2014. (Compl. ¶ 26.) ASIC filed this Motion for
Judgment on the Pleadings and/or Motion for Summary Judgment confirming the denial of a
defense and coverage and seeking dismissal of all claims directed towards it in this matter.
Fidelity filed a Response in Opposition to ASIC’s Motion and separately cross-moved for
summary judgment.
A.

THE UNDERLYING MATTER

The Plaintiff in the Underlying Matter is identified as Fidelity National Title Insurance
Company, a national title insurance underwriting company. (Def.’s Br. in Support Mot. J. on
Pleadings/Summ. J. at 5) (citing Ex. B ¶ 1 (“Underlying Compl.”).) The Underlying Complaint
was filed on or about September 23, 2013, in the Court of Common Pleas of Philadelphia
County, asserting claims of declaratory judgment, negligence and vicarious liability, breach of
contract, personal guarantee, and specific performance. (See Underlying Compl.) The
Underlying Complaint identified Lenders Edge Settlement Services, LLC (“Lenders Edge”),
Integrity, and their owners, principals, and/or alleged employees, Alfred J. Drechsel

2

(“Drechsel”), Andrew C. Salvucci, and Charles W. Morrone, as Defendants. (Underlying
Compl. ¶¶ 4-6.)
The Underlying Matter asserted that Fidelity and Integrity entered into an Issuing Agency
Contract (the “Contract”) that appointed Integrity as a policy issuing agent authorized to
undertake certain duties regarding the issuance of title insurance, commitments, policies,
endorsements, and other title assurances for real property. (Id. ¶¶ 13-14.) Fidelity alleged that in
conjunction with the Contract, the Defendants in the Underlying Matter were obligated to
maintain and disburse funds related to the real estate transactions in accordance with the purpose
for which they were entrusted. (Id. ¶ 15.) The Underlying Complaint alleged that the
Defendants breached the contract by creating “irregularities in the Accounts;” creating
“shortfall[s] in both Accounts resulting in many mortgage transactions not being funded and
properly closed;” and creating a shortfall in the approximate amount of $2,136,718.69. (Id. ¶¶
24, 29.) It is specifically alleged that funds from the Accounts were transferred to Drechsel’s
personal accounts. 2 (Id. ¶¶ 30-34.)
For example, the Underlying Complaint alleged that on September 16, 2013, Fidelity
discovered irregularities in the Integrity Escrow Account. (Id. ¶ 23.) The next day, September
17, 2013, Fidelity discussed the irregularities with Drechsel, who acknowledged shortfalls in the
Escrow Account that resulted in many mortgage transactions not being funded or properly
closed. (Id. ¶ 24.) On September 18, 2013, Fidelity confirmed that Integrity and Lenders Edge
were the escrow and title agents for eighteen mortgage transactions with total outstanding
mortgage payoffs of at least $3,658,592.72. (Id. ¶ 25.) Fidelity was the underwriter for fifteen

2

The Underlying Complaint refers to “Accounts” because Drechsel is alleged to have transferred money from “The
Lenders Edge Escrow Account” and the “Integrity Escrow Account.” (See Underlying Compl. ¶ 20.) Because this
Opinion concerns only ASIC’s alleged obligation to defend Integrity in the Underlying Matter, we will only refer to
the “Integrity Escrow Account” or “Escrow Account.”

3

of the eighteen transactions, which had outstanding payoffs of $2,871,718.69. (Id. ¶ 26.) On or
about September 18, 2013, a representative from Fidelity reviewed the Integrity and Lenders
Edge Accounts records and determined that funds from the accounts had been transferred to
Drechsel’s personal bank accounts. 3 (Id. ¶ 30.)
Two Counts in the Underlying Complaint were specifically directed towards Integrity:
Count IV – Negligence and Vicarious Liability (“Count IV” or the “Negligence Count”), which
sought monetary damages arising from Integrity’s various alleged negligent disregard of its
duties; and Count VI – Breach of Contract, which sought monetary damages arising from
Integrity’s alleged breach of its agency agreement with Fidelity. (See Underlying Compl.) In
addition, three Counts were pleaded against all defendants: Count I – Declaratory Judgment;
Count IX – Accounting; and Count X – Specific Performance. Fidelity concedes that the ASIC
Policy did not cover Counts I, VI, IX, and X, but argues that Count IV, the Negligence Count,
was “clearly” covered. (Pl.’s Resp. Opp’n Def.’s Mot. at 11.) Accordingly, the crux of the
matter before the Court is whether the ASIC Policy covered Count IV of the Underlying
Complaint.
The Negligence Count, which incorporated by reference all prior averments, stated as
follows:
¶ 61. Defendant Integrity owed a duty to Fidelity to properly
maintain or supervise the maintenance of the Integrity Escrow
Account and to properly account for all payments and funds
Integrity received in connection with the issuance of Fidelity’s
policies pursuant to the Integrity Contract.
¶ 62. Defendant Integrity also owed a duty to Fidelity to properly
train and supervise the employees and/or principals to whom it
assigned such responsibility.

3

The Underlying Complaint detailed a number of transactions between December 21, 2012 and June 12, 2013 that
were transfers from the Lenders Edge Account to Drechsel’s personal account. (See Underlying Compl. ¶¶ 31-34.)

4

¶ 63. Integrity breached its duty to Fidelity by negligently
disregarding the foregoing duties and responsibilities.
¶ 64. As a result of Integrity’s negligent disregard of its duties,
Fidelity may be required to indemnify its insured for their covered
losses under respective title insurance policies resulting from
Integrity’s negligent conduct.
¶ 65. As a further result of Integrity’s negligent disregard of its
duties, Fidelity has been and may be exposed to additional claims
from its insureds who may allege to have suffered covered losses
under respective title insurance policies resulting from Integrity’s
negligent conduct.
(Underlying Compl. ¶¶ 61-65.)
B.

THE POLICY

ASIC issued a Policy of Professional Liability Insurance number ENO 6000133 13 02 to
Integrity for a Policy Period of August 13, 2013 through August 13, 2014. 4 (ASIC Policy at 2.)
The Policy provides the following relevant language:
SECTION I – INSURING AGREEMENT
A.

Miscellaneous Professional Liability5
Subject to the applicable Limit of Liability, the Company will pay on behalf of
the Insured all Damages and Claim Expenses in excess of the Retention that an
Insured becomes legally obligated to pay as a result of a covered Claim first made
against the Insured during the Policy Period and reported in writing to the
Company during the Policy Period . . . for a Wrongful Act by an Insured or by
anyone for whom the Insured is legally responsible, in the rendering of
Professional Services.

SECTION II – DEFINITIONS
A.

Professional Services means the following services when performed by the
Insured in the ordinary conduct of the Insured’s profession for or on behalf of a

4

As is typical of many insurance policies, the ASIC Policy does not contain consecutively numbered pages from the
Declarations through the Endorsements. For purposes of clarity, we will utilize the ECF generated pagination when
referring to the Policy.

5

The Policy defines the “Company” as “American Safety Indemnity Company,” and the “Insured” as “Integrity
Assurance, Inc.” (ASIC Policy at 2, 6-7.)

5

customer or client for a fee or other compensation: 1. Title Insurance Agent; 2.
Title Abstractor; 3. Title Searcher; 4. Escrow Agent; 5. Closing Agent; 6. Notary
Public; 7. Public Records Searcher (including UCC searches); 8. Corporate
Document Searcher; 9. Flood Zone Certifications; and 10. Witness Closer.
U.

Wrongful Act means any actual or alleged breach of duty, negligent act, error,
omission or Personal Injury offense committed by an Insured solely in the
performance of, or failure to perform, Professional Services.

SECTION III – EXCLUSIONS
This Policy does not apply to any Claim, and the Company is not obligated to defend or
pay Damages or Claim Expenses for any Claim alleging, arising out of, based upon,
relating to, or attributable to, directly or indirectly:
M.

for the breach of express warranties, guarantees or contracts; provided, however,
with respect to allegations of breach of contract this exclusion shall not apply to
any liability that would have attached in the absence of such contract.

N.

arising out of any defect in title (1) not disclosed within public records or (2) of
which you had actual or constructive knowledge at the date of issuance of such
title. 6

TITLE AND ESCROW SERVICES ENDORSEMENT
This Policy does not apply to any Claim, and the Company is not obligated to defend or
pay Damages or Claim Expenses for any Claim alleging, arising out of, based upon,
relating to, or attributable to, directly or indirectly, any:
1.

Intentional failure to comply with escrow instructions or intentional breach by the
Insured in his or her capacity as a title insurance agent, title abstractor, title
searcher, escrow agent, closing agent, notary public, public record searcher,
corporate documents searcher, flood zone certification, or witness closer;

6.

commingling of funds or accounts, inability to pay or failure to safeguard funds.

(ASIC Policy at 5, 8-9, 15-16) (emphasis omitted).

6

“Exclusion N” was added to the ASIC Policy by way of General Change Endorsement EO AS 1000 04 11. (See
ASIC Policy at 16.)

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II.

LEGAL STANDARD
A.

RULE 12(c) STANDARD

A party may move for judgment on the pleadings “[a]fter the pleadings are closed - but
early enough not to delay trial.” Fed. R. Civ. P. 12(c). A court may grant a motion for judgment
on the pleadings “if, on the basis of the pleadings, the movant is entitled to judgment as a matter
of law.” DiCarlo v. St. Mary Hosp., 530 F.3d 255, 262 (3d Cir. 2008) (citation omitted). “We
‘view[] the facts alleged in the pleadings and the inferences to be drawn from those facts in the
light most favorable to the plaintiff.’” D.E. v. Cent. Dauphin Sch. Dist., 765 F.3d 260, 271 (3d
Cir. 2014) (quoting Mele v. Fed. Reserve Bank of N.Y., 359 F.3d 251, 253 (3d Cir. 2004)). “A
Rule 12(c) motion ‘should not be granted unless the moving party has established that there is no
material issue of fact to resolve, and [the moving party] is entitled to judgment as a matter of
law.’” Id. (quoting Mele, 359 F.3d at 253). “Ordinarily, in deciding a motion for judgment on
the pleadings, the court considers the pleadings and attached exhibits, undisputedly authentic
documents attached to the motion for judgment on the pleadings if plaintiffs’ claims are based on
the documents, and matters of public record.” Atiyeh v. Nat’l Fire Ins. Co. of Hartford, 742 F.
Supp. 2d 591, 595 (E.D. Pa. 2010) (footnotes omitted). 7

7

The parties do not dispute that New York law applies to the instant matter. (See Def.’s Br. in Support Mot. J. on
Pleadings/Summ. J. at 12; Pl.’s Resp. Opp’n Def.’s Mot. at 9 n.1.) Under New York law, an insurer’s duty to
defend is determined “whenever the allegations in a complaint state a cause of action that gives rise to the
reasonable possibility of recovery under the policy.” Town of Massena v. Healthcare Underwriters Mut. Ins. Co.,
779 N.E.2d 167, 170 (N.Y. 2002). ASIC moves for judgment on the pleadings and/or summary judgment pursuant
to Federal Rules of Civil Procedure 12(c) and 56(a), respectively. Under Rule 12(d), if matters outside of the
pleadings are presented and not excluded by the Court, “the motion must be treated as one for summary judgment
under Rule 56,” and “[a]ll parties must be given a reasonable opportunity to present all the material that is pertinent
to the motion.” Fed. R. Civ. P. 12(d). We need only to consider the Underlying Complaint and the ASIC Policy to
determine whether ASIC breached its duty to defend Integrity in the Underlying Matter. See Town of Massena, 779
N.E.2d at 170. Accordingly, we will treat ASIC’s Motion as one for judgment on the pleadings because no matters
outside of the pleadings and attached exhibits will be considered.

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B.

RULE 56(a) STANDARD

Federal Rule of Civil Procedure 56(a) states that summary judgment is proper “if the
movant shows that there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The Court asks “whether the evidence
presents a sufficient disagreement to require submission to the jury or whether . . . one party
must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).
The moving party has the initial burden of informing the court of the basis for the motion and
identifying those portions of the record that demonstrate the absence of a genuine dispute of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “A fact is material if it could
affect the outcome of the suit after applying the substantive law. Further, a dispute over a
material fact must be ‘genuine,’ i.e., the evidence must be such ‘that a reasonable jury could
return a verdict in favor of the non-moving party.’” Compton v. Nat’l League of Prof’l Baseball
Clubs, 995 F. Supp. 554, 561 n.14 (E.D. Pa. 1998) (quoting Liberty Lobby, 477 U.S. at 255).
Summary judgment must be granted “against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322. Once the moving party
has produced evidence in support of summary judgment, the non-moving party must go beyond
the allegations set forth in its pleadings and counter with evidence that presents “specific facts
showing that there is a genuine issue for trial.” See Big Apple BMW, Inc. v. BMW of N. Am.,
Inc., 974 F.2d 1358, 1362-63 (3d Cir. 1992). “More than a mere scintilla of evidence in its
favor” must be presented by the non-moving party in order to overcome a summary judgment
motion. Tziatzios v. United States, 164 F.R.D. 410, 411-12 (E.D. Pa. 1996). If the court

8

determines that there are no genuine disputes of material fact, then summary judgment will be
granted. Celotex, 477 U.S. at 322.
C.

DUTY TO DEFEND 8

An insurer’s duty to defend is broader than its duty to indemnify. See Durant v. N.
Country Adirondack Co-op. Ins. Co., 807 N.Y.S.2d 427, 429 (N.Y. App. Div. 2005).
“‘Determining whether an insurer has a duty to defend requires an examination of the policy
language and the allegations of the complaint to see if the underlying complaint alleges any facts
or grounds which bring the action within the protection purchased.’” Int’l Bus. Machines Corp.
v. Liberty Mut. Fire Ins. Co., 303 F.3d 419, 424 (2d Cir. 2002) (quoting First Investors Corp. v.
Liberty Mut. Ins. Co., 152 F.3d 162, 165-166 (2d Cir. 1998)). “‘An insurer must defend
whenever the four corners of the complaint suggest—or the insurer has actual knowledge of facts
establishing—a reasonable possibility of coverage.’” Id. (quoting Cont’l Cas. Co. v. Rapid-Am.
Corp., 609 N.E.2d 506, 509 (N.Y. 1993)). The analysis of whether an insurer must defend its
insured “depends on the facts which are pleaded, not the conclusory assertions.” Allstate Ins.
Co. v. Mugavero, 589 N.E.2d 365, 370 (N.Y. 1992). An insurer is excused from providing a
defense when “there is no possible factual or legal basis on which the insurer might eventually be
obligated to indemnify [the insured] under any provision contained in the policy.” Villa
Charlotte Bronte, Inc. v. Commercial Union Ins. Co., 476 N.E.2d 640, 641 (N.Y. 1985) (citations
omitted). If any claim against the insured arises out of covered events, the insurer must defend
the entire action. See Town of Massena, 779 N.E.2d at 170; E. Ramapo Cent. Sch. Dist. v. N.Y.
Sch. Ins. Reciprocal, 54 N.Y.S.3d 413, 417 (N.Y. App. Div. 2017).

8

As noted above, the parties agree that New York law applies. (See Def.’s Br. in Support Mot. J. on
Pleadings/Summ. J. at 12; Pl.’s Resp. Opp’n Def.’s Mot. at 9 n.1.)

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However, “an insurer can be relieved of its duty to defend if it establishes as a matter of
law that there is no possible factual or legal basis on which it might eventually be obligated to
indemnify its insured under any policy provision.” E. Ramapo, 54 N.Y.S.3d at 418 (citations
and internal quotation marks omitted). Policy exclusions must be strictly and narrowly construed
and cannot be extended by interpretation or implication. See id. To be excused from its duty to
defend based on a policy exclusion, the insurer bears the burden of demonstrating “that the
allegations of the complaint [in the underlying action] cast the pleadings wholly within that
exclusion, that the exclusion is subject to no other reasonable interpretation, and that there is no
possible factual or legal basis upon which the insurer may eventually be held obligated to
indemnify the insured under any policy provision.” Id. (citations and internal quotation marks
omitted) (alteration in original).
D.

INTERPRETATION OF THE POLICY

Insurance agreements are subject to ordinary principles of contract interpretation. See
Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 37 N.E.3d 78, 80 (N.Y.
2015). Interpreting an insurance contract is a question of law when the contract terms are clear
and unambiguous. See id.; see also LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp.,
424 F.3d 195, 205 (2d Cir. 2005). Under New York law, words and phrases should be given
their ordinary meaning, and the contract should be construed to give full meaning and effect to
all of its provisions. LaSalle Bank, 424 F.3d at 205 (citations omitted).
III.

DISCUSSION
As indicated above, Fidelity concedes that the analysis of whether ASIC had a duty to

defend Integrity in the Underlying Matter is strictly confined to Count IV of the Underlying
Complaint. (Pl.’s Resp. Opp’n Def.’s Mot. at 12.) ASIC maintains that it owed no duty to

10

defend Integrity in the Underlying Matter because: (1) there were no factual allegations of
negligence made against it, but only conclusory legal contentions; and (2) Exclusions M, N, 1,
and 6 excluded coverage for Count IV. (See generally Def.’s Br. in Support Mot. J. on
Pleadings/Summ. J.) In response, Fidelity claims that Count IV of the Underlying Complaint
was sufficient to trigger the duty to defend and that none of the exclusions on which ASIC relies
apply. (Pl.’s Resp. Opp’n Def.’s Mot. at 16-31.) Fidelity also contends that ASIC’s reliance on
Exclusion C in its coverage denial letter was improper and that Exclusion C actually required
ASIC to defend Fidelity in the Underlying Matter. 9 (Id. at 21-22.)
A.

FACTUAL ALLEGATIONS IN THE UNDERLYING COMPLAINT

We will first address ASIC’s argument that it correctly denied a defense to Integrity
based on the allegations in the Underlying Complaint. “‘Determining whether an insurer has a
duty to defend requires an examination of the policy language and the allegations of the
complaint to see if the underlying complaint alleges any facts or grounds which bring the action
within the protection purchased.’” Int’l Bus. Machines, 303 F.3d at 424 (quoting First Investors,
152 F.3d at 165-166). Analyzing whether an insurer must defend its insured “depends on the
facts which are pleaded, not the conclusory assertions.” Mugavero, 589 N.E.2d at 370.
Count IV of the Underlying Complaint alleged that Integrity owed a duty to Fidelity “to
properly maintain or supervise the maintenance of the Integrity Escrow Account and to properly
account for all payments and funds Integrity received in connection with the issuance of
Fidelity’s policies pursuant to the Integrity Contract.” (Underlying Compl. ¶ 61.) Count IV also

9

Exclusion C provides, “[t]he Policy does not apply to any Claim, and the Company is not obligated to defend or
pay Damages or Claim Expenses for any Claim alleging, arising out of, based upon, relating to, or attributable to,
directly or indirectly . . . any dishonest, fraudulent, criminal or malicious act, error or omission, or any intentional or
knowing violation of the law. . . . The Company will, however, defend Claims alleging any of the foregoing conduct
until there is a judgment, final adjudication, adverse finding of fact, or adverse admission, establishing that the
Insured committed such conduct.” (ASIC Policy at 8.)

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alleged that Integrity owed “a duty to Fidelity to properly train and supervise the employees
and/or principals to whom it assigned such responsibility.” (Id. ¶ 62.) ASIC argues that, despite
Fidelity’s allegations that Integrity was liable for negligent supervision and maintenance of the
Escrow Account and negligent training of its employees, there are no facts alleged in the
Underlying Complaint to support such claims. (Def.’s Br. in Support Mot. J. on
Pleadings/Summ. J. at 18.) ASIC further argues that the allegation of negligent training and
supervision of employees is not a “professional service” under the definition of the term in the
Policy and under New York law.
In short, there are no factual allegations in the Underlying Complaint that would trigger a
duty to defend Integrity in the Underlying Matter. Fidelity’s Underlying Complaint goes into
specific detail about numerous transfers between the Lenders Edge Escrow Account and
Drechsel’s personal checking account, but lacks any averments regarding specific transfers
between the Integrity Escrow Account and Drechsel’s account. (See, e.g., Underlying Compl. ¶¶
31-36.) The Underlying Complaint is devoid of facts to establish any kind of negligent
supervision or maintenance of the Integrity Escrow Account or failure to properly supervise
employees. It contains what amounts to simple conclusory allegations of duty, breach,
causation, and injury. New York law is clear that an insurer’s obligation to defend its insured is
determined by comparing the factual allegations of the Underlying Complaint to the insurance
policy at issue. See Int’l Bus. Machine, 303 F.3d at 424. The particular cause of action pleaded
is not what determines defense and coverage obligations. See Mugavero, 589 N.E.2d at 370.
Accordingly, ASIC did not have a duty to defend Integrity in the Underlying Matter.
We also agree with ASIC that the allegation of negligent training and supervision of
employees is not a “professional service” as defined in the Policy or under New York law. The

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ASIC Policy defines “Professional Services” as “the following services when performed by the
Insured in the ordinary conduct of the Insured’s profession for or on behalf of a customer or
client for a fee or other compensation . . .” (ASIC Policy at 15) (emphasis added). New York
courts have consistently held that acts or omissions that “set the stage for the performance of
business or professional services” are not professional activities within the scope of a
professional liability policy. See Albert J. Schiff Assocs., Inc. v. Flack, 417 N.E.2d 84, 88 (N.Y.
1980); see also Cmty. Hosp. at Glen Cove v. Am. Home Assurance Co., 567 N.Y.S.2d 122, 123
(N.Y. App. Div. 1991) (stating that negligent supervision and training of a physician was not a
“professional service”); Propis v. Fireman’s Fund Ins. Co., 492 N.Y.S.2d 228, 231 (N.Y. App.
Div. 1985), aff’d, 489 N.E.2d 250 (N.Y. 1985) (holding that the hiring and firing of employees is
a nonprofessional business activity). Supervision and training merely “set the stage” for the
Integrity employees’ job performance. Further, there is no allegation that the supervision or
training was done “for or on behalf of a customer or client for a fee or other compensation.”
(See ASIC Policy at 15.) Accordingly, Fidelity’s allegation of negligent supervision or training
was not within the scope of the Insuring Agreement.
B.

POLICY EXCLUSIONS AS A BASIS FOR DENYING A DEFENSE

ASIC also claims that its denial of a defense was correct based on numerous exclusions
in the Policy. The relevant exclusions for Count IV of the Underlying Matter are Exclusions M,
N, 1, and 6. Even if we were to find above that the Underlying Complaint contained sufficient
facts to trigger a duty to defend Integrity, we agree with ASIC that Exclusion 6 clearly excluded
coverage.
Exclusion 6 of the ASIC Policy, which was added via the Title and Escrow Services
Endorsement, provides that the Policy does not apply to any claim “alleging, arising out of,

13

based upon, relating to, or attributable to, directly or indirectly, any . . . commingling of funds or
accounts, inability to pay or failure to safeguard funds.” (ASIC Policy at 15.) ASIC argues that
Exclusion 6 is clear and unambiguous and directly applies to Count IV due to the allegations in
the Underlying Complaint. (Def.’s Br. in Support Mot. J. on Pleadings/Summ. J. at 23-25.) In
response, Fidelity argues that: (1) Exclusion 6 does not apply to its averments of failure to
properly train and supervise employees; and (2) the Negligence Count against Integrity did not
“arise out of” Drechsel’s commingling, failure to safeguard funds, or inability to pay; rather, the
averment is the opposite—that Drechsel’s commingling of the funds arose out of Integrity’s
negligence in maintaining and supervising the Escrow Account. (Pl.’s Resp. Opp’n Def.’s Mot.
at 27-29.)
We agree with ASIC that the clear and unambiguous language of Exclusion 6 bars
coverage for Count IV of the Underlying Complaint. First, it is clear that Fidelity’s theory of
negligent supervision and maintenance of the Escrow Account in Count IV is, at the very least,
indirectly related to, based upon, and attributable to Drechsel’s commingling of the funds. For
example, Fidelity alleged there were “irregularities in the [Integrity Escrow Account], namely
transfers between the operating and escrow accounts,” which resulted in shortfalls in the Escrow
Account that led to many mortgage transactions not being properly funded. (Underlying Compl.
¶¶ 19-21, 23.) Fidelity further alleged that a representative from Fidelity determined that “funds
from the [Escrow Account] . . . [had] been transferred to Mr. Drechsel’s personal bank accounts
in violation of the Contracts and in breach of Mr. Drechsel, Lenders Edge and Integrity’s
fiduciary duties to the borrowers.” (Id. ¶ 30.) In Count IV, Fidelity’s theory of liability against
Integrity is that Integrity’s negligent supervision and maintenance of the Escrow Account
allowed Drechsel to commingle the funds. (See id. ¶¶ 60-65.) Therefore, the allegations of

14

commingling and negligent supervision and maintenance are clearly linked. The linkage comes
within the scope of the broad exclusionary language of Exclusion 6 because the claim directly or
indirectly alleges, arises out of, is based upon, relates to, or is attributable to the commingling of
funds. (See ASIC Policy at 15.)
Second, and more importantly, the allegations in Count IV go directly to Integrity’s
failure to safeguard funds. Indeed, the language in the Underlying Complaint could not be
clearer. Fidelity specifically alleged that “Integrity owed a duty to Fidelity to properly maintain
or supervise the maintenance of the Integrity Escrow Account and to properly account for all
payments and funds Integrity received.” (Underlying Compl. ¶ 61.) The alleged failure to
properly maintain or supervise the Escrow Account is a claim directly alleging, arising out of,
based upon, relating to, and attributable to Integrity’s failure to safeguard funds, a claim that is
excluded from coverage under the clear and unambiguous language of Exclusion 6.
Accordingly, ASIC was not obligated to provide a defense to Integrity.
We may dispose of Fidelity’s arguments fairly quickly. First, we determined above that
the failure to train or supervise employees is not a “professional service” under the Policy
language or New York precedent. Second, Fidelity’s argument that Integrity’s alleged negligent
supervision and maintenance of the Escrow Account did not “arise out of” Drechsel’s
commingling takes too narrow of a view of Exclusion 6. In support of its argument, Fidelity
relies on the Superior Court of Pennsylvania’s (“Superior Court”) en banc decision in Bd. of
Pub. Educ. of Sch. Dist. of Pittsburgh v. Nat’l Union Fire Ins. Co. of Pittsburgh, 709 A.2d 910
(Pa. Super. Ct. 1998) (en banc). In Bd. of Pub. Educ., a civil rights complaint was filed on
behalf of a minor student against, inter alia, the School District of Pittsburgh and the president of
a teacher-parent organization. Id. at 911. The complaint alleged that due to the school district’s

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negligent supervisory conduct, the president of the teacher-parent organization was able to
sexually molest the minor student. Id. at 911-12. The insurer denied coverage on the basis of
several policy exclusions, which provided that “[t]his policy does not apply . . . to any claims
arising out of . . . assault or battery or . . . to any claim arising out of bodily injury to . . . any
person.” Id. at 912 (emphasis added). The school district ultimately settled the underlying
matter and brought a coverage action against the insurer, claiming the insurer breached the
contract and acted in bad faith in not defending the school district. Id.
The Superior Court reasoned that the negligence claim against the school district did not
“arise out of” the molestation of the student; instead, the molestation of the student “arose out
of” the negligent failings of the school district. Id. at 916. The court stated that the “allegations
against the School District were of negligence and violations of the student’s constitutional
rights. While there was a criminal act and an assault or battery here, that was not the act of the
School District.” Id. at 917. Therefore, the Superior Court held that the exclusions the insurer
relied on were not applicable to the student’s allegation against the school district. Id. at 916-17.
Bd. of Pub. Educ. is a Pennsylvania case that analyzed the limited policy language of
claims “arising out of” certain conduct. Exclusion 6 of the ASIC Policy contains much broader
language, excluding claims “alleging, arising out of, based upon, relating to, or attributable to,
directly or indirectly,” any commingling or failure to safeguard funds. (ASIC Policy at 15.) Bd.
of Pub. Educ. is inapposite, as the policy language in that case is very different than the ASIC
Policy. However, even if Exclusion 6 did contain only the limited language of “arising out of,”
Fidelity’s allegation in Count IV of failure to supervise and maintain the Escrow Account

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directly arises out of the failure to safeguard funds. Accordingly, Exclusion 6 barred coverage
for Count IV of the Underlying Complaint. 10
IV.

CONCLUSION
Under New York law, in evaluating whether an insurer must defend its insured when a

complaint has been filed, an examination of the policy and the factual allegations must be
conducted to determine whether there is a reasonable possibility of coverage. See Int’l Bus.
Machines, 303 F.3d at 424 (quoting First Investors, 152 F.3d at 165-166). The Underlying
Complaint in this case lacked any facts to establish any kind of negligence on the part of
Integrity in failing to supervise or maintain the Escrow Account. Further, the allegation of
failing to train or supervise employees is not a “professional service” as the term is defined in the
Policy or under New York law. Therefore, ASIC had no duty to defend Integrity in the
Underlying Matter.
However, even if we concluded that the Underlying Complaint contained sufficient facts,
the clear and unambiguous language of Exclusion 6 excluded coverage of the Negligence Count
because the averments directly pertain to a failure to safeguard funds. Accordingly, ASIC had
no defense obligations to Integrity. ASIC’s Motion for Judgment on the Pleadings and/or
Motion for Summary Judgment is granted, and Fidelity’s Motion for Summary Judgment is
denied.
An appropriate Order follows.

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As mentioned above, ASIC also argues that Exclusions M, N, and 1 excluded coverage for Count IV. However,
given the clarity that Exclusion 6 barred coverage, we need not address them.
We also note that Fidelity claims Exclusion C required ASIC to defend Integrity in the Underlying Matter.
While Integrity may have relied on Exclusion C in its coverage denial letter, it does not currently move for judgment
on the pleadings and/or summary judgment based on that exclusion. Further, ASIC did not solely rely on Exclusion
C as its basis for denying a defense and coverage, as outlined above. Accordingly, Exclusion C has no impact in
this case.

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