Illinois Court Holds Services Performed By Sub for Parent Comes Within E&O Policy

by Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in Hilco Trading LLC v. Liberty Surplus Ins. Co., 2014 Ill. App. LEXIS (Ill. 1s Mar. 17, 2014), the Appellate Court of Illinois for had occasion to consider whether appraisals and evaluations prepared by one insured for another insured, and provided to a third party, were “Professional Services” under a professional liability policy so as to trigger a duty to defend.

Hilco Trading, LLC had several subsidiaries, among them Hilco Appraisal and Hilco Valuation (“Appraisal” and “Valuation”, respectively). Although not a subsidiary, Hilco Financial (“Financial”) was also owned and controlled by Hilco Trading. Appraisal and Valuation were in the business of providing expert professional services consisting of the valuation of various types of assets, while Financial was in the business of making loans to other companies through asset-based lending. In order to finance the loans to its borrowers, Financial itself borrowed money from financial institutions.

Hilco Trading obtained a $20 million junior secured loan from Patriot Group, LLC (“Patriot”). The proceeds from the loan were to be used by Financial to enter into asset-based loans to third-party borrowers that met the criteria established by Financial and Patriot. As part of the agreement, Financial was required to provide Patriot with written appraisal and audit reports showing that the loans Financial was making to third-party borrowers were fully secured. Hilco Trading entered into a similar agreement with a second bank, Bayerische Hypo-und Verinsbank AG, New York Branch (“HVB”).  Hilco Appraisal and Valuation appraised the assets securing the loans Financial would provide to its third party borrowers.

Hilco Financial ultimately defaulted on its loans with Patriot and HVB. As a result, both Patriot and HVB filed suit, alleging that Hilco Appraisal and Valuation “grossly inflated” loan collateral appraisals with the understanding and intent that the plaintiffs would rely on the appraisals.  The Hilco entities tendered the suits to its primary professional liability insurer, Liberty Surplus Insurance Company (“Liberty”).

Hilco filed a declaratory judgment action seeking a determination that Liberty had a duty to defend the underlying suits. The Liberty policy defined “Professional Services” to mean “those services specified in Item 7 of the Declarations which are provided by the Insured to a third party for a monetary fee.” The services identified in Item 7 of the Declarations included “value opinions in support of asset-based lending.”

In its motion for summary judgment, Liberty took the position that there was no coverage under the policy because Hilco Appraisal and Valuation provided the appraisals only to Financial, which was not a “third party” as required by the definition of “Professional Services.”  According to Liberty, the fact that the appraisals were ultimately reviewed by Patriot and HVB did not satisfy the definition of “Professional Services.” In its cross-motion for partial summary judgment, Hilco maintained that the underlying complaint alleged that it provided a professional service to a third party because Patriot and HVB received the appraisals prepared by Appraisal and Valuation. The trial court agreed with Liberty and found that Liberty did not have a duty to defend because the appraisals were prepared for Financial and not for Patriot and HVB. Hilco appealed.

The Illinois Appellate Court reversed the trial court’s ruling that the insured’s services were not performed for a “third party.”  The underlying suits alleged Hilco Appraisal and Valuation knew that Patriot and HVB would receive and rely upon the appraisals before the appraisals were delivered to Hilco Financial. The Court concluded that it was immaterial that the appraisals were delivered to only Financial, so long as the complaints alleged that Patriot and HVB were intended recipients of the appraisals.  Further supporting that conclusion, Patriot alleged in its complaint that Hilco Appraisal and Valuation provided their written consent for Patriot to use the appraisals in evaluating whether to advance money for loans. Therefore, the complaints sufficiently alleged that the insured’s services were performed for a third party.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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