Ohio Court Holds E&O Policy Not Triggered By Underlying Misappropriation

by Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in Entitle Ins. Co. v. Darwin Select Ins. Co., 2013 U.S. Dist. LEXIS 14218 (N.D. Ohio Feb. 1, 2013), the United States District Court for the Northern District of Ohio had occasion to consider whether a title insurer errors and omissions liability policy was triggered by the insured’s indemnity obligations pursuant to a series of closure protection letters.
Darwin insured EnTitle Insurance Company, a title insurer, under a professional liability policy with the following insuring agreement:
The Insurer will indemnify the Insured for Loss, including Defense Expenses, from any Claim or Extra-Contractual Claim first made against them during the Policy Period or any applicable Extended Reporting period and reported in accordance with Section VIII(G) of this Policy, for Professional Liability Wrongful Acts committed on or after the date of incorporation or formation of the Named Insured and prior to the end of the Policy Period.
The policy defined Professional Liability Wrongful Acts, and the related term Professional Services as follows:
2)   Professional Liability Wrongful Act- any actual or alleged act, error, omission, misstatement or misleading statement in the performance of or failure to perform Professional Services....by any Insured, or by an individual or entity for whom the Company is legally responsible.
3) Professional Services-services performed by the Company or any Insured Person on behalf of the Company, for a policyholder, customer or client of the Company, pursuant to a policy of insurance issued by, or a written contract with, the Company, in the usual and customary conduct of the Company's business, for a fee or other business consideration.
In connection with its business, EnTitle hired an agency named Direct Title to offer its title insurance product as a “non-exclusive policy issuing agent.” EnTitle offered “closing protection letters,” obligating EnTitle to reimburse its clients for any loss stemming from Direct Title's fraud, dishonesty or negligence in the handling of the closings of title insurance. Direct Title was later discovered to have misappropriated amounts from client escrow funds, and as a result, these clients demanded reimbursement from EnTitle under the closing protection letters. EnTitle, in turn, sought indemnification from Darwin under its errors and omissions policy on the theory that Direct Title had committed Professional Liability Wrongful Acts for which EnTitle was legally responsible. Darwin denied coverage to EnTitle on the basis that EnTitle’s indemnity obligations pursuant to the letters did not arise out of  a “Professional Liability Wrongful Act” and that these obligations did not otherwise qualify as covered Loss under the policy.
In considering the coverage issue, the court observed that to qualify as a “Professional Liability Wrongful Act,” there must be an act, error, omission, misstatement or misleading statement either by EnTitle, as the policy’s insured, or by another entity for whom EnTitle was “legally responsible.” Thus, the court focused on the issue of whether EnTitle was legally responsible to its clients for Direct Title’s malfeasance. EnTitle argued that closing protection letters are customary in the title insurance industry, and as such, a practice that Darwin could have expected EnTitle to engage in.
The court agreed that the protection letters were customary in the industry and, in fact, that Darwin knew EnTitle issued these letters. This, however, was not determinative of the coverage issue for the court. Instead, the issue was whether EnTitle was legally responsible for Direct Title’s wrongful act. Darwin argued, and the court agreed, that EnTitle had no legal responsibility to its clients resulting from Direct Title’s malfeasance.  Instead, EnTitle’s liabilities were a matter of contract. The court recognized a distinction:
The issuance of [closing protection letters] did not make EnTitle legally responsible for Direct Title. Instead, the [closing protection letters] made EnTitle contractually responsible. A contractual obligation to pay is not the same as a legal obligation to pay … In addition, even with EnTitle's contractual right to inspect the accounts of Direct Title, the right to inspect an agent's accounts does not demonstrate the control necessary to hold a title insurer liable for the agent's mismanagement of escrow funds.
The court went on to conclude that EnTitle’s obligations under the protection letters did not qualify as “Loss,” a term expressly defined to exclude “amounts due under any contract.” Further, the Darwin policy excluded coverage “for actual or alleged liability under any express contract or agreement.” The court agreed that this exclusion applied. The court also identified a moral hazard in allowing EnTitle to insure contractual obligations such as those set forth in the protection letters, explaining:
A company could enter into a contract safe in the assumption that if he later decides to engage in an act which might be considered a breach, the insurance company will step forward to cover the consequences of his act if he was wrong; and if he was right, he still walks away with no consequence to himself. Such a practice is inimical to the entire concept of insurance.

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.

© Traub Lieberman Straus & Shrewsberry LLP | Attorney Advertising

Written by:

Traub Lieberman Straus & Shrewsberry LLP

Traub Lieberman Straus & Shrewsberry LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.