Plain Language, Surplus, and Reasonable Expectations: Utah Supreme Court Uses Entire Contract Construction Toolbox in Concluding Policy Inapplicable to Botched Real Estate Deal

In Compton v. Houston Casualty Co., 2017 UT 17 (Mar. 23, 2017), the Utah Supreme Court affirmed the district court’s grant of summary judgment in favor of Houston Casualty Company , holding that Houston Casualty had no duty to defend or indemnify its insured in an underlying real estate transaction gone bad. Essentially, Utah’s high court held that because the insured did not provide services “for a fee” in the underlying transaction, the underlying plaintiffs were barred from coverage under the policy.

As background, Prudential, a real estate brokerage, employed Seegmiller as a real estate buyer. The employment contract between Prudential and Seegmiller stipulated that compliance with state laws, rules, and regulations required commissions, finder fees, bonuses, or referral fees to be paid to a Brokerage rather than the Salesperson directly. Further, Prudential’s internal “Policy and Procedure Manual” prohibited payments of commissions by associates, or commissions between sales associates. Rather all commissions or referral fees had to be handled through the broker. While employed with Prudential, Seegmiller introduced the investors, the underlying plaintiffs, to Valley View, which planned to convert a piece of real estate into individual lots. The parties’ agreement required the investors to deposit $705,000 into an escrow account — the agreement never mentioned Prudential’s name, or required any funds to be paid to Prudential. However, Valley View breached the agreement when it failed to develop the lots, and when the investors sought a return of their escrow deposit, they learned Valley View had removed the funds and used them for various purposes — including paying Seegmiller $165,000 for his role in bringing the investors to the transaction.

At the time, Prudential was covered under a “Professional Liability Errors & Omissions Insurance” policy in order to insure against potential liability for the acts of its agents. The policy only covered transactions in the Named Insured’s Profession, defined in the policy as “solely in the performance of services as a Real Estate Agent/ Broker of non-owned properties, for others ‘for a fee.’”

In an attempt to recover their deposits, the investors filed suit against Seegmiller. The court found Seegmiller liable for negligence and entered judgment against him for $1,041,275. Rather than enforce this judgment, the investors settled with Seegmiller in exchange for an assignment of any claims that Seegmiller had against Houston Casualty. Subsequently, the investors filed suit against Houston Casualty, alleging it breached the Policy when it refused to defend and indemnify Seegmiller. Both parties moved for summary judgment, which the trial court granted in Houston Casualty’s favor. The court held that because Seegmiller had a personal interest in the transaction, he held dual or competing roles in the transaction, which prevented him from acting “solely” on behalf of Prudential.

On appeal, the Utah Supreme Court affirmed the lower court’s judgment, although for different reasons, holding that Seegmiller did not provide services “for a fee” in the underlying transaction. The investors first argued there was no need to determine the meaning of “for a fee,” as the coverage clause was not limited by the description of the “Named Insured’s Profession” that appeared in an endorsement because the endorsement only identified one profession — real estate agent/broker — to the exclusion of other professions. However, the Supreme Court refused to adopt this interpretation, as it would essentially rewrite the “Named Insured’s Profession” to real estate agents/brokers with no further limitation.

Next, the investors alleged that “for a fee” was not limited to traditional real estate transactions, but was broad enough to encompass the $165,000 fee paid directly to Seegmiller, even though the payments never passed through Prudential. Essentially, they argued “for a fee” simply meant “for the payment of money.” The Supreme Court rejected the investors’ over-broad interpretation of “for a fee” as to include payment made directly to a real estate agent from a source other than the brokerage. Instead, the court concluded the term was limited to traditional real estate commissions to be paid to the agent from the brokerage out of funds transferred at the closing of the real estate transaction.

The Supreme Court reasoned that Utah law requires that any money paid to a real estate agent must first be funneled through a real estate broker, and it was unlikely that the parties’ to the Policy (Houston Casualty and Prudential) intended to include the payment of money in violation of state law. Further, the court reasoned that the parties’ internal policy documentation and Seegmiller’s employment contract with Prudential reinforced the conclusions, as the documents stated the only “fees” Prudential agents were to receive were commissions, funds paid at the closing of a real estate transaction in compliance with state laws, rules, and regulations.

After concluding “for a fee” meant with the expectation of receiving a tradition real estate commission, Utah’s high court held that Seegmiller did not expect to be paid a portion of the funds transferred at the closing of the underlying real estate transaction, or that any funds were to flow though Prudential before being transferred to him — as was customary at Prudential. Even Seegmiller admitted he had no expectation that a traditional real estate commission would be paid. Therefore, the Utah Supreme Court held that Seegmiller was not providing services “for a fee,” and thus, his actions fell outside of the Policy’s coverage.

This decision is significant in adopting a real world understanding of the commonly used “for a fee” requirement in E&O/MPL policies. By utilizing a holistic and not overly rigid and technical view of coverage, the Supreme Court actually considered the reasonable expectations of both parties to the contract, not only the expectations of the insured.