S.C. District Court Finds E&O Endorsement Does Not Provide Coverage for Insured’s Alleged Collection of Illegal Fees

S.C. District Court Finds Insured Car Dealer’s Alleged Violation of S.C. Code §§ 56-15-10 to 600 and S.C. Code § 37-2-307 Not Covered Under Truth in Lending or Leasing Provision of E&O Endorsement

Post by Logan Wells

On September 10, 2012, the United States District Court for the District of South Carolina held that a commercial package policy, particularly the Auto Dealers Errors and Omissions Liability (“ADEOL”) endorsement, did not provide coverage to the insured automobile dealer for the underlying action, which was based on alleged violations of S.C. Code §§ 56-15-10 to 600 and S.C. Code § 37-2-307.

In Graphic Arts Mutual Insurance Co. v. Caldwell Chevrolet, Inc., the underlying plaintiffs filed suit against Caldwell Chevrolet and other automobile dealers alleging the latter had collected illegal administrative fees in connection with the sale of automobiles. The purchasers accused the dealers of setting and advertising a sticker price for cars and then, upon closing, collecting illegal fees as part of a conspiracy to deceive car buyers.

Caldwell was insured through Graphic Arts via an insurance package which included liability coverage and auto dealers’ errors and omissions coverage. Graphic Arts provided a defense in the underlying action pursuant to a reservation of rights, but initiated the declaratory judgment action, alleging inter alia the ADEOL endorsement did not provide coverage. The ADEOL endorsement provided in pertinent part:

III. Truth in Lending or Leasing–Errors and Omissions Coverage–A. We will pay all sums an “insured” legally must pay as damages because of any negligent act, error or omission committed during the policy period for failing to comply with any federal, state, or local: 1. Truth in lending statute, or any statute that specifically regulates disclosures required to complete consumer finance agreements; or 2. Statute that specifically regulates disclosures required to complete consumer lease agreements. B. We have the right and duty to defend any “insured” against a “suit” asking for these damages even if the allegations of the “suit” are groundless, false or fraudulent. However, we have no duty to defend an “insured” against a “suit” not covered under part A. above ... C. This insurance does not apply to any claim or “suit” arising out of: 1. Section 112, Criminal Liability of Title 1 (Truth in Lending Act) of the Consumer Protection Act, (Public Law 90–321:82 Stat. 146 et. seq.); 2. Any dishonest, fraudulent, criminal or intentional act or acts committed by the “insured,” any of the partners, officers, employees or agents of the “insured” or other party in interest acting alone or in collusion with others; or 3. “bodily injury” or “property damage.”

Graphic Arts moved for summary judgment, contending: (1) S.C. Code §§ 56–15–10 to 600 and S.C. Code § 37–2–307 were not truth in lending statues and did not specifically regulate disclosures required to complete consumer finance agreements or consumer lease agreements, as required by the ADEOL endorsement; and (2) the underlying action arose from dishonest or intentional acts which were excluded pursuant to subsection C of the endorsement.

In opposition, Caldwell argued: (1) although the complaint did not specifically provide that the acts of deceiving customers as to the illegal fees was part of the financing for the purchase of the vehicle, the sale and financing is one ongoing transaction and the acts alleged against Caldwell fell under the ADEOL endorsement; (2) the complaint involved at least one disclosure statute which could be interpreted as regulating disclosure required to complete finance agreements; (3) the exclusion for intentional acts did not bar coverage because sections of the underlying complaint did not mention any deceptive or intentional conduct and at least one cause of action did not require proof of such intent.

The court rejected Caldwell’s argument, and found the language of the ADEOL endorsement precluded coverage. The court reasoned, first, the endorsement provided coverage for amounts the insured had to pay “because of ... failing to comply with any federal, state, or local: Truth in lending statute, or any statute that specifically regulates disclosures required to complete consumer finance agreements; or ... required to complete consumer lease agreements,” and the underlying complaint did not allege violation of a lending or leasing disclosure statute. Second, coverage did not exist under the ADEOL endorsement “because subsection C of the endorsement excludes coverage for ‘[a]ny dishonest, fraudulent, criminal or intentional act or acts committed by the insured.’” The facts of the underlying complaint specifically alleged intentional conduct by Caldwell. Accordingly, the court granted Graphic Arts’ motion for summary judgment and declared that the policy did not provide coverage to Caldwell for the claims and allegation in the underlying action. The court found Graphic Arts had no duty to defend or indemnify Caldwell with respect to the underlying action.