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Fee Exclusion Does Not Bar Duty to Defend Claim for Deceptive Debt Management Services

August 2007

The United States District Court for the District of Maryland, applying Maryland law, has held that a fee exclusion in an E&O policy did not bar an insurer's duty to defend an insured in a class action in which the plaintiffs alleged that the insured engaged in deceptive debt management and credit counseling activities. Ace Am. Ins. Co. v. Ascend One Corp., 2007 WL 1774495 (D. Md. June 15, 2007).

The insured sold debt management plans to consumers and described itself as a non-profit organization. The plaintiffs in the underlying action alleged that the insured in reality ran a for-profit company that did not substantially reduce its clients' debt and that charged its clients monthly fees.

The E&O policy contained the following exclusion: "this policy does not apply to any Claim against the Insured based on or arising out of . . . any dispute involving fees, expenses or costs paid to or charged by the Insured." The insurer argued that "the essence of the class action at issue is an allegation that [the insured] defrauded consumers by requiring them to pay illegal fees and expenses."

The court disagreed, citing Maryland case law "indicat[ing] that each individual count of the complaint must be analyzed to determine whether it falls within the policy's coverage." The court determined that the complaint was "not limited to a request that the allegedly fraudulently obtained fees be returned." The court stated that the "[p]laintiffs also allege that [the insured] caused consumers to incur late fees, increase their debt and hurt their credit ratings" and that the plaintiffs "allege that [the insured's] practice of advising consumers not to file for bankruptcy adversely affected consumers' financial situations." The court concluded that "[n]one of the damages from these allegations can fairly be said to arise from a dispute involving 'fees, expenses or costs paid to or charged by' [the insured]," and then held that because at least one claim did not fall within the terms of the fee exclusion, the insurer had a duty to defend the entire action.