Tenth Circuit Deems Claims on Multiple Audits “Interrelated” for Purposes of Insurance Coverage

On October 16, 2023, the U.S. Court of Appeals for the Tenth Circuit held that an auditor’s failures to detect fraud in three consecutive year-end audits constituted “interrelated acts,” and that separate lenders suing on those audits had “interrelated claims,” under a professional liability insurance policy. Robinson Gary Johnson & Associates, PLLC audited the 2014, 2015, and 2016 financial statements of First Mortgage Company, LLC but, in doing so, failed to discover that warehouse loans extended to First Mortgage by two other lenders were, due to a fraudulent scheme, not properly collateralized. The lenders sued Robinson Gary, and each obtained a consent judgment for $1.5 million subject to a settlement agreement in which the lenders agreed to collect solely from the audit firm’s insurance policy—which provided coverage of $1 million per claim and $3 million in the aggregate. The insurer paid only $1 million on the judgments—$500,000 to each lender—on the basis that they constituted a single “interrelated” claim under the policy. The lenders, as assignees of the audit firm’s rights under the policy, instituted a coverage action.

The district court found that each audit by Robinson Gary was a separate act under the policy but that each lender’s claim on those acts was related—meaning that the lenders could split the limits for three claims. On appeal, however, the Tenth Circuit reversed the former determination and held that each of the audits was “interrelated”—defined in the policy as “logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision”—because the auditor’s negligence in one year made it “‘predictable’ that [it] may make the same mistake” in later years. The lenders were thus entitled to split the limits (i.e., $1 million) for a single claim.

The case is American Southwest Mortgage Corp. v. Continental Casualty Co., No. 22-6071 (10th Cir. Oct. 16, 2023). The plaintiff-lenders are represented by Spencer Fane LLP. The insurer is represented by Wiley Rein LLP.

The opinion is available here.