Deemer Clauses Can Extend “Fee” Exclusions to Third-Party Fees When the Insured Is Derivatively Liable

1. Introduction

In re Residential Capital, LLC (2d Cir. Feb. 3, 2026) addresses insurance coverage for mortgage-fee class actions brought against a mortgage-loan purchaser that did not itself charge the challenged fees. Residential Funding Company, LLC (“RFC”) purchased mortgage loans from originating banks and then resold or securitized them. Borrowers sued over allegedly unlawful loan-closing/origination/settlement fees charged by originating banks, asserting that RFC, as an assignee, was derivatively liable—principally under the Home Ownership and Equity Protection Act (“HOEPA”), 15 U.S.C. § 1641(d)(1).

While the Mitchell and Kessler class actions were pending, RFC entered Chapter 11. The bankruptcy plan approved settlements and assigned to the ResCap Liquidating Trust and class representatives the right to pursue insurance proceeds and defense costs from RFC’s professional liability insurers (Lloyd’s and excess insurers). The core coverage question was whether the insurers could deny indemnity (and related costs) under a policy exclusion for fee claims, given that the disputed fees were paid to originating banks, not to RFC.

2. Summary of the Opinion

The Second Circuit affirmed summary judgment for the insurers, holding that the policy’s Fee Exclusion barred coverage for the settlements and related losses. Although the fees were paid to the originating banks, the court held that a separate Deemer Clause expanded the term “Assured” (for purposes of exclusions) to include “any person or entity for whose conduct an Assured is legally responsible in rendering or failing to render Professional Services.” Because RFC was derivatively liable for the originating banks’ fee conduct under 15 U.S.C. § 1641(d)(1), the originating banks were treated as “Assured” for exclusion purposes, bringing the fee claims within the Fee Exclusion.

The court also dismissed as moot Swiss Re’s conditional cross-appeal (which offered an alternative basis to affirm), because the Fee Exclusion was sufficient to resolve the case.

3. Analysis

3.1. Precedents Cited

  • Marcus & Cinelli, LLP v. Aspen American Insurance Co., 158 F.4th 333 (2d Cir. 2025)
    Supplied the standard of review: interpretation of an insurance policy is a question of law reviewed de novo. This framing allowed the Second Circuit to independently evaluate the Fee Exclusion and Deemer Clause without deference.
  • Thermal Surgical, LLC v. Brown, 150 F.4th 115 (2d Cir. 2025)
    Provided the Rule 56 summary judgment standard (“no genuine dispute as to any material fact”), supporting resolution as a pure contract-interpretation question.
  • CITGO Petroleum Corp. v. Ascot Underwriting Ltd., 158 F.4th 368 (2d Cir. 2025)
    Anchored New York contract-interpretation principles: plain meaning controls; extrinsic evidence only if ambiguous; ambiguity unresolved by extrinsic evidence is construed in favor of the insured. The court used this framework to treat the Deemer Clause and Fee Exclusion as unambiguous when read together.
  • Marchek v. United Services Automobile Association, 118 F.4th 830 (6th Cir. 2024)
    Cited for Michigan’s alignment with similar ambiguity principles, supporting the panel’s conclusion that no material conflict existed between New York and Michigan law on the relevant interpretive questions.
  • In re Snyder, 939 F.3d 92 (2d Cir. 2019) & Finance One Public Co. v. Lehman Brothers Special Financing, Inc., 414 F.3d 325 (2d Cir. 2005)
    Supported the choice-of-law approach: implied consent and lack of true conflict permitted application of both New York and Michigan law without a full conflicts analysis.
  • 10 Ellicott Square Court Corp. v. Mountain Valley Indemnity Co., 634 F.3d 112 (2d Cir. 2011) & Smejkal v. Beck, 2024 WL 1684864 (Mich. Ct. App. Apr. 18, 2024)
    Provided the methodological basis for using dictionaries to determine the “plain and ordinary meaning” of undefined policy terms. The panel used this approach to define “fees” and “legally responsible.”
  • Mitchell v. Residential Funding Corp., 334 S.W.3d 477 (Mo. Ct. App. 2010), as modified (Feb. 1, 2011)
    Functioned as key record support that the underlying borrower claims targeted fee conduct and sought compensatory damages tied to those fees, and that assignee liability could attach to RFC via statutory or state-law theories.
  • In re Residential Capital, 610 B.R. 725 (Bankr. S.D.N.Y. 2019) & Drennen v. Certain Underwriters at Lloyd's of London, 2024 WL 4476067 (S.D.N.Y. Oct. 11, 2024) and 2024 WL 4839350 (S.D.N.Y. Nov. 20, 2024)
    Traced the procedural path (bankruptcy court recommendation; district court withdrawal of reference) and framed the dispute: the district court’s dispositive ruling on the Fee Exclusion (and the later decision prompting Swiss Re’s conditional cross-appeal).
  • In Re: Community Bank of Northern Virginia Second Mortgage Lending Practices Litigation, MDL No. 1674, No. 2:03-cv-00425 (W.D. Pa., filed Oct. 4, 2011)
    Provided allegations and prayer-for-relief context (including damages sought for payment of fees), reinforcing that the underlying claims were “for” fees.
  • Vanguard Insurance Co. v. McKinney, 459 N.W.2d 316 (Mich. Ct. App. 1990)
    Addressed the “the insured” vs. “an insured” distinction in exclusions meant to protect innocent co-insureds. The panel distinguished it because the originating banks were not co-insureds; they were deemed “Assured” only for exclusion purposes via the Deemer Clause.

3.2. Legal Reasoning

A. The claims were “for … fees”

The policy did not define “fees,” so the court used ordinary meaning (including Black’s Law Dictionary). The challenged amounts—closing, origination, and settlement charges—fit the plain meaning of “fees” as charges for services. The court further held that the presence of a separate Mortgage Fee Claim framework did not eliminate the Fee Exclusion’s application, noting that the Fee Exclusion itself contains an express carve-out addressing certain defense costs connected to Mortgage Fee Claims, indicating that mortgage-related fees can still fall within the Fee Exclusion’s general sweep.

B. The Deemer Clause pulls third-party fee recipients into “Assured” for exclusion purposes

The dispositive move was reading the Fee Exclusion together with the Deemer Clause:

  • Fee Exclusion: excludes loss arising from claims for “fees … paid or payable by or to the Assured.”
  • Deemer Clause: for Clause III.C exclusions, “Assured includes any person or entity for whose conduct an Assured is legally responsible in rendering or failing to render Professional Services.”

Because RFC’s asserted liability was derivative of originating-bank conduct under HOEPA assignee liability (15 U.S.C. § 1641(d)(1)), RFC was “legally responsible” for the originating banks’ fee conduct. Therefore, for exclusion purposes, the originating banks were treated as “Assured,” and the claims were for fees “paid … to the Assured” (as expanded by the Deemer Clause).

C. “Legally responsible” means legally answerable, not merely supervisory

Plaintiffs argued “legally responsible” should be limited to an agency/supervision relationship. The court rejected that narrowing, relying on ordinary meaning: responsibility includes being legally answerable. HOEPA’s assignee-liability mechanism made RFC legally answerable for claims and defenses borrowers could assert against the originating creditor.

D. “In rendering … Professional Services” modifies the insured’s responsibility context, not the third party’s status

Plaintiffs also argued the Deemer Clause would apply only if the originating banks themselves rendered “Professional Services” as defined. The court held the more natural reading is that the clause applies where the insured is legally responsible for another entity’s conduct in connection with the insured’s rendering (or failure to render) Professional Services—consistent with the policy’s focus on insuring the Assureds, not the banks.

E. The definite article (“the Assured”) does not defeat the Deemer Clause

Plaintiffs invoked cases distinguishing exclusions triggered by “the insured” versus “an insured.” The court distinguished those authorities (e.g., Vanguard Insurance Co. v. McKinney) because the originating banks were not co-insureds. By definition, the Deemer Clause expands “Assured” within exclusions; reading “the Assured” narrowly to exclude those deemed Assured by the Deemer Clause would nullify the Deemer Clause’s function.

3.3. Impact

  • Coverage for assignee/derivative liability is vulnerable to fee exclusions with deemer language: Even where the insured never received the challenged fees, an exclusion can still apply if the policy deems the fee-charging actor an “Assured” for exclusions and the insured’s liability is derivative (e.g., statutory assignee liability).
  • Drafting and underwriting consequences: Policyholders in loan purchase/securitization chains should scrutinize deemer clauses tied to exclusions. If the intent is to cover assignee liability arising from originator fees, endorsements may be necessary to cabin deemer effects or carve back coverage.
  • Bankruptcy-plan assignments won’t expand coverage beyond contract terms: Even with settlement assignments to a liquidating trust and class representatives, the assignee takes only what the insured had—coverage remains governed by exclusions.
  • Litigation framing matters: The court treated the underlying suits as “for” fees because damages sought were tied to fee payments; mixed allegations (kickbacks/disclosure failures) did not change that.

4. Complex Concepts Simplified

  • Fee Exclusion: a policy term saying the insurer will not pay losses that arise from claims seeking certain kinds of fees/charges.
  • Deemer Clause: a definition-expanding clause that “deems” someone else to be within a defined term (here, “Assured”) for a limited purpose (here, applying exclusions). It can change the practical reach of an exclusion without adding new insureds for coverage grants.
  • Derivative (assignee) liability under HOEPA (15 U.S.C. § 1641(d)(1)): a rule that can make a purchaser/assignee of certain mortgages subject to the borrower’s claims and defenses against the original lender—effectively placing the assignee in the lender’s shoes for liability.
  • “The insured” vs. “an insured”: in multi-insured policies, “an insured” exclusions can bar coverage for all insureds if any insured engaged in the excluded conduct, while “the insured” can sometimes preserve coverage for an innocent insured. The court held that logic did not apply where the third party is not actually a co-insured but is only treated as an “Assured” for exclusions via a deemer clause.

5. Conclusion

The decision’s central contribution is its integrated reading of a fee exclusion and a deemer clause: where a policy deems entities for whose conduct the insured is “legally responsible” to be within “Assured” for exclusions, fee-based claims can be excluded even if the fees were paid to third parties, so long as the insured’s exposure is derivative (including by statute such as 15 U.S.C. § 1641(d)(1)). The opinion underscores that in professional liability coverage disputes, definitional “deemer” provisions can be as outcome-determinative as the exclusions they modify.