Opinion
02 Civ. 3096 (TPG)
December 15, 2003
OPINION
Plaintiff Westport Resources Investment Services, Inc. brings this action against its insurer, defendant Chubb Custom Insurance Company. Westport is a securities brokerage firm and holds a professional indemnity insurance policy with Chubb. Westport has filed a claim against Chubb under that policy. Chubb has denied the claim. Westport brings this action seeking a declaratory judgment that it is entitled to both defense and indemnity under the policy.
Westport moves for summary judgment. In the alternative, Westport moves to strike certain of Chubb's affirmative defenses on the ground that Chubb has waived them.
Chubb cross-moves for summary judgment. In the alternative, Chubb moves to dismiss as premature Westport's complaint insofar as it seeks a declaration that Chubb owes Westport a duty to indemnify Westport.
Westport's motions are denied. Chubb's motion for summary judgment is granted. Chubb's alternative motion is denied as moot.
Facts
The Fraud Claim
Westport purchased professional indemnity insurance from Chubb. The policy is a "claims made" policy and covers the policy holder against wrongful acts by broker-dealers and other insured persons employed by or representing Westport.
Arthur Good was a registered representative of Westport from November of 1996 to April of 1997. In addition to his employment by Westport, Good operated an investment vehicle named Boston Investment Group, Inc. ("BIG") beginning in the mid-1990's, through which he sold millions of dollars of unregistered and worthless securities. Good persuaded clients at Westport to invest in BIG. BIG was a Ponzi scheme operated by Good. Good has been prosecuted for fraud and is now serving a seven-year prison term.
Two clients of Westport, Van's Livestock and Roger Layton, have made claims against Westport, alleging that Good, while acting as a registered representative at Westport, fraudulently induced them to invest large amounts of money in BIG. Van's Livestock and Roger Layton allege that Westport failed to supervise and monitor Good's activities, and have instituted NASD arbitrations against Westport.
Westport's Claim Against Chubb
Westport sent Chubb a timely notification of the investors' claims and requested that Chubb defend and indemnify Westport under the professional liability policy.
In response, Chubb sent Westport letters, dated September 13, 2001 (regarding Van's Livestock) and October 3, 2001 (regarding Roger Layton) in which Chubb denied coverage of the claims.
In its letters of September 13 and October 3, 2001 Chubb asserted that the Van's Livestock and Roger Layton claims arose out of a wrongful act which was committed prior to the "retroactive date" of coverage specified in the policy. The denial of coverage was based on the following policy provisions:
The company will pay on behalf of the Insured Loss from Claims first made against the Insured during the Policy Period, or, if applicable, the Extended Reporting Period, for Wrongful Acts first committed on or after the Retroactive Date.
The policy provided that the policy period was from March 2, 2001 until March 2, 2002, and that the retroactive date was January 31, 1997.
In the letters denying coverage Chubb claimed that, because Good allegedly initiated his scheme in November of 1996, the wrongful acts occurred prior to the retroactive coverage date. However, the letters contained the reservations of rights as follows:
CCIC expressly reserves all rights under the policy and available at law to deny coverage and/or rescind the policy on additional and alternative bases as other terms, conditions, exclusions, endorsements and provisions of the policy, including representations, statements, declarations and omissions in connection with the application therefore, are found to be applicable.
One of the defenses of Chubb which is now asserted (but was not described in the letters to Westport) relies on policy language under which Good is "an insured," and upon further policy language which excludes claims brought about or contributed to by the fraudulent act of "an insured." Westport counters by arguing that this exclusion does not apply in view of a "safe harbor" provision. The following section of the policy contains both the exclusion and the safe harbor provision.
This Coverage Part does not apply to any Claim:
(A) Brought about or contributed to by:
(1)any knowing, intentional, fraudulent, or dishonest Wrongful Act by an Insured;
(2)any willful or intentional violation of statute, rule or regulation by an Insured; or
(3)any gaining by an Insured of any profit, remuneration or advantage to which the Insured was not entitled, including, without limitation, any Insured's use of, aiding or abetting the use of, or participation after the fact in use of non-public information in violation of any law, rule or regulation;
provided, that, except for Claims based on or directly or indirectly arising out of or resulting from, in whole or in part, an Insured's commission of or knowing participation in any embezzlement, misappropriation, commingling of funds, or criminal act, this EXCLUSION (A) shall only apply to an Insured if it is established in fact that the Insured participated in or acquiesced in the knowing, intentional, fraudulent, or dishonest act, the wilful or intentional violation, or the gaining of profit, remuneration or advantage. . . .
The policy states that an "Insured . . . means the Broker/Dealer, Individual Insureds and Registered Representatives."
Discussion
Summary judgment on a claim or defense will be granted when the moving party demonstrates that there are no genuine issues as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a) and (b); Celotex Corp v. Catrett, 477 U.S. 317, 331 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Rattner v. Netburn, 930 F.2d 204, 209 (2d Cir. 1991). The moving party bears the burden of establishing the nonexistence of any genuine issue of material fact. If there is any evidence in the record based upon any source from which a reasonable inference in the nonmoving party's favor may be drawn, the moving party cannot obtain a summary judgment. Celotex, 477 U.S. at 331.
The parties' briefs assume that New York law controls this dispute, and such implied consent . . . is sufficient to establish choice of law.Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 296 (2d Cir. 2000).
Westport argues that Chubb has a duty to defend Westport in the arbitrations and that Westport is entitled to indemnification. It is worth noting that under New York Law, it is axiomatic that the duty to defend is exceedingly broad and more expansive than the duty to indemnify. Cont. Cas. Co. v. Rapid American Corp., 80 N.Y.2d 640, 648, 609 N.E.2d 506, 593 N.Y.S.2d 966 (1993); International Business Machines Corporation v. Liberty Mutual Fire Ins. Co., 2002 WL 31002299, *4 (2d Cir 2002). An insurer must defend whenever the four corners of the complaint suggest — or the insurer has actual knowledge of facts establishing — a reasonable possibility of coverage. Cont. Cas. Co., 80 N.Y.2d at 648.
However, where it can be determined from the factual allegations that no basis for recovery within the coverage of the policy is stated in the complaint, the court may grant summary judgment sustaining the insurer's refusal to defend. Allstate Ins. Co. v Mugavero, 79 N.Y.2d 153, 163, 589 N.E.2d 365, 581 N.Y.S.2d 142 (N.Y. 1992).
The Intentional Act Exclusion
As shown by the policy language quoted earlier, the policy excludes coverage for claims "brought about or contributed to" by "any knowing, intentional, fraudulent, or dishonest Wrongful Act by an Insured. . . ." Chubb argues that the claims against Westport were brought about and contributed to by the intentional fraudulent acts of Good, who was a registered representative of Westport, and, therefore, "an insured" under the explicit terms of the insurance agreement.
Westport argues that the intentional act exclusion does not apply, because the claims against Westport in the Van Livestock and the Layton arbitrations are based upon Westport's alleged negligent failure to supervise and monitor Good. These claims do not even allege Westport's knowing participation in any fraudulent or dishonest acts.
The authoritative New York Court of Appeals case supports Chubb's contentions, rather than Westport's. Allstate Insurance Company v. Mugavero, 79 N.Y.2d 153, 589 N.E.2d 365, 581 N.Y.S.2d 142 (1992). Allstate brought a declaratory judgment action against a husband and a wife, Edward Mugavero and Ann Mugavero, who were making claims of liability coverage under a homeowner's insurance policy with Allstate. The Mugaveros were being sued by parents who claimed that their children were sodomized when in the care of Ann as babysitter. It was alleged that Edward did the sodomizing and that Ann was negligent.
The Mugaveros' homeowner's insurance policy contained an intentional act exclusion, stating that the policy did "not cover bodily injury or property damage intentionally caused by an insured person." According to the policy, "Insured Person . . . means you and, if a resident of your household, any relative and any dependent person in your care."Mugavero, 79 N.Y.2d at 163-64, n. 3.
Allstate asserted that the policy's intentional act exclusion barred coverage as to both Edward and Ann. The issue regarding Ann is of interest in dealing with the Westport case. The Mugaveros argued (as Westport now argues) that the intentional act exclusion did not apply to the underlying claim against Ann because the underlying claim against her was only for negligence.
The New York Court of Appeals rejected this argument, reasoning as follows:
The argument depends upon reading the exclusionary clause as if it applied to intentional injuries caused by the particular "insured person" whose coverage is in question, instead of by any "insured person" under the policy. In other words, defendants interpret the exclusion as if it read "caused by the insured person" instead of "by an insured person". But this is not what the policy says. We agree with the Federal court in Allstate Ins. Co v. Roelfs ( 698 F. Supp. 815 [D Alaska]) — interpreting an identical homeowner's policy — that "the exclusion . . . clearly and unambiguously excludes from coverage all claims which arise out of the intentional act of any one of the insureds" (id. at 822 [emphasis added]). Although no New York appellate court has previously addressed the question, other courts have interpreted this or similar exclusionary clauses as we do. In contrast, exclusionary clauses barring coverage of intentional harm by "the insured", rather than by "an insured", have been held to exclude coverage only for harm caused by the particular insured committing the act.79 N.Y.2d at 164; see also. Branch v. Chenango Mutual Insurance Co., 225 A.D.2d 1079, 1080, 639 N.Y.S.2d 202, 203 (App.Div. 1996).
Like Ann Mugavero, Westport is charged with negligent conduct that facilitated the intentional wrongdoing of another insured under the policy. Like the Allstate policy in Mugavero, the Chubb policy's intentional act exclusion states that there will be no coverage in case of intentional wrongful acts by "an insured." Following Mugavero, the exclusionary clause in Westport's policy must be read as applying to "all claims which arise out of the intentional act of any one of the insureds." 79 N.Y.2d at 164. Westport does not deny that Good, a registered representative of Westport, was "an insured" for all relevant times under the policy. Nor does Westport deny that Good committed fraud. The exclusionary clause must therefore apply unless the "safe harbor" provision bars such application, as Westport contends.
The safe harbor which qualifies the intentional act exclusion, states:
[E]xcept for Claims based on or directly or indirectly arising out of or resulting from, in whole or in part, an Insured's commission of or knowing participation in any embezzlement, misappropriation, commingling of funds, or criminal act, this EXCLUSION (A) shall only apply to an Insured if it is established in fact that the Insured participated in or acquiesced in the knowing, intentional, fraudulent, or dishonest act, the wilful or intentional violation, or the gaining of profit, remuneration or advantage. . . .
Westport argues that the safe harbor provision means that the intentional act exclusion only applies to Westport, if Westport "participated in or acquiesced in" the fraudulent acts of Good. According to this argument, mere negligence on the part of Westport, in failing to supervise or monitor Good, would be within the "safe harbor."
There are problems of interpretation with this particular language of the safe harbor provision relied on by Westport. But it is not necessary to resolve these problems. Other language in the provision makes it clear beyond any question that the safe harbor provision cannot benefit Westport. The safe harbor does not apply to claims "arising out of or resulting from, in whole or in part, an Insured's commission of . . . any . . . criminal act. . . ." Good was "an insured" and committed criminal acts.
Waiver
Westport claims that Chubb has waived its right to invoke the intentional act exclusion by failing to invoke it in the denial of coverage letters.
New York insurance law defines waiver as a voluntary and intentional relinquishment of a known right. Albert J. Schiff Associates, Inc. v. Flack, 51 N.Y.2d 692, 698, 435 N.Y.S.2d 972, 417 N.E.2d 84 (1980); State of New York v. AMRO Realty Corp., 936 F.2d 1420, 1431 (1991). Waiver may be found "where there is direct or circumstantial proof that the insurer intended to abandon the defense." AMRO Realty Corp., 936 F.2d at 1431. "An `implied waiver . . . exists when there is an intention to waive unexpressed, but clearly to be inferred from circumstances. . . .'" AMRO Realty Corp., 936 F.2d at 1431.
Westport relies on a line of cases in which New York courts have found that an insurance company's denial of coverage based a specified ground precluded it from relying on another, unspecified ground later in contesting coverage. See, e.g., General Accident Ins. Group v. Cirucci, 46 N.Y.2d 862, 387 N.E.2d 223, 414 N.Y.S.2d 512 (1979) ("Although, under the facts of this case a disclaimer might have been premised on the late notice furnished by the third-parties themselves to the insurer, since this ground was not raised in the letter of disclaimer, it may not be asserted now."); Fabian v. Motor Vehicle Acid. Indem. Corp., Ill A.D.2d 366, 367, 489 N.Y.S.2d 581, 582-83 (App.Div. 1985) ("Allstate, in its letter of disclaimer, failed to assert the alleged non-cooperation of its [policyholder]. Thus, Allstate cannot now assert that as a basis for its disclaimer."); Unigard Inc. Group v. Bothwell, 237 A.D.2d 450, 655 N.Y.S.2d 77, slip op. 97-2707 (App.Div., Mar 17, 1997) (failure "to make a timely denial of claim based on a policy `exclusion' precludes an insurance company from raising such an exclusion as a defense against the claim"); see also. AMRO Realty Corp., 936 F.2d at 1429-33 (carrier that sent letters declining coverage but never mentioning untimely notice as a ground was deemed to have waived late notice as a defense).
There is, however, "a major limitation of the waiver doctrine."National Union Fire Ins. Co. of Pittsburgh v. Travelers Indemnity CO., 210 F. Supp.2d 479, 484 (S.D.N.Y. 2002). The New York Court of Appeals held in Albert J. Schiff Assoc., 435 N.Y.S.2d at 975, that where the issue is the existence or non-existence of coverage (e.g., the insuring clause and exclusions), the doctrine of waiver is simply inapplicable.See also. Juliano v. The Health Maintenance Org. of New Jersey, 221 F.3d 279, 288 (2d Cir. 2000).
The waiver cases cited by Westport typically involve an insurer's attempt to disclaim coverage on the basis of lack of notice or failure of the insured to cooperate, where the disclaimer of coverage letter had cited no such grounds. In other words, they address forfeiture of coverage. A waiver, however, may not apply to create coverage where none exists. National Union Fire Ins. Co., 210 F. Supp. at 485. In the context of "death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within [New York]," there is a statute establishing a somewhat different rule. N.Y. Ins. Law § 3420(d). But that statute does not apply to the present case.
In the present case the issue about the application of the intentional act exclusion is about whether coverage exists or does not exist. Under New York law the omission of this issue from Chubb's initial letters denying coverage did not amount to a waiver of the issue. It should be noted that neither party relies, in their briefs, on the reservations of rights contained in the letters of September 13 and October 3, 2001.
The Retroactive Date Provision
Although Chubb's letters denying coverage relied on the theory that the wrongful acts were committed before the retroactive date, Chubb has not raised this argument in its motion and appears to have dropped it.