Insurance, investment broker policy, consolidation

INSURANCE: Investment brokerage policy providing for consolidation of similar claims valid under NY law… insurer had reasonable basis to consolidate so coverage was for single occurrence subject to $2 million limit, not $8 million aggregate… defense costs consumed $2 million limit… Strong.

Victor & Rita Donovan, former Montana Rep. Rick Hill and his wife Betti, and George & Gertrude Stevens purchased securities through Independent Financial Group which turned out to be part of a ponzi scheme by DBSI and they did not get the distributions that their brokers allegedly guaranteed. IFG notified Catlin Specialty Ins. of Plaintiffs’ potential claims in 4/09. Catlin issued a reservation of rights letter in 6/09. Plaintiffs sued IFG and individual brokers in 7/09 alleging malpractice and other claims. Catlin disputed IFG’s liability as well as coverage for the claims. It also maintained that 17 pending claims including Plaintiffs’ were “interrelated wrongful acts,” so if there was coverage, it was only for a single occurrence and subject to a $2 million policy limit. Catlin contends — and Plaintiffs do not dispute — that all of the consolidated claims were based on allegations related to the claimants’ purchase of fraudulent “Tenant-In-Common” interests in DBSI. Catlin maintains that the claims are interrelated because they arise from IFG’s single — and allegedly insufficient — due diligence investigation into DBSI. Before the case resolved, defense costs consumed the $2 million policy limit that Catlin contended was applicable, and it withdrew. IFG and Plaintiffs settled without Catlin’s input. IFG is not a party to this action. Plaintiffs do not allege that they have been assigned claims against Catlin by IFG. They allege that Catlin acted in bad faith by providing $2 million for all 17 claims rather than the $8 million aggregate. They argue that by the 12/10 mediation it was reasonably clear that IFG was liable to them, and that the claims against IFG were not interrelated acts as the policy used that term. They argue that its position constituted failure to promptly settle after liability had become reasonably clear, in violation of the Montana UTPA, and allege that this “bad faith” caused them $3 million actual damages and that punitives should also be imposed. Catlin responds that its coverage position was correct or at least not in bad faith. It moved for summary judgment only on the legal issue of whether it was bad faith to apply the limit of liability, but also takes the position that a ruling in its favor on bad faith disposes of the entire case.

The policy included a provision that New York law would govern “issues pertaining to meaning, interpretation and effect” of the policy. Catlin argues that reasonableness of their coverage positions therefore depends on New York law. Plaintiffs argue that the choice-of-law provision should not apply because it was part of a contract between Catlin and IFG and Plaintiffs did not agree to it, and that the conduct at issue occurred in Montana and application of New York law would contravene Montana public policy. Modroo (Mont. 2008). However, the Modroo criteria are not satisfied. Montana law would not apply to a provision of a contract between out-of-state parties that was not performed in Montana, and Montana does not have a materially greater interest than New York in the dispute between the insured and the insurer. Even if the choice-of-law provision contravenes a fundamental Montana policy, the 2 preceding Modroo factors are not satisfied.

The “Interrelated Wrongful Acts” provision is valid under New York law. Quanta Lines Ins. (SDNY 2009) approved application of the identical provision under similar facts. Plaintiffs provide no authority to suggest that any court has found it invalid under New York law. Quanta held that separate demands alleging that an insured fraudulently sold unregistered securities shared a “sufficient factual nexus” and therefore were “interrelated wrongful acts” under the policy. Florida and Nebraska have also upheld equivalent provisions on substantially identical facts.

The claims that Catlin consolidated arose from allegations that related to a single entity’s fraudulent securities and from IFG’s single investigation into that entity. Precedential cases provided a reasonable basis to assert that the claims could be consolidated under a single policy limit, satisfying the UTPA’s safe harbor, §33-18-242(5). Montana law does not require insurers to hand over a blank check for every claim, but simply that an insurer must have a reasonable basis to contest existence or amount of coverage. Catlin and IFG formed a contract that included a choice-of-law provision and a broad Interrelated Wrongful Acts provision. Catlin has cited on-point cases in which similar or identical provisions were held applicable in similar or identical circumstances. It has established a reasonable basis for consolidating Plaintiffs with others. Plaintiffs have advanced no persuasive reason that the provisions should not be enforceable between the insurer and insured, nor have they shown that they, as a 3rd party, are entitled to damages for Catlin’s application of the provision with respect to IFG’s claim. Catlin is entitled to summary judgment.

The parties appear to agree that only damages arising from any bad faith conduct in the underlying litigation are recoverable in this action, and that they cannot “double recover” the same damages they already recovered in the underlying action. They appear to dispute whether Plaintiffs can now recover damages that were alleged but not recovered in the underlying action. The summary judgment on the bad faith claim may moot the damages issue. Ruling on the damages issue will be reserved, subject to the parties’ status reports describing what claims they believe remain pending and whether Catlin’s motion for summary judgment as to underlying claim damages is moot.

Donovan, Hill, and Stevens v. Catlin Specialty Ins., 42 MFR 1, 8/25/14.

Linda Deola (Morrison, Sherwood, Wilson & Deola), Helena, for Plaintiffs; Randall Nelson (Nelson Law Firm), and Jared Dahle (Dahle Law Firm), for Catlin.