Court holds that insurer that breached duty to defend must pay policy limits after default judgment against policyholder

A union's Pension and Annuity Funds ("the Funds") alleged that the Wellesley Advisory Realty Fund  (WARF) had mismanaged and squandered a $5 million investment.  WARF put the money into various real properties such as hotels.  The properties were foreclosed upon or lost all their value due to unpaid taxes and mortgages. The Funds sued WARF for negligence and ERISA violations.

WARF's insurer, Scottsdale Insurance Company, declined to defend it under a Business and Management Indemnity Policy, asserting that exclusions applied.  A default judgment entered against WARF.  WARF assigned to the Funds its rights in the insurance policy.

Scottsdale relied on three exclusions.  The Professional Services Exclusion excluded claims that "arose out of" or "involved" "real estate development, property management, the purchase of real property, or the arrangement of financing on real property."

In Scottsdale Insurance Co. v. Byrne, __ F.3d __, 2019 WL 211420 (1st Cir.), the United States Court of Appeals for the First Circuit held that Scottsdale had breached its duty to defend.  Although some of the Funds' allegations pertained to WARF's actions as a property manager for one of the hotels, there were other allegations that did not necessarily pertain to property management.

Scottsdale also argued that an ERISA exclusion applied.  There was no dispute that that exclusion applied to the ERISA claim.  Scottsdale argued that it also applied to the negligence claim because it arose from the same set of facts as the ERISA claim.  The court disagreed, holding that, interpreting ambiguous terms in the the policy against the insurer, the ERISA exclusion did not extend to a negligence action.  

Scottsdale argued that even if it had a duty to defend, a conduct exclusion excluded its duty to indemnify.  The court noted that while some of the allegations would come within the conduct exclusion, others would not. Scottsdale had not made any attempt to allocate losses that fell within the conduct exclusion from losses that were outside of it.  A default judgment had already entered.  The court held that there was no basis to relieve Scottsdale of its obligation to pay the policy limit.