First Circuit interprets broad specific litgation exclusion

UBS-PR was an underwriter for Puerto Rican municipal bonds.  Its related company, UBS-Trust, managed a type of stock fund called closed-end funds, or CEFs.  (Together, the two companies are called UBS.) 

In 2009 UBS-PR was the subject of an investigation by the SEC concerning violations of securities laws with respect to the CEFs.  The SEC ultimately concluded that UBS-PR misrepresented the risks associated with CEF shares and committed other malfeasance.  UBS-PR  settled with the SEC and agreed to pay over $26 million.

In 2010, CEF investors sued UBS, alleging, among other claims, mismanagement, fraud, and artificial inflation of prices of four CEFs. 

In 2011, UBS negotiated new primary and excess insurance coverage.  The policies, issued by XL, Hartford, and Axis, included  "specific litigation exclusions."  Those exclusions excluded "any Claim in connection with [the SEC investigation and the investor lawsuit], or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein."

During negotiations of the primary policy UBS attempted to narrow the scope of the specific litigation exclusion.  In particular, UBS sought to replace "any fact, circumstance or situation underlying or alleged therein" with "the same Wrongful Acts alleged in any such proceeding" and to remove the phrase "in any way."  XL rejected the proposed changes. UBS proceeded to purchase the policies. 

After the policies went into effect, UBS sought coverage for numerous proceedings relating to its treatment of CEFs, including civil actions, regulatory investigations, and hundreds of Financial Industry Regulatory Authority (FINRA) arbitrations. 

The insurers denied coverage for the various claims, asserting that the claims were excluded because they were sufficiently related to the excluded litigation.  

In UBS Financial Services, Inc. of Puerto Ric v. XL Specialty, __ F.3d __, 2019 WL 2864751 (1st Cir.), the United States Court of Appeals for the First Circuit agreed with the insurers that there was no coverage for the claims. 

The court held that although the language of the specific litigation exclusion "is undoubtedly broad, it was the language UBS bargained for.  . . .  Aware of the breadth of the . . . exclusion, UBS nevertheless agreed to purchase the Policy as it read.  Therefore we see no reason to depart from the negotiated plain text of the provision." 

UBS argued that under prior case law the specific litigation exclusion applies only if there is a "substantial" overlap between the prior matter and the matter for which the insured seeks coverage.  The court distinguished the language in the UBS policy from that in the earlier caselaw, which did not include the clause "in any way involving."  The court held that that phrase "significantly broadens" the scope of the exclusion.  The phrase is a "'mop-up' clause intended to exclude anything not already excluded." 

In addition, unlike the UBS policy, the policy in the earlier case had the phrase "the same or substantially similar" before the term "fact, circumstance or situation." 

The court held that the exclusion in the USB policy did not render coverage illusory.  Although the exclusion excluded coverage for claims relating to CEFs, and CEFs were a substantial part of UBS's business, they were not its sole business.

US District Court holds no duty to defend contractor for claim of damage to foundation of building despite some evidence that foundation was outside contractor's scope of work

Collette Synchantha alleged that she had hired Mills Construction Company to rebuild her house after it was damaged by a fire, and that there were problems during construction including damage to the foundation and various construction defects.

Mills' general liability insurer, Nautilus Insurance Company, declined its request for defense of the lawsuit.  Mills provided additional information indicating that the foundation was outside of its scope of work.  Nautilus continued to decline to defend.

The issue before the United States District Court in Mills Constr. Corp., Inc. v. Nautilus Ins. Co., 2019 WL 1440404 (D. Mass) was whether the damage alleged was an occurrence and, if so, whether business risk exclusions excluded coverage.  As many (but not all) courts do, the court treated the two questions as the same -- the issue (in a nutshell) being whether the damage was to Mills' work, in which case there would be no coverage.   

For example, let's say a contractor is hired only to replace a roof.  He installs flashing incorrectly, which allows water infiltration that damages the roof and the interior of the building.  There would be no coverage for damage to the roof, but there would be coverage for damage to the interior of the building (which the contractor did not work on).  (Disclaimer: that description is a broad outline.  The case law on insurance coverage for construction defects is not straightforward, the policy terms are complex and not entirely standardized, and any given claim usually requires extensive factual and legal analysis.)

The court first addressed the perennial problem of whether Nautilus was required to take into account the additional information provided by Mills -- that the foundation was not part of its scope of work  -- in determining whether it had a duty to defend  Although the court provided a pretty good summary of the law on that issue, ultimately it did not give a sharp analysis of whether the external facts determined the duty to defend in the case before it.  It took some of the external facts into account. It held in a footnote that where Mills had provided selected quotes from Sychantha's response to requests for admission, it would consider those responses in their entirety instead of just the isolated quotes. Then it held that "it is the underlying claimant's claims, and not the insured's contrary version of events, or even the merits of the underlying claim, that controls the issue of coverage at the duty to defend stage." 

The court found that there was no coverage.  Sychantha alleged in her complaint that Mills was hired to rebuild her entire home.  The foundation was part of the home even if Mills had not worked on and did not anticipate working on it.  Sychantha stated in her discovery responses that the scope of work included work on the foundation.  The contract between Sychantha and Mills was for "reconstruction of a single family home."  The fact that the estimate did not include work on the foundation did not change the outcome. 

U.S. District Court finds insurer's failure to settle within policy limits was not a breach of duty

Andrew Gallotto,  a boiler repairman, was severely injured when he was servicing a boiler at a building owned by Parkview Condominium Trust.  He sued Parkview.  Parkview's primary insurer, Granite State Insurance Company, retained insurance defense counsel to represent Parkview. 

The Granite State policy had a $1 million limit.  Great American Insurance Company provided excess coverage for losses up to $5 million above the Granite State policy. 

The insurance defense attorney hired by Granite State sent reports to  both Granite State and Great American. While his estimated value of the case changed somewhat during discovery, he generally opined that there was a 70 percent chance of a defense verdict because of Gallotto's comparative negligence.  Close to trial he opined that the case had a settlement value of up to $1 million, but he did not believe that Gallotto would accept that offer. 



During trial Gallotto offered to settle in the $900,000 range.  Granite State counteroffered that the parties enter into a high-low agreement with a $200,000 low and a $1 million high.  Gallotto rejected the counteroffer.  He later insquired whether Granite State would settle for $650,000, but stated that the did not have authority from his clients to lower his demand to that.  Granite State subsequently increased its offer to $300,000.  Gallotto rejected that offer.

Gallotto then proposed a high-low of $300,000 to $1.5 million, which would require participation from Great American.  Great American instead demanded that Granite State settle the claim within the primary policy limit. 

A trial verdict resulted in an award of $7.5 million to Gallotto.  The two insurers paid their policy limits. 

Great American then sued Granite State, alleging that it had breached its duty to the insured and to Great American (standing in the insured's shoes), by failing to settle Gallotto's claim prior to the jury verdict.

In Great Am. Ins. Co. v. Granite State Ins. Co., __ F.3d __, 2019 WL 1435912 (D. Mass.), the United States District  Court for the District of Massachusetts found for Granite State. 

The court noted that the test for liability for an insurer's negligent failure to settle a case is whether no reasonable insurer would have failed to settle within the policy limit.

The court held that it was not unreasonable for Granite State to have rejected the demand for $900,000 made early in the trial and to instead consider other possible arrangements within  that range.  "An insurer's obligation to exercise good faith toward its insured does not require it to roll over and play dead vis-a-vis the claimants.  . . .  Negotiation is an art, not a science." The court held that the offer of a $200,000/$1 million high-low had been "far from an unreasonable offer," especially in light of the recommendations of insurance defense counsel.  "An insurer is entitled to consider the advise of trial counsel in deciding whether to settle a case and at what price." 

U.S. District Court awards $5.4 million in bad faith settlement practices claim arising from car accident after minor was served alcohol at her place of employment

Kailee Higgins, a 20 year old woman, worked as an exotic dancer at a nightclub in Worcester called Centerfolds II, owned by P.J.D. Entertainment of Worcester, Inc.  In November, 2010, she completed a shift at 2 AM. Within minutes of beginning to drive away she was in an accident.  She suffered serous and permanent injuries including traumatic brain injury. 

P.J.D notified its insurer, Capitol Specialty Insurance Corporation.  Capitol referred the claim to Norfield & Associates, an adjustment agency.  Capitol instructed Norfield to do a "limited investigation."

Norfield sent Capitol a preliminary report after interviewing only the owner, the owner's brother, who was the General Manager at P.J.D., and one bartender.  They all denied that Higgins had been drinking at the club or had been intoxicated when she left.  As the court later noted, they all had a vested interest in denying Higgins' alcohol consumption.  The accident had received a lot of publicity and the club was being investigated by the Liquor Liability Commission.

Norfield indicated that it was obtaining contact information for everyone who had worked at the club on the night of the accident so it could interview them.  Capitol terminated Norfield's investigation.  Capitol did not conduct any further investigation until Higgins sued P.J.D. three years later.


Insurance defense counsel hired by Capitol to defend P.J.D. filed successive reports to Capitol in which he indicated that at the time of the accident Higgins had a .155 blood alcohol level, which was twice the legal limit; that a police officer who had been detailed to the club that night stated that she may have consumed alcohol at the club; that there was other evidence that she had been drunk at the club; that it was a known practice at that club and other similar clubs that dancers encourage the patrons to buy them drinks; that it was likely Higgins had been drinking on the night of the accident; that there was a question about whether P.J.D. should have monitored that; that Higgins was actually stumbling on her way to her vehicle; and that she was escorted to her vehicle by an employee of the club.   He opined that there was clearly a seven figure potential on her claim, and that its full value could be as high as $3 million. 

After receiving the communications from insurance defense counsel Capitol sent an email to counsel for Higgins offering the policy limits minus the costs of defense.  Her attorney did not receive the email.  Capitol never recommunicated the settlement offer or confirmed that it had been received. 

Almost two years later, Capitol tendered a check to Higgins for $267,000, the amount remaining in the policy (after it had been eroded by defense costs).

P.J.D. then settled with Higgins for $7.5 million.  Under the settlement agreement it paid a nominal amount to her and assigned to her its rights against Capitol.  Higgins sued Capitol for bad faith settlement practices.

In Capitol Specialty Ins. Co. v. Higgins, 375 F. Supp.2d 124 (D. Mass. 2019), a judge of the United States District Court for the District of Massachusetts held that Capitol had violated Mass. Gen. Laws chs. 93A and 176D.   He held that if Capitol had allowed Norfield to complete its investigation it would have learned at that point that liability was reasonably clear, and that it had many opportunities after that to conduct a full investigation. 

The court noted that the "reasonably clear" standard under ch. 176D is not based on information that an insurer actually obtained and possessed, but on information that a reasonable insurer conducting an investigation of all available information would have obtained and possessed. 

Capitol argued that P.J.D's liability was not reasonably clear because Higgins had been contributorily negligent.  The court dismissed that argument, holding that such a defense is not applicable to a claim of serving alcohol to an underage person. 

The judge disregarded the amount of the settlement between Higgins and P.J.D., holding that it was not an arm's-length transaction.  He assessed single damages in the amount of $1.8 million.  He tripled that under Mass. Gen. Laws ch. 93A to $5.4 million, holding, "[q]uite simply, Capital's conduct in handling this claim was exactly the type of conduct that C.176D and C.93A proscribe."  

Capitol has filed an appeal.  Stay tuned. 

First Circuit rules that insurers can pay brokers commissions for annuities purchases as part of structured settlement agreements

Norma Ezell, Leonard Whitley, and Erica Biddings settled wrongful death and personal injury claims in exchange for structured settlement agreements with the defendants' insurer, Lexington Insurance Company.  The settlements provided that Lexington would purchase annuities from which the claimants would receive specific periodic payments.

The settlement agreement for Ezell and Whitley provided that $200,000 would be "annuitized" by Lexington for the purpose of financing periodic payments, and indicated the exact amount they would receive each month.  The settlement agreement for Biddings provided that the "total present value" of the periodic payments would be $1,642,000, and also specified the amount she would receive each month.

Years later, the claimants brought a class action lawsuit against Lexington and other insurers, alleging that the insurers had made misrepresentations and engaged in a scheme to defraud the claimants.  They alleged that they did not receive the amount they were promised because the life insurer that sold the annuities to Lexington diverted four percent of those amounts to pay commissions to the brokers who arranged the transactions.  The commissions were not disclosed in the settlement agreements. 

In Ezell v. Lexington Ins.Co., 926 F.3d 48 (1st. Cir. 2019), the court affirmed the dismissal of the case.  It held that the settlement documents, fairly read, did not promise that Ezell and Whitley would receive $200,000 or that Biddings would receive $1,642,000.  Rather, they promised only that $200,000 would be "annuitized" for Ezell and Whitley, and that the "total present value" of the periodic payments to Biddings would be $1,642,000.  The court held that the amount "annuitized" to produce a periodic payment stream plausibly referred to the amount of money spent to purchase that payment stream, not the amount a beneficiary receives from it.  Similarly, the "total present value" of a payment stream plausibly referred to its cost, not the amount the beneficiary receives. 

There was no dispute that Lexington paid $200,000 to purchase the annuities for Ezell and Whitley, and $1,642,000 for the annuities for Biddings.  The payment of part of those amounts to brokers was standard in the annuity industry.  The court held that the insurers were under no obligation to inform a settlement party of the items of overhead that were standard. 

More convincing to me, the court held that even if the insurer had breached a duty to inform the claimants of the commissions, such breach was cured because the settlements included specific payment schedules, and those schedules were met. 

Massachusetts Appeals Court holds that Supplementary Payments Provision does not include coverage for award of attorney's fees or most costs

When I started practicing law  I was puzzled by Massachusetts Rule of Civil Procedure 54(d), which provides that after judgment "costs shall be allowed as of course to the prevailing party."  It struck me as something that every prevailing party should pursue. Although costs don't include attorney's fees, litigation costs such as expert witness fees can be huge in a hard-fought case of significant damages.

Older and wiser attorneys explained to me that costs in the rule didn't actually mean costs in the ordinary sense of expert fees and so on.  They told me that asking for them after winning a case was considered "Mickey Mouse," and experienced attorneys didn't do that.

I never revisited the question, but in Styller v. Nat'l Fire & Marine Ins. Co., __ N.E.3d __, 2019 WL 2607504 (Mass. App. Ct.), the Massachusetts Appeals Court affirmed what I had been told.  

That case arose out of a dispute between a contractor and a homeowner.  FCMNH performed demolition and reconstruction work on Alex Styller's house.  Styller withheld payment, and FCMNH sued him.  Styller asserted counterclaims, alleging breach of contract, negligence, and statutory violations. National Fire, FCMNH's insurer, defended it on the counterclaims under a reservation of rights.

A jury awarded damages to Styller on the counterclaim for negligence.  The trial judge found that FCMNH was liable for breach of Mass. Gen. Laws ch. 93A., and awarded attorney's fees and expenses to Styller under that statute.  

National Fire denied a duty to indemnify FSMNH because all the damages found came within a policy exclusion for damages to FSMNH's own work.

FCMNH assigned its rights against National Fire to Styller.  Styller sued National Fire.  The trial judge in that case held that although the policy exclusion for FCMNH's own work applied, National Fire was nevertheless required, pursuant to the Supplementary Payments provision of the policy, to indemnify FCMNH (and thus, Styller) for the attorney's fee award.

The Supplementary Payments clause provided that with respect to any suit against the insured that the insurer defends, the insurer will pay "all costs taxed against the insured in the suit." 

In Styller v. Nat'l Fire & Marine Ins. Co., __ N.E.3d __, 2019 WL 2607504 (Mass. App. Ct.), the Massachusetts Appeals Court reversed.  It held that although the term costs usually means all the expenses incurred during the course of litigation, including attorney's fees, the policy does not use the word in that way.  Rather, it specifically limits costs to "costs taxed" in the technical sense, "namely, the meaning of that term in the context of a legal proceeding."  The court noted that the supplementary payments provision refers to the insurer's obligations to pay for "costs taxed against the insured in the suit."  The word suit is defined as "a civil proceeding in which damages because of property damage to which this insurance applies are alleged."

The court continued that in the context of civil proceedings, taxable costs ordinarily refer to costs that are recoverable under Mass. Gen. Laws ch. 261 §§1 et seq. (the statute parallel to Massachusetts Rule of Civil Procedure 54(d)).  Those costs do not include attorney's fees or most litigation expenses.

Addendum:  A reader inquired what costs actually are covered under Rule 54(d).  I believe the answer is filing fees, service of process fees, travel costs, and, sometimes, deposition costs. 

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