|
Financial Management Advisors, LLC and Financial Management Advisors, Inc. (collectively "FMA") are firms that provide investment advice and portfolio management services. Kenneth Malamed ("Malamed") is FMA's President and Chief Investment Officer, and acts as the financial advisor to many of FMA's clients.
In May of 2002, FMA purchased from American International Specialty Lines Insurance Company ("AISLIC") an Investment Management Insurance Policy to cover claims made against FMA for "Wrongful Acts" in the rendering of, or failure to render, investment advisory services. The initial policy issued to FMA ("Policy I") covered the period from May 2, 2002 to May 2, 2003. In May of 2003, AISLIC issued a renewal policy ("Policy II") covering the period from May 2, 2003 to May 2, 2004. Each policy was subject to a $2 million limit of liability.
Endorsement No. 3 of Policy I provides:
If written notice of a Claim has been given to the Insurer ... then a claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given, or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim of which such notice has been given, shall be considered made at the time such notice was given.
Exclusion II (9) of Policy II excludes from coverage:
[A]ny claim arising out of the facts alleged, or arising out of the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time.
The Sitricks are a family of investors who invested in traditional equities and fixed income products managed by FMA. In December of 2002, the Sitricks filed a lawsuit against FMA ("Sitrick Claim") alleging, among other things: (1) that Malamed made certain misrepresentations in order to dissuade the Sitricks from liquidating their equity investments; and (2) that Malamed misrepresented the risk inherent in several Collateral Bond Obligation funds ("CBOs") managed by FMA in order to induce the Sitricks to invest in those funds. FMA tendered the Sitrick Claim to AISLIC for coverage and AISLIC agreed to assume the defense. In May of 2004, the Sitricks and FMA reached a settlement which exhausted the $2 million coverage limitation of Policy I.
In February of 2004, FMA began settlement discussions with another of its clients, Mark Steinman. In June of 1999, relying on Malamed's advice, Steinman invested in CBOs. When his investment declined materially, Steinman sought recovery ("Steinman Claim") on the ground that Malamed had misrepresented the risk of the investment and, moreover, had placed Steinman's investment into a tranche of the fund different from and which carried more risk than the tranche he had agreed to invest in. After reviewing the pertinent materials and comparing the Sitrick Claim, AISLIC preliminarily denied coverage for the Steinman Claim, on the ground that it arose out of the same Wrongful Acts as, or Wrongful Acts related to, those alleged by the Sitricks and thus would be treated as having been made under Policy I-the limits of which had been exhausted in settling the Sitrick Claim. In September of 2004, Steinman sued FMA. FMA urged AISLIC to reconsider its coverage position, and AISLIC issued a formal denial of coverage.
In November of 2004, FMA and Malamed sued AISLIC. The complaint alleged that AISLIC's denial of coverage constituted a breach of its contract obligations and that AISLIC had breached its implied covenant of good faith and fair dealing by failing to investigate and refusing to defend the Steinman Claim. After AISLIC removed the action to federal court, FMA moved for partial summary judgment on their breach of contract claim and AISLIC cross-moved for summary judgment on all issues.
The district court denied FMA's motion and granted AISLIC's motion for summary judgment. The district court agreed with AISLIC that the Sitrick Claim and Steinman Claim were "related" because both involved material misrepresentations made by the same financial advisor about the risk of investing in CBOs. Because the limits of Policy I had already been exhausted by the Sitrick Claim, the district judge held that AISLIC had no further obligation to defend or indemnify FMA or Malamed.
On appeal, the Ninth Circuit Court of Appeal reversed the district court's holding. The Ninth Circuit framed the issue as whether the Sitrick Claim and the Steinman Claim "arise[ ] out of the same or related Wrongful Acts." The Ninth Circuit held that the Sitricks and Steinman were unrelated investors, with unique investment objectives. Moreover, they were advised at separate meetings on separate dates, according to their unique financial positions. Indeed, the investment packages ultimately recommended to and chosen by each client were different-the Sitricks invested in several CBO funds as well as various equities, while Steinman invested only in a single CBO fund. More importantly, the Wrongful Acts alleged by the two clients were different. In short, the Ninth Circuit held that the Sitrick Claim and the Steinman Claim were not related simply because both claimants blamed the same financial advisor.
Click here for opinion.
|
