Court: Court of Appeals for the Second Circuit; August 6, 1998; Federal Appellate Court
First Investors Corporation and its affiliates filed a lawsuit seeking insurance coverage from Liberty Mutual Insurance Company for claims of emotional distress tied to investors' economic losses. Liberty Mutual denied coverage, claiming the claims were not covered by the policies. The U.S. District Court for the Southern District of New York initially ruled in favor of Liberty Mutual, granting summary judgment and dismissing First Investors's complaint. Subsequently, the court granted summary judgment for First Investors, dismissing Liberty Mutual’s counterclaim for breach of contract.
The case involves undisputed facts: First Investors sells mutual funds and has long held comprehensive general liability and umbrella excess liability insurance from Liberty Mutual. In the early 1990s, First Investors faced twelve lawsuits alleging fraudulent practices targeting unsophisticated investors, particularly retirees, who were sold risky "junk bond" mutual funds under the pretense of safety. The complaints included allegations of misleading sales tactics by inexperienced representatives using deceptive phrases about the safety of the investments. Claimants reported substantial financial losses and emotional distress.
Liberty Mutual, concerned about potential misleading information given to First Investors regarding coverage, agreed to cover two specific lawsuits (Hanley and Barbosa) under a settlement agreement. This agreement stipulated that Liberty Mutual's payment of $3,450,000 for these lawsuits would not be construed as an admission regarding the availability of coverage for any other pending claims against First Investors. First Investors ultimately settled all remaining claims except for the Bonner and Parsons lawsuits.
In January 1995, First Investors initiated a lawsuit against Liberty Mutual in district court for defense costs and indemnification related to ten underlying actions, referencing Liberty Mutual's settlement payments in previous cases. Liberty Mutual responded with an amended answer and a counterclaim for breach of the settlement agreement. In August 1995, First Investors sought partial summary judgment regarding Liberty Mutual's duty to defend. However, on February 28, 1997, the district court denied this motion and granted summary judgment in favor of Liberty Mutual, dismissing First Investors's complaint, citing a lack of merit in First Investors's case. The court indicated that Liberty Mutual's counterclaim remained active.
Subsequently, on June 17, 1997, Liberty Mutual sought summary judgment on its counterclaim, while First Investors filed a cross-motion to dismiss it. On October 28, 1997, the court granted First Investors's motion, concluding that the settlement agreement did not prevent First Investors from referencing Liberty Mutual's funding obligations in its complaint. The court clarified that it had not considered the settlements in its earlier ruling regarding Liberty Mutual's duty to defend, affirming that the settlement agreement had not been breached.
First Investors appealed the dismissal of its complaint, while Liberty Mutual cross-appealed the dismissal of its counterclaim. The appeal reviews the district court's summary judgment de novo, applying New York law due to the diversity of citizenship, and considering how the state's highest court would resolve any ambiguities in the law based on relevant precedents.
Liberty Mutual's duty to defend First Investors against emotional distress claims is contingent on whether their CGL and excess policies cover such claims. Under New York law, an insurer's duty to defend is broader than its duty to indemnify but has limits. The determination of this duty involves analyzing the policy language and the complaint allegations. A court must avoid imposing a duty to defend based on strained interpretations of the complaint.
The primary issue is whether emotional distress claims due to economic losses qualify as 'bodily injury' under the CGL policies. First Investors argues that the New York Court of Appeals in Lavanant v. General Accident Ins. Co. established that emotional distress can constitute 'bodily injury.' Liberty Mutual maintains that Lavanant is not applicable since the policies in question were not designed to cover emotional distress from economic losses.
The district court agreed with Liberty Mutual, affirming the dismissal of First Investors's complaint. The CGL policy in Lavanant covered bodily injury and property damage linked to a specific incident (a ceiling collapse), leading to emotional distress claims despite no physical injuries. The current case presents a novel legal question in New York regarding emotional distress from economic losses and requires careful prediction of the New York Court of Appeals' stance. Ultimately, the district court appropriately interpreted Lavanant, deciding not to extend its coverage to emotional distress claims arising from economic losses. The policy specifies that injuries must result from an 'occurrence,' defined as an unintended event, which New York courts have interpreted as something unexpected or catastrophic.
First Investors contends that its alleged fraudulent actions caused the emotional distress claimed in related cases. However, it is determined that the emotional distress stemmed from economic losses due to declining investment values, which do not qualify as an "accident" under applicable law. New York case law supports that Comprehensive General Liability (CGL) policies do not cover economic losses, as seen in multiple cases, including Hartford Accident & Indem. Co. and George A. Fuller Co. First Investors attempts to differentiate its situation by asserting that it only sells financial products, but this argument overlooks that CGL policies cover torts resulting in bodily injury, including emotional distress, rather than economic losses. Under New York law, emotional distress resulting from an "occurrence" must arise from an accident, which does not apply here. Following the precedent established in Lavanant, emotional distress claims linked to economic losses are not covered, and it is unlikely that New York courts would extend coverage in this manner.
Regarding the excess policies, Liberty Mutual asserts that First Investors is classified as a "financial institution," thus activating an exclusion clause that negates coverage for emotional distress claims. First Investors disputes this classification, arguing that the exclusion does not apply and that its emotional distress claims should be covered. However, the district court finds the exclusion's language clear and applicable, confirming First Investors' classification as a financial institution, which precludes them from coverage under the excess policies. When interpreting insurance policy terms, the court adopts a perspective consistent with the understanding of the average policyholder rather than a narrowly defined legal interpretation.
The document outlines the legal interpretation of the term "financial institution" as it pertains to insurance policy coverage. It references dictionary definitions, notably from Webster’s Third New International Dictionary and Black’s Law Dictionary, which categorize financial institutions as enterprises involved in handling and investing funds, including banks and investment companies. Following this interpretation, the court concludes that First Investors qualifies as a financial institution under the relevant insurance endorsement. Consequently, emotional distress claims from related actions are deemed not covered by the excess policies.
The discussion also addresses Liberty Mutual’s cross-appeal concerning claims for coverage in ten remaining actions. First Investors pointed to Liberty Mutual’s settlement payments in previous cases (Hanley and Barbosa) to support its claims. However, Liberty Mutual counterclaimed for breach of a settlement agreement that stipulated those payments should not be used as evidence in insurance coverage proceedings. The district court granted summary judgment in favor of Liberty Mutual, noting it would not consider the settlements in its coverage analysis.
Liberty Mutual argues that First Investors, not the district court, breached the agreement. However, the court finds no breach occurred, as the settlement funds were not admitted into evidence. The standards for breach of contract under New York law require proof of a contract, performance, breach, and damages, elements Liberty Mutual failed to demonstrate regarding the breach. The court emphasizes that the clarity of the settlement agreement's language indicates the parties’ intent to exclude the settlement funding from consideration in future disputes, reinforcing that the responsibility for precise drafting lies with the parties involved, not the court.
The phrase "shall not be admitted into evidence" is interpreted literally and does not undermine the settlement agreement's intent, thus retaining its plain meaning. Since neither the complaint nor the summary judgment motion was admitted into evidence, the settlement agreement's terms remain intact. Liberty Mutual is unable to demonstrate damages because it has avoided a duty to defend. Consequently, the district court's decision to grant First Investors's motion for summary judgment on Liberty Mutual's breach of contract counterclaim is affirmed.
Key legal findings include: (1) under New York law, comprehensive general liability (CGL) policies do not cover emotional distress claims associated with economic losses, negating Liberty Mutual's duty to defend; (2) First Investors qualifies as a "financial institution" under the endorsements in excess liability policies, which also eliminates Liberty Mutual's duty to defend under those policies; (3) First Investors’s mention of two settlements in its complaint and summary judgment documents does not constitute a breach of the settlement agreement with Liberty Mutual.
The ruling affirms the February 28, 1997 Memorandum and Order, which granted summary judgment in favor of Liberty Mutual and dismissed First Investors's complaint, as well as the October 31, 1997 judgment dismissing Liberty Mutual's counterclaim and closing the case. The CGL policies stipulate that Liberty Mutual must cover damages for "bodily injury" or "property damage" caused by an "occurrence,” which is defined as an accident or continuous exposure to harmful conditions. Excess policies similarly require Liberty Mutual to pay sums exceeding the retained limit for damages related to various injury types, although they exclude liabilities arising from the insured's business activities as a bank or financial institution and from losses of property under their control.
Twelve claims against First Investors Corp. are listed: Tarver, Corley, Wilson, Parsons, Rayhill, Quinn, Crossley, Crow, Ingrum, Bonner, Hanley, and Barbosa. Notably, the Bonner case remains pending. The Parsons case resulted in a judgment against First Investors for $26,949 in compensatory damages and $300,000 in punitive damages. The Banks and Financial Institutions endorsement specifies that excess policies do not cover personal injury related to property loss, depreciation, or damage, nor errors or omissions in the insured's business activities. Unlike the discussed CGL policies that address 'bodily injury,' the excess policies include a broader definition of 'personal injury,' encompassing injury to feelings or reputation. 'Occurrence' in this context is defined as an 'offense' rather than an 'accident.'
