Court: District Court, D. Rhode Island; November 16, 2014; Federal District Court
Lifespan initiated a lawsuit against National Union Fire Insurance Company and RLI Insurance Company, seeking a declaratory judgment and monetary damages related to a $29,605,282.93 judgment from a prior legal dispute with New England Medical Center (NEMC) and the Massachusetts Attorney General. The case concerns whether Lifespan's insurance policies cover losses linked to breaches of fiduciary duties and gross negligence during negotiations for health insurer contracts and an interest rate swap. Three summary judgment motions challenge the applicability of certain coverage exclusions asserted by the insurance companies. After reviewing the facts and applicable law, the court determined that these exclusions do not apply.
Prior to the underlying lawsuit, Lifespan and NEMC entered a memorandum of understanding in January 1997, proposing Lifespan as NEMC's corporate parent to mitigate NEMC's financial struggles. Following due diligence and regulatory approvals, they finalized the Amended and Restated Master Affiliation Agreement in October 1997, establishing Lifespan of Massachusetts, Inc. (LOM) with Lifespan maintaining majority control. LOM became NEMC's sole voting member, overseeing its operations and financial decisions, while Lifespan agreed to transfer $8.7 million annually to NEMC, totaling approximately $42 million over the affiliation period. Although NEMC's financial condition improved initially, it ultimately worsened, leading to dissatisfaction with Lifespan regarding the management of health insurer contracts and overhead expenses. This resulted in a Restructuring Agreement for disaffiliation signed in September 2002, concluding in November 2002.
Under the Restructuring Agreement, NEMC was obligated to pay Lifespan $80 million and share any Medicare recovery related to losses from the Affiliation. Although NEMC paid most of the $30 million, it withheld the final two installments of $3.66 million, citing significant losses due to Lifespan’s alleged misconduct involving health insurer contracts, interest rate swaps, corporate overhead charges, and financial performance. The Agreement also mandated that Lifespan indemnify NEMC for losses resulting from Lifespan's willful misconduct or gross negligence during the Affiliation Period. Additionally, NEMC released Lifespan from any claims related to the Affiliation Agreement.
In 2006, Lifespan initiated a lawsuit for breach of contract to recover the unpaid $3.66 million. NEMC counterclaimed, seeking indemnification for losses attributed to Lifespan's actions and alleging breach of fiduciary duty, unjust enrichment, and unfair business practices. Lifespan later amended its complaint to include a claim for half of NEMC's Medicare reimbursement. NEMC responded with further counterclaims against the Medicare recovery provision, asserting it was unconscionable and contrary to public policy.
Following the recusal of all judges in the district, the case was assigned to Judge Joseph N. Laplante. The Massachusetts Attorney General intervened on public interest grounds, aligning with most of NEMC's counterclaims but not pursuing new claims. All parties filed for partial summary judgment, where the court determined that Lifespan had a fiduciary duty to NEMC due to its control over a non-profit hospital. The court also ruled that Lifespan was entitled to half of NEMC's Medicare recovery and dismissed most of NEMC's counterclaims against the Medicare provision.
The court determined that NEMC had waived its tort counterclaims against Lifespan through the Restructuring Agreement, which included claims for breach of fiduciary duty and unfair business practices, limiting NEMC to a contractual remedy under the indemnification provision. NEMC's unjust enrichment counterclaim was also dismissed due to the availability of a contractual remedy. However, the Attorney General was permitted to proceed to trial on her breach of fiduciary duty claim as she was not bound by NEMC's release. A three-week bench trial took place in February and March 2011, with nearly twenty witnesses testifying. The court treated both the Attorney General and NEMC as plaintiffs against Lifespan, the defendant.
Post-trial, the court issued Findings of Fact, concluding that: (i) NEMC breached the Restructuring Agreement by not making two payments and failing to pay Lifespan half of the Medicare recovery; (ii) Lifespan breached its fiduciary duty of care to the Attorney General; and (iii) Lifespan's gross negligence caused NEMC's losses, thus necessitating indemnification under the Restructuring Agreement. Lifespan's liability to the Attorney General stemmed from the breach of fiduciary duty, while its liability to NEMC arose from the indemnification clause.
The court found Lifespan liable concerning health insurer contracts and the interest rate swap, while it had no liability for corporate overhead charges and NEMC's overall financial performance. The analysis regarding insurance coverage was limited to the health insurer contracts and the interest rate swap. Lifespan, under the Affiliation Agreement, had the authority to negotiate NEMC’s contracts with health insurance providers, a task delegated to the Lifespan Physicians Professional Services Organization (PSO). The court agreed with the Attorney General that Lifespan breached its fiduciary duty by failing to renegotiate reimbursement rates with Cigna and United and by not negotiating jointly with Cigna or sharing relevant rate information.
Lifespan significantly deviated from the standard of care expected in its fiduciary duties, leading to damages for NEMC. The court identified these breaches as the "but-for" and proximate causes of NEMC's financial losses, specifically hindering its ability to negotiate higher reimbursement rates from Cigna and United. The court noted Lifespan's gross negligence in failing to renegotiate contracts for inflationary increases, not jointly negotiating with Cigna, and not securing adequate reimbursement rates.
The court examined an alleged misconduct related to an interest rate swap during NEMC's affiliation with Lifespan. NEMC had over $100 million in callable revenue bonds due in July 2002, coinciding with a drop in interest rates that created a refinancing opportunity. Lifespan’s CFO, David Lantto, facilitated a bond refinancing proposal from Morgan Stanley, which included an interest rate swap. This swap, proposed by Morgan Stanley broker Jeff Seubel, was suggested to NEMC without Lantto disclosing their personal relationship, which violated Lifespan's conflict of interest policies. Prior to this, NEMC had no experience with interest rate swaps. The swap arrangement involved NEMC paying a fixed rate to Morgan Stanley while receiving a variable rate based on a swap index, aimed at locking in low rates before refinancing.
Upon termination of the interest rate swap, the party with the higher balance would pay the difference; if variable rates rose, Morgan Stanley would pay NEMC, and if they fell, NEMC would pay Morgan Stanley. The swap was intended to offset refinancing rate changes, allowing NEMC to "lock in" a rate, albeit minus a $1.6 million transaction fee. However, if the swap rate index diverged from the refinancing rate, NEMC risked paying more or receiving less than necessary to offset refinancing changes. Although Morgan Stanley briefly mentioned these risks, NEMC did not fully comprehend them, especially given CFO Mark Scott's strong opposition due to the complexity of the transaction. NEMC ultimately entered into the swap governed by the "ISDA Master Agreement" with Morgan Stanley. Following unfavorable interest rate movements, NEMC's projected savings halved to $5.73 million. As NEMC approached disaffiliation from Lifespan, Mr. Lantto distanced himself from the transaction, leading NEMC to hire a new consultant and refinance bonds with Merrill Lynch, resulting in the termination of Morgan Stanley's services. The court ruled that losses from the swap constituted a breach of duty by Mr. Lantto and Lifespan, citing his preferential treatment of Morgan Stanley, concealment of personal relationships, lack of competitive bidding, and misleading claims about the swap's benefits. Based on these findings, an Amended Judgment awarded Lifespan $20,398,336.94 for breach of contract and $29,605,282.93 to NEMC and the Attorney General for counterclaims, with a net $9,206,945.99 awarded to NEMC. Lifespan satisfied this judgment with a payment to NEMC. Lifespan is now seeking indemnification for the Amended Judgment amount and associated post-judgment interest, exceeding prior legal service retention, supported by a $15 million insurance policy.
Lifespan is pursuing a judgment against National Union for the full amount of the Amended Judgment, exceeding the policy limit, which includes 80% of defense costs incurred beyond the retention, along with costs, interest, and attorneys’ fees. Lifespan also seeks a similar judgment against RLI under a $10 million Excess Policy, which supplements a $15 million Directors and Officers (D. O) Policy from National Union. Both policies cover the period from October 1, 2005, to October 1, 2006, and provide broad coverage for wrongful acts involving Lifespan's insured individuals and the organization itself.
Lifespan claims $29,607,959.57 in damages and interest awarded against it by the Attorney General, following a payment of $9,207,778.40 to NEMC. National Union denied coverage citing specific policy exclusions, while RLI stated that the Amended Judgment does not qualify as a covered loss under the D. O Policy and that the Excess Policy is contingent upon the exhaustion of the underlying limit.
In response to these denials, Lifespan filed a lawsuit seeking a declaratory judgment that the exclusions are inapplicable (Count I) and alleges breach of contract, bad faith, and breach of the implied covenant of good faith against both insurers (Counts II-VII). Additionally, an Asermely rule claim is made against National Union (Count VIII). Lifespan seeks recovery of the Amended Judgment amount, interest, costs, and attorneys' fees from both insurers.
Lifespan seeks to recover eighty percent of defense costs beyond retention from National Union and is pursuing compensatory and punitive damages for bad faith claims against both insurance companies. For the Asermely claim against National Union, it seeks full damages to address the Attorney General's Counterclaims as reflected in the Amended Judgment. Both insurance companies have responded, denying coverage for Lifespan.
All parties have filed for summary judgment. National Union argues it is entitled to judgment as a matter of law on all claims against it. Lifespan seeks summary judgment on Counts I, II, and III of its complaint, including the declaratory judgment and breach of contract counts. RLI seeks summary judgment on Counts I and III, asserting it has no duty to indemnify Lifespan concerning a judgment in favor of NEMC.
The court will evaluate these motions under Rule 56(a) of the Federal Rules of Civil Procedure, which permits summary judgment when there are no genuine disputes of material fact. The analysis of insurance policy interpretation in Rhode Island follows established rules of contract construction, with courts determining clarity based on the policy's language and context. The insured must first establish a prima facie case, showing the existence of coverage before the insurer must demonstrate applicable exclusions.
An insurance policy's exclusion from coverage must be clear and unambiguous according to Rhode Island law. Exclusionary clauses with multiple interpretations are construed in favor of the insured, aligning with the principle that such provisions are interpreted strictly against the insurer. When an exception to an exclusion exists, the insured must demonstrate that the exception provides coverage once the exclusion is triggered.
In this case, Lifespan has established a prima facie case for insurance coverage, demonstrating the existence of a valid policy with both defendants, that a loss occurred during the policy period, and that both insurers have denied payment. The National Union issued a policy to Lifespan (Policy No. 494-17-30) for the period from October 1, 2005, to October 1, 2006, which included three types of coverage: individual insured insurance, organization indemnification reimbursement insurance, and organization entity coverage. It defined "Wrongful Act" for individual insureds as any breach of duty or act related to their status as insureds. For organization entity coverage, "Wrongful Act" pertains to actions on behalf of Lifespan.
The term "Loss" encompasses damages, judgments, settlements, and defense costs, subject to exclusions. The RLI Policy (Policy No. EPG0003701), also covering the same period, functions as an Excess Policy, contingent upon the primary insurer (National Union) paying the full underlying limit. The loss in question arises from an Amended Judgment in a prior suit where Lifespan was found grossly negligent and in breach of fiduciary duty related to health insurer contracts and an interest rate swap.
Findings of Fact indicate that certain actions qualify as "Wrongful Acts" under the Directors and Officers (D. O) Policy. Lifespan has fulfilled the requirements of the Amended Judgment. The loss occurred during the policy period from October 1, 2005, to October 1, 2006, as a claim by NEMC was made against Lifespan in August 2006, followed by a lawsuit in September 2006. Lifespan promptly notified its insurers, National Union and RLI, of the claim. Both insurers, however, have declined to provide coverage. In a letter dated November 29, 2011, Lifespan requested reimbursement for the Amended Judgment amounting to $29,605,282.93, plus post-judgment interest. RLI responded that the Amended Judgment did not constitute a covered loss under their policies, and that coverage under the Excess Policy is contingent upon exhausting the D. O Policy's limits. National Union also refused payment. Lifespan has established a prima facie case by proving the existence of the policy, the loss's coverage, and the insurers' refusal to pay, shifting the burden to the insurers to demonstrate any applicable policy exclusions.
Exclusions from the D. O Policy include five specific items now under scrutiny. The court will first examine Exclusions 4(a) (Unlawful Advantage) and 4(b) (Deliberate Fraudulent Act), which are connected to claims involving unlawful advantages or deliberate fraud by the insured. The original language of these exclusions was replaced by Endorsement #16, which specifies that coverage is barred if a judgment or adjudication shows the insured gained profits unjustly or committed criminal acts. Both exclusions require a negative judgment against the insured to deny coverage, and the insurers must prove both elements for these exclusions to apply. The original policy language included additional terms that may still be relevant.
The Wrongful Act of one Insured will not affect the determination of exclusions 4(a) and 4(b) for other Insureds. The D.0 Policy defines “Insured(s)” to include both the Organization and Individual Insureds, the latter encompassing past, present, or future directors, officers, employees, or volunteers. There is a dispute over whether the Bracketed Language remains effective after Endorsement #16. The Court will first analyze Exclusion 4(a), which pertains to unlawful advantage, requiring the insurer to prove two components: that a claim arises from the pursuit of profit or advantage and that a judgment or binding decision finds the Insureds legally entitled to such.
In the Underlying Suit, findings revealed that Mr. Lantto from Lifespan had a long-standing friendship with Mr. Seubel of Morgan Stanley, which included mutual personal favors and interests in wine. The court determined Mr. Lantto had a conflict of interest in a swap transaction that favored Morgan Stanley. The defendant insurers argue that his actions constituted unlawful advantage, asserting he had personal interests tied to the swap, hoping it would lead to an invitation to join Mr. Seubel's wine club. However, Lifespan argues there was no evidence that Mr. Lantto gained any actual profit or advantage. The Court's review concluded that no profit or advantage was obtained from the swap; Mr. Lantto's hopes and desires were insufficient to apply Exclusion 4(a). The insurers did not meet the burden of proof required to demonstrate that Mr. Lantto’s actions fell under the exclusion, as previous cases indicate that significant profit or advantage must be established for such exclusions to apply.
Cosby held a 49% interest in Action Funding, Inc., and his $2 million investment significantly benefited him by providing essential operating capital. A prior case, Plainview Milk Prods. Coop. v. Westport Ins. Corp., involved an overcharging settlement, illustrating that not all conflicts or breaches of fiduciary duty trigger insurance exclusions. Specifically, Mr. Lantto's situation involved a minor possible benefit compared to significant financial interests, indicating that his actions reflected a conflict of interest rather than a triggering advantage for exclusion. The purpose of D&O insurance is to protect directors and officers in their roles, and the insurance companies failed to meet the criteria for Exclusion 4(a), thus coverage remains intact.
Exclusion 4(b) regarding deliberate fraudulent acts has two components: the claim must arise from a criminal or fraudulent act, and there must be a judgment confirming such conduct against the insured. In the Underlying Suit, it was established that Mr. Lantto concealed material facts related to his conflict of interest in a swap transaction, which he had a fiduciary duty to disclose. His actions included preferentially giving access to Morgan Stanley, failing to recuse from the transaction, suppressing competitive bidding, and misleading NEMC about the swap's risks, which the court interpreted as fraud.
The insurance companies argue that these findings meet the fraud definition, as Mr. Lantto knowingly made false statements intending to deceive NEMC, leading to their financial loss. Conversely, Lifespan argues that there was no judicial finding of a criminal or deliberate fraudulent act, contesting the application of Exclusion 4(b). The analysis continues with a focus on the definition of "judgment" in the context of this exclusion.
The Court finds that Mr. Lantto engaged in a deliberate fraudulent act, supported by factual findings indicating he made knowingly false statements with intent to deceive, which NEMC relied upon. However, the Court agrees with Lifespan that there was no definitive legal judgment, final adjudication, or binding arbitration confirming Mr. Lantto's fraudulent conduct. The relevant judgment against Lifespan was solely for breach of fiduciary duty and contractual indemnification, neither of which involves fraud. Consequently, the defendant insurance companies have not proven that Exclusion 4(b) precludes coverage, as they must demonstrate both parts of the exclusion. The interpretation of contractual language requires that every term be given effect, and since the second part of Exclusion 4(b) was not established, coverage is not barred.
Furthermore, even if Exclusions 4(a) or 4(b) were to limit coverage, the Bracketed Language would still apply, ensuring coverage. The Bracketed Language states that the wrongful act of one insured does not affect the determination of exclusions for other insureds. Lifespan contends that this language remains part of the D. O Policy due to the language in Endorsement 16, which indicates that other terms remain unchanged. The defendant insurance companies argue that the Bracketed Language was deleted as it was part of Exclusions (a) and (b). Under Rhode Island law, any ambiguity in an insurance contract is interpreted against the insurer.
National Union, as the drafter of the D. O Policy, had the opportunity to clarify the status of the Bracketed Language in Endorsement 16 but instead created ambiguity that can be interpreted in two ways. The Court construes this ambiguity against National Union, concluding that the Bracketed Language survives and remains part of the D. O Policy. The Court then assesses the implications of this Bracketed Language concerning Exclusions 4(a) and 4(b), determining that it serves as an exception to these exclusions. Lifespan must demonstrate that this exception provides coverage after the exclusions are triggered. The Court interprets the Bracketed Language to mean that the wrongful acts of one insured cannot be attributed to another, specifically indicating that Mr. Lantto's wrongful acts cannot be imputed to Lifespan.
The Court rejects the insurance companies' argument that this interpretation would negate the applicability of exclusions for corporate insureds, emphasizing that National Union did not include imputation language in the exclusions. The defendant insurance companies assert that the case is not about imputation due to findings of intentional misconduct by Lifespan. However, the Court clarifies that these findings relate to Lifespan's indemnification obligations under the Restructuring Agreement and principles of agency, which hold corporations liable for their employees' actions within the scope of employment. The Court finds no factual basis for claims that anyone other than Mr. Lantto committed intentional misconduct, focusing strictly on factual findings from the case.
Defendants incorrectly interpret the court's shorthand suggesting that Lifespan made misrepresentations, as the factual findings from the Underlying Suit attribute misconduct solely to Mr. Lantto. Although Exclusion 4(a) does not preclude coverage, any loss tied to Mr. Lantto’s alleged profit does not impact Lifespan due to the Bracketed Language in the D. O Policy, which prevents imputation of Mr. Lantto’s conduct to Lifespan. Similarly, while Exclusion 4(b) applies to losses from deliberate fraudulent acts, no judgment has been made against Lifespan establishing such fraud. Even with a hypothetical adverse judgment, the Bracketed Language ensures coverage remains intact since the fraudulent conduct was solely attributed to Mr. Lantto. Lifespan has demonstrated that Mr. Lantto's wrongful acts, which violated Lifespan’s policies, cannot be imputed to it for the purpose of determining the applicability of exclusions 4(a) and 4(b). Additionally, regarding Exclusion 4(k), which pertains to contractual liability, the defendant insurance companies argue that any judgment against Lifespan in the Underlying Suit stems from a failure to meet contractual obligations under the Affiliation Agreement. Lifespan contends that it bears no contractual liability to NEMC, thus rendering this exclusion irrelevant. The court must evaluate whether the judgment related to the Attorney General’s breach of fiduciary duty claim against Lifespan is indeed linked to its contractual obligations.
Exclusion 4(k) in Endorsement 11 excludes coverage for losses related to claims based on the actual or alleged contractual liability of the Organization or an Insured under any express contract or agreement, including various compensation agreements upon termination. However, this exclusion does not apply to Employment Practices Claims that do not arise from such contracts, nor to claims alleging Wrongful Acts regarding hospital practice privileges or credentialing matters. The Court has determined that the defendant insurance companies failed to demonstrate the applicability of Exclusion 4(k) for two reasons: first, there was no contractual liability between NEMC and Lifespan at the time of the Underlying Suit, as all contractual claims were released prior to the claims being asserted; second, the claims against Lifespan were based on a breach of fiduciary claim by the Attorney General, which does not stem from contractual liability.
Specifically, Lifespan and NEMC's Restructuring Agreement released all claims related to the Affiliation Agreement, negating any contractual liability for Lifespan at the time of the Underlying Suit. The insurance companies’ argument misinterprets the distinction between "contract" and "contractual liability," improperly broadening the exclusion’s applicability. The Court emphasizes that every term in a contract must be given meaning, and interpretations that diminish specific wording are inappropriate. Consequently, since Lifespan had no contractual liability due to the release, Exclusion 4(k) does not apply to its request for indemnity regarding the judgment against it.
Defendant insurance companies assert that the Massachusetts Attorney General's breach of fiduciary duty claim against Lifespan is rooted in Lifespan's contractual obligations under the Affiliation Agreement with NEMC, thereby invoking an exclusion that would bar coverage. They argue that Rhode Island courts interpret "arising out of" broadly, indicating that Lifespan's liabilities to NEMC stemmed directly from its contractual duties. The defendants maintain that Lifespan's alleged failures, which led to the Attorney General's claim, were directly linked to its contract performance. Conversely, Lifespan contends that its obligations to the Attorney General are independent of any contractual liability, deriving instead from the trust NEMC placed in it. Lifespan cites a court ruling that emphasizes its fiduciary duty, separate from any contractual agreements, and argues that the Attorney General's claim does not fall under the exclusion. The Attorney General moved to intervene in the case, emphasizing her statutory role in upholding fiduciary duties owed by Lifespan to NEMC, which the court recognized as an independent obligation. The court also reiterated that a fiduciary relationship exists when one party relies on another's judgment and advice, confirming that Lifespan owed such a duty to NEMC during their affiliation.
Lifespan sought summary judgment against NEMC’s breach of fiduciary duty claim, arguing that NEMC released all rights and claims related to the Affiliation Agreement in the Restructuring Agreement. The court supported Lifespan's position, interpreting the release to encompass tort claims closely connected to the Affiliation Agreement. However, the Attorney General, not being a party to the Affiliation Agreement, was not barred from pursuing her breach of fiduciary duty claim, as she had the standing to act independently due to her common-law duty and statutory mandate to protect public interests regarding non-profit organizations.
The court emphasized that Lifespan maintained a high fiduciary duty despite entering into the Affiliation Agreement, which arises from both Lifespan's control over a nonprofit hospital and the trust NEMC placed in Lifespan's judgment. The fiduciary duty included a duty of loyalty and care. The Attorney General's claim was found to be distinct and not derivative of NEMC’s claim. Ultimately, the court determined that Lifespan had breached its fiduciary duty regarding payor contracting and an interest rate swap, leading to an award of $14,176,704 to NEMC and the Attorney General.
The court reaffirmed that the Attorney General’s claim was not based on contractual liability under the Affiliation Agreement, but on the special relationship of trust and confidence. In relation to the D&O Policy, the key issue is whether the breach of fiduciary duty claim relates to any actual or alleged contractual liability of Lifespan, with the burden of proof resting on the defendant insurance companies to demonstrate the applicability of the exclusion, which must be clearly defined.
The Attorney General has the exclusive authority to address abuses in the administration of public charities through appropriate legal actions, as established in *Dillaway v. Burton*. It is the Attorney General's duty to safeguard public interests, which justifies intervention in cases of breach of fiduciary duty. In the Underlying Suit, the court affirmed that the Attorney General could pursue a breach of fiduciary duty claim independently of NEMO and the Affiliation Agreement due to her common-law duty and statutory obligations to protect public rights in non-profit governance.
The U.S. Court of Appeals for the Third Circuit ruled that a breach of fiduciary duty related to an agreement does not fall under a contractual liability exclusion, as demonstrated in *Foodtown Inc. v. Nat’l Union Fire Ins. Co.* This court's interpretation aligns with the current case, asserting that National Union's Exclusion 4(k) does not apply to such claims, even in contractual contexts.
Directors and officers (D&O) insurance is designed to cover claims against corporate leaders for actions taken in their corporate roles, which is crucial for attracting individuals to these positions. The D&O Policy in question covers wrongful acts, including breaches of fiduciary duty. Lifespan, having acquired this insurance, is protected for such breaches, and denying coverage would contradict the purpose of the insurance obtained. The Attorney General is not a party to the Affiliation Agreement between Lifespan and NEMC, and her role in protecting public interests is distinct from Lifespan's contractual liabilities. The insurance defendants have not demonstrated that the Attorney General's claim arises from contractual liabilities, thus Exclusion 4(k) does not preclude coverage for her breach of fiduciary duty claim.
Exclusion 4(m) in the legal document addresses claims related to the purchase or sale of securities, stating that the insurer is not liable for losses connected to such claims made against the insured, except for tax-exempt bond debt issuances and claims from related bondholders. The interest rate swap between NEMC and Morgan Stanley involves NEMC paying a fixed interest rate while receiving a variable rate based on an index. Lifespan argues that under federal law (15 U.S.C. 77b) and New York law (McKinney’s UCC 8-102), the interest rate swap is not classified as a security, thus Exclusion 4(m) should not prevent coverage. Lifespan also contends that Rhode Island's definition of "security" (R.I. Gen. Laws 6A-8-102(a)(15)) supports this view. Additionally, Lifespan claims that even if the swap were considered a security, the exception for tax-exempt bond debt would apply. Conversely, the defendant insurance companies argue that Rhode Island law applies, citing a different statute (R.I.G.L. 7-11-101(22)) that classifies the swap as a security due to its connection with NEMC's revenue bonds. They also reference the Securities Exchange Act's evolving definitions, indicating that the interest rate swap is recognized as a security under current law following the Dodd-Frank Act.
Rhode Island did not amend its law in 2000, and although the D.O. Policy is governed by Rhode Island law, the Court must determine if a specific transaction is excluded from coverage. The Master Agreement between Morgan Stanley and NEMC, dated January 15, 2002, governs the transaction in question. This agreement specifies that it will be construed according to New York law, as outlined in its Schedule.
Under New York law, specifically McKinney's Uniform Commercial Code (UCC) § 8-102, a security is defined as an obligation of an issuer or an interest in an issuer or property that can be represented by a security certificate or is transferable. The Court of Appeals of New York has established that an interest rate swap must meet the transferability, divisibility, and functional tests to qualify as a security.
The transferability test requires that the interest rate swap be represented by a security certificate, but the Court found no such certificate mentioned in the Master Agreement. Furthermore, there was no indication that the interest rate swap could be registered in Lifespan's transfer books, which is also necessary for the transferability test. Consequently, the Court concluded that the interest rate swap does not qualify as a security under New York law due to the failure to meet the transferability test.
The Court also examined the divisibility test, which assesses whether the interest rate swap is part of a class or series of shares or obligations. The Master Agreement indicates that all transactions are treated as a single, indivisible contractual relationship, further supporting the conclusion that the interest rate swap does not meet the criteria to be classified as a security.
The interest rate swap does not meet the divisibility test or the functional test required to qualify as a security under New York law, specifically under McKinney’s U.C.C. 8-102(15). The functional test necessitates that the interest rate swap be either traded on exchanges or explicitly defined as a security, which it is not. Consequently, the defendant insurance companies have not demonstrated that the interest rate swap qualifies as a security, and thus Exclusion 4(m) does not preclude coverage.
Under Rhode Island law, the term "security" as defined in R.I.G.L. 6A-8-102(a)(15) mirrors New York's definition, and since the insurance companies have failed to establish that the interest rate swap fits within this definition, Exclusion 4(m) also does not apply under Rhode Island law.
Regarding federal law, specifically 15 U.S.C. 77b-l(b)(1) and 78c-1(b)(1) as of January 2002, the interest rate swap is also not classified as a security. Therefore, regardless of whether New York, Rhode Island, or federal law governs, the interest rate swap does not constitute a security, and Exclusion 4(m) does not bar coverage. Additionally, even if the interest rate swap were considered related to the purchase or sale of securities, it would still not preclude coverage.
Coverage exists due to the tax-exempt bond debt exception to Exclusion 4(m), which states that it does not apply to claims related to tax-exempt bond debt issued by the Organization. The interest rate swap, characterized as a bond refinancing proposal by the court, was terminated in November 2002, with NEMC refinancing the bonds through Merrill Lynch, resulting in savings of $681,209. Lifespan has demonstrated that this refinancing qualifies as part of the issuance of tax-exempt bond debt, thus maintaining coverage despite the swap being related to securities transactions.
Exclusion 4(n), part of Endorsement #11, specifies that the insurer is not liable for claims arising from the performance of medical or professional services. Lifespan argues that this exclusion should be interpreted within the context of Endorsement #11 and a D&O Policy, asserting it pertains only to healthcare-related professional services. Lifespan highlights that the policy is not a professional liability or malpractice policy, as separate malpractice coverage exists, and contends that a broad interpretation by the defendants would undermine the D&O Policy's coverage.
In contrast, the insurance companies argue that all claims arise from Lifespan's professional management services, claiming that the term "professional services" is broadly construed to exclude various professional services, not limited to healthcare. They insist that Lifespan's interpretation improperly ignores the policy's wording.
The First Circuit's interpretation mandates that an insurance policy's disjunctive exclusions must be applied as written. The court emphasizes the importance of reading the D.O. Policy in its entirety, interpreting undefined terms within the context of the whole contract, and adhering to their usual meanings. Specifically, Exclusion 4(n) within Endorsement #11 is determined to relate to Lifespan's provision of medical services and healthcare-related professional services. The term "or other professional services" is understood to encompass additional healthcare services not explicitly categorized as "medical," potentially including nursing and laboratory services.
Rhode Island law dictates that insurance exclusions must be clear and unambiguous, and if terms can be reasonably interpreted in multiple ways, they should be construed against the insurer. The court finds that the exclusion can be reasonably interpreted to apply only to healthcare-related services, not to encompass all professional services generically. Consequently, the defendant insurance companies did not adequately demonstrate that the exclusion applies to any services beyond healthcare, failing to articulate such exclusions in clear terms. As a result, Exclusion 4(n) does not prevent coverage for Lifespan's corporate management services. Therefore, Lifespan is entitled to judgment as a matter of law regarding Counts I, II, and III, affirming its insurance coverage for monetary losses linked to breaches of fiduciary duties and gross negligence in contractual negotiations and financial transactions.
Defendant insurance companies have not demonstrated the applicability of any coverage exclusions, resulting in the denial of National Union's Motion for Summary Judgment regarding all claims (Counts I, II, IV, VI, and VIII) and RLI's Motion for Summary Judgment concerning Counts I and III. Conversely, Lifespan's Motion for Summary Judgment on Counts I, II, and III is granted. The court heavily relies on the May 24, 2011 "Findings of Fact, Rulings of Law After Bench Trial" from the Underlying Suit, which provides critical material for adjudicating the motions. The case remains on the District of Rhode Island docket, and Lifespan has not yet received a judgment due to unresolved indemnification claims from NEMC. The settlement between NEMC and Morgan Stanley regarding an interest rate swap, amounting to $2.25 million, did not include an admission of liability. Lifespan's hospitals later rejected a similar swap proposal from Morgan Stanley. The governing law for the Master Agreement is that of New York State. The total amount includes post-judgment interest calculations. The definitions of "Individual Insured(s)" and "Claim" have been altered by specific endorsements. According to Rhode Island law, insurers are liable for excess judgments if they decline settlement offers within policy limits unless the insured refused the offer. The parties have submitted eleven briefs regarding summary judgment, with Lifespan and RLI not filing for summary judgment on certain bad faith claims. All parties concur that Rhode Island law governs the insurance contracts in question, and the defendant insurers' focus on exclusions rather than the initial coverage analysis suggests acknowledgment of Lifespan's established prima facie case for coverage.
Coverage under the policy is contingent upon adherence to its terms and conditions. The court interprets the Excess Policy to align with the language of the D. O. Policy for exclusion analysis. It was determined that Morgan Stanley received "preferential access" to Lifespan, impacting the case's material facts, defined as those likely to influence a reasonable person's transaction decisions. Endorsement #16 changes the policy by removing "in fact" and necessitating a final judicial or arbitral determination adverse to the insured, thereby narrowing certain exclusions and increasing coverage. The retention of specific language in the policy further enhances coverage.
The D. O. Policy’s Endorsement #14 includes a modified imputation clause, while the relevant section does not, suggesting that if National Union intended an imputation clause for exclusions (a) and (b), it could have been included. The court established that Mr. Lantto was a Lifespan employee under Lifespan’s supervision when providing services related to refinancing and swaps.
Regarding claims, although the court acknowledged a close connection between NEMC’s tort claims and the Affiliation Agreement, it did not link the Attorney General's claims to Lifespan’s contractual liabilities under that agreement. Courts differ on whether tort claims from a contractual relationship should be excluded from coverage. The document also elaborates on the relevance of the law governing a transaction, using an analogy of a person engaging in legal activity in a different jurisdiction, highlighting the complexity of legal interpretations. Lastly, the Master Agreement restricts transfers except in specific circumstances, such as mergers or defaults.
Defendant insurance companies cite a June 5, 2007 letter from Lifespan's former outside counsel, asserting that there is no coverage for claims related to a ‘Wrongful Act’ concerning an Interest Rate Swap Transaction, as it involves securities transactions. They contend that this letter indicates Lifespan has waived any coverage claims for losses associated with the interest rate swap. In contrast, Lifespan argues that it had not incurred any loss at the time of the letter, thus no waiver could exist. Lifespan further claims that National Union has forfeited the waiver defense by not including it in their pleadings, as required by Rule 8(c)(1) of the Federal Rules of Civil Procedure. The Court determines that the 2007 letter does not bind Lifespan's litigation stance, noting it was written years before the August 31, 2011 Amended Judgment and prior to the May 24, 2011 Findings of Fact.
