Alexander & Alexander Services, Inc. v. These Certain Underwriters at Lloyd's, London, England

• Decision Date: 23 January 1998
• Docket Number: No. 77,Nos. 879,D,s. 879,77
• Citation: 136 F.3d 82
• Court: U.S. Court of Appeals — Second Circuit
• Parties: ALEXANDER & ALEXANDER SERVICES, INC. and Alexander & Alexander, Inc., Plaintiffs-Appellants, v. THESE CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, England, Subscribing to Insurance Evidenced by Policy/P.31356 and 879/P.35349, and Assicurazioni Generali S.P.A., Defendants-Appellees. ocket 96-9535.

Page 82

136 F.3d 82

ALEXANDER & ALEXANDER SERVICES, INC. and Alexander &

Alexander, Inc., Plaintiffs-Appellants, v. THESE CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, England,

Subscribing to Insurance Evidenced by Policy Nos.

879/P.31356 and 879/P.35349, and

Assicurazioni Generali S.P.A.,

Defendants-Appellees.

No. 77, Docket 96-9535.

United States Court of Appeals, Second Circuit.

Argued Aug. 25, 1997.

Decided Jan. 23, 1998.

James A. Shanman, New York City (Sharfman, Siviglia, Poret, Kook, Ross & Shanman, New York City, on the brief), for Plaintiffs-Appellants.

Lawrence Mentz, White Plains, New York (Peter Hoenig, Elissa Berkman, Biedermann, Hoenig, Massamillo & Ruff, New York City, on the brief), for Defendants-Appellees.

Before: KEARSE, MCLAUGHLIN, Circuit Judges and GODBOLD ¹ Senior Circuit Judge.

GODBOLD, Senior Circuit Judge:

This case involves a dispute over insurance coverage. The policy in dispute is an errors and omissions (E & O) policy that promises to provide reimbursement for losses and legal expenses incurred by the insured when it is sued by third parties who claim that the insured or its employees have harmed them. The plaintiffs, Alexander & Alexander Services and Alexander & Alexander, Inc. (A & A), an insurance brokerage conglomerate, brought a declaratory judgment action in New York state court seeking a determination that the losses and expenses it incurred in defending and settling an action brought against it in Pennsylvania by the rehabilitator of a Pennsylvania insurance company, Mutual Fire, Marine and Inland Insurance Company (Mutual Fire), were covered under an E & O policy issued by the defendants, These Certain Underwriters at Lloyd's, London (Lloyd's). Lloyd's denied coverage. The present case was brought in New York state court and was removed to the United States District Court, S.D.N.Y. Both parties moved for summary judgment. The district court denied A & A's motion and granted summary judgment to Lloyd's. We reverse and remand.

The central issue concerns the meaning of Exclusion E of the policy. The coverage provision of the policy reads: "[T]his Insurance ... indemnifies the Assured against any claim for breach of professional duty by the Assured, or any person or entity for which the Assured is legally liable, ... by reason of any negligent act, error or omission or the fraud or dishonesty of its employees."

Exclusion E provides that there shall be no liability for "any claim arising from the financial inability to pay of any insurer or reinsurer with which the Assured has placed or obtained coverage for a client or an account."

The district court held that the policy did not cover losses incurred from intentional conduct, but it found that much of the conduct alleged to have given rise to coverage arguably fell within the coverage language for alleged negligent acts, errors or omissions. The court concluded, however, that it was unnecessary to address the scope of coverage because it found that Exclusion E unambiguously excluded all relevant coverage. This conclusion is the subject matter of this appeal.

I. Factual Background

A & A, which engages in insurance brokerage and risk management, contracted with Lloyd's to acquire two E & O policies. The first, number P.31356, was effective from December 1, 1985 through November 30, 1986. The second, P. 35349, was effective from December 1, 1987 through November 30, 1988. The parties agree that only one policy applies to A & A's claims and that identification of the appropriate policy depends upon a determination of when a claim was made. Because the language of the relevant clauses is the same in both policies, a determination of which policy applies is not necessary. For simplicity, at times we refer to the policies in the singular.

The policy was the result of extensive negotiations between the parties concerning scope of coverage and appropriate premiums. A & A retained Michael S. Monkland to act as its "Lloyd's broker." Monkland negotiated with Richard E. Thomson, the active underwriter of a Lloyd's syndicate. Both Thomson and Monkland were experienced and knowledgeable in the field of E & O policies insuring brokers. They renewed their negotiations throughout the years when the A & A policy was subject to renewal. ²

Exclusion E is one item of a list of specific exclusions presenting circumstances for which coverage will be denied.

II. The Pennsylvania Action

During the 1970's and 1980's A & A's wholly owned subsidiary, Shand, Morahan & Company ("Shand"), contracted with and performed underwriting services for Mutual Fire. It performed basic management services for Mutual Fire including accepting or declining applications for insurance, issuing policies, collecting premiums, handling claims, and obtaining reinsurance, all on behalf of Mutual Fire. Because Shand is a wholly owned subsidiary of A & A, and claims asserted against the two entities treat them as alter egos, we treat them as a single entity and refer to the entity by either name.

During the mid-1980's Mutual Fire began experiencing financial difficulties, and on December 8, 1986, the Commonwealth Court of Pennsylvania issued an order of rehabilitation naming the Pennsylvania Insurance Commissioner as rehabilitator for Mutual Fire. The rehabilitator brought an action in the Commonwealth Court against A & A and Shand (the Pennsylvania action). The rehabilitator's complaint, on theories of agency and alter ego, sought to hold Shand and A & A liable upon various claims, alleging negligence, breach of contract, and breach of fiduciary duty in connection with professional services performed on behalf of Mutual Fire. The complaint also alleged against A & A alone claims for negligence, tortious interference with contract, and unjust enrichment.

The rehabilitator sought to recover from A & A nearly $235,000,000. The district court described the complaint as embracing eight failures to act:

(1) Failure to properly manage claims on Mutual Fire business;

(2) Failure to provide adequate information on Mutual Fire business;

(3) Failure to properly select reinsurers and to collect funds due from them on Mutual Fire business;

(4) Failure to properly select and supervise defense counsel for claims made on Mutual Fire policies;

(5) Failure to comply with applicable laws and regulations;

(6) Failure to operate in Mutual Fire's best interest, instead favoring themselves and other companies;

(7) Failure to develop appropriate underwriting procedures with respect to Mutual Fire business;

(8) Failure to set, modify, or collect premiums on Mutual Fire business.

The rehabilitator and A & A entered into a settlement agreement in the Pennsylvania suit whereby A & A agreed to pay a total of $47,000,000 to the rehabilitator over six years. The settlement included parties other than A & A, and it did not allocate the settlement amount to particular claims made in the rehabilitator's complaint.

III. The Current Dispute

After settling the rehabilitator's action in the Pennsylvania court A & A requested indemnification from Lloyd's to the extent of the applicable policy limits for its losses and legal expenses in defending the Pennsylvania action. Each E & O policy provides primary insurance in the aggregate amount of $10 million less specified deductibles. A & A claims that in the Pennsylvania suit it incurred over $21 million in defense costs alone.

Lloyd's unequivocally denied coverage, and A & A commenced this suit for declaratory judgment, asking the court to declare its right to reimbursement under the E & O policies. After extensive discovery both parties moved for summary judgment. The district court granted summary judgment in favor of Lloyd's, holding that coverage under the policies was precluded by Exclusion E. The court declined to rule on whether A & A's claim was within the scope of coverage of the policies. Instead it declared that even if the claim was the type of claim covered under the policies, the language of Exclusion E plainly and unambiguously excluded coverage for reimbursement of expenses and costs incurred in defending the action brought by the rehabilitator against A & A. A & A appealed.

IV. Discussion

We examine the summary judgment in favor of Lloyd's under a de novo standard of review. Aslanidis v. United States Lines, Inc., 7 F.3d 1067, 1072 (2d Cir.1993). Summary judgment should be granted only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Proc. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). All facts, inferences, and ambiguities must be viewed in a light most favorable to the nonmovant. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

Under New York law "the initial interpretation of a contract is a matter of law for the court to decide." K. Bell & Assoc., Inc. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir.1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir.1996)). Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous. Cable Science Corp. v. Rochdale Village, Inc., 920 F.2d 147, 151 (2d Cir.1990); Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 27 (2d Cir.1988). An ambiguity exists where the terms of a contract could suggest "more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir.1997). Ambiguity with respect to the meaning of...