First Investors Corp. v. Liberty Mut. Ins. Co.

• Decision Date: 28 February 1997
• Docket Number: No. 95 Civ. 0681 (KTD).,95 Civ. 0681 (KTD).
• Citation: 955 F.Supp. 274
• Parties: FIRST INVESTORS CORPORATION, First Investors Management Company, Inc., First Investors Consolidated Corporation, First Investors Fund for Income, Inc., and First Investors High Yield Fund, Inc., Plaintiffs, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

955 F.Supp. 274

FIRST INVESTORS CORPORATION, First Investors Management Company, Inc., First Investors Consolidated Corporation, First Investors Fund for Income, Inc., and First Investors High Yield Fund, Inc., Plaintiffs, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.

No. 95 Civ. 0681 (KTD).

United States District Court, S.D. New York.

February 28, 1997.

Kirkpatrick & Lockhart L.L.P., New York City, (Eugene R. Licker, of counsel), for Plaintiffs.

Kirkpatrick & Lockhart L.L.P., Washington, D.C. (Matthew L. Jacobs, Valerie M. Baruch, of counsel), for Plaintiffs.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, (Marshall T. Potashner, of counsel), for Defendant.

MEMORANDUM & ORDER

KEVIN THOMAS DUFFY, District Judge:

Plaintiffs (collectively, "First Investors") initiated this litigation seeking insurance coverage from Defendant ("Liberty Mutual") for various securities fraud claims asserted against First Investors regarding its sale of mutual funds and related products. Pending before this Court are three motions — First Investors' partial summary judgment motion on Liberty Mutual's duty to defend; Liberty Mutual's partial summary judgment motion concerning First Investors' demand for attorneys fees and First Investors' fourth cause of action for breach of the duty of good faith and fair dealing; and Liberty Mutual's objections to the Orders of U.S. Magistrate Judge Nina Gershon, dated June 6, 1996, and June 12, 1996. For the following reasons, First Investors' partial summary judgment motion regarding Liberty Mutual's duty to defend is denied, rendering any review of the other two motions moot.

I.

From July 1, 1987, through July 1, 1993, Liberty Mutual provided First Investors with Comprehensive General Liability ("CGL") and Umbrella Excess Liability ("Umbrella") policies. The insuring clause in the CGL policies, after inserting a New York modification, states that Liberty mutual must:

pay those sums that ... [First Investors] becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance policy applies.... This insurance applies only to "bodily injury" and "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence".... [Liberty Mutual] will have the right and duty to defend any "suit" seeking those damages even if the allegations of the suit are groundless, false or fraudulent.

The CGL policies define "bodily injury" as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time" and "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

The Umbrella policies, broader in coverage than the CGL policies, provide protection for "bodily injury; property damage; personal injury; or advertising injury liability." "Personal injury" is defined as "injury to the feelings or reputation of a natural person." Further, the Umbrella policies contain a Banks and Financial Institutions Endorsement, which provides in part that:

This policy does not apply to bodily injury, property damage, personal injury or advertising liability arising out of:

...

3. The loss, depreciation in value, or damage to any real or personal property, including, but not limited to, money, securities, negotiable instruments or contracts representing money, held by or in the care, custody or control of the insured.

4. Errors or omissions committed or alleged to have been committed by or on behalf of the insured in the conduct of the insured's business activities as a Bank or Financial Institution.

Beginning in 1990, First Investors was named as a defendant in suits filed by individual plaintiffs alleging that First Investors negligently, recklessly or otherwise fraudulently sold mutual funds. The instant case was commenced by First Investors due to Liberty Mutual's refusal to defend and indemnify under the insurance policies. First Investors allegedly marketed mutual funds, apparently specializing in junk bond securities, to retirees with fixed incomes and to residents of nursing homes. (Potashner Aff. in Opp'n at 2.) After sustaining economic losses, twelve separate actions were brought against First Investors ("Underlying Actions") seeking recovery for various injuries, for which First Investors has incurred substantial defense costs.

Liberty Mutual agreed to fund the settlement of two of the twelve actions — the Hanley and Barbosa claims, which are the focus of Liberty Mutual's counterclaims. (See Am. Answer and Countercl. ¶¶ 107-43). On February 3, 1994, First Investors and Liberty Mutual entered into an agreement, whereby the parties memorialized that "the settlement of the [two] lawsuits shall not be considered an admission of any nature by Liberty Mutual ... and payment of the [settlement] shall not be admitted into evidence in any proceeding regarding the applicability of insurance coverage." Because Liberty Mutual raises the improper conduct of one of its agents as a reason for entering into the settlement agreement and First Investors apparently drops this issue in its Reply Memorandum of Law, this Court will not consider the Hanley and Barbosa settlements when analyzing whether Liberty Mutual has a duty to defend.

Furthermore, First Investors asserts that Liberty Mutual's Local Rule 3(g) statement is deficient as a matter of law. For each point, Liberty Mutual responds either "Admitted" or "Denied". Due to the volume and sufficiency of the submissions as a whole and the unfair prejudice that would be inflicted upon Liberty Mutual due to its counsel's deficiencies, the material facts set forth in First Investors' Local Rule 3(g) statement are not deemed admitted.

II.

Liberty Mutual contends that First Investors failed to comply with the notice provisions of the CGL and Umbrella policies and, thus, Liberty Mutual is relieved of its duty to defend and to indemnify the Barbosa, Corley, Hanley, Parsons, Quinn, Rayhill, Tarver, and Wilson claims. (Def. Mem. of Law in Opp'n at 49-50.) "The governing principle is that an insured must give notice to his or her insurer within the time limit provided in the insurance policy or within a reasonable time under all the circumstances and that, absent a valid excuse, failure to satisfy the notice requirement vitiates coverage." Eveready Ins. Co. v. Saunders, 149 A.D.2d 456, 539 N.Y.S.2d 957, 957 (2d Dep't 1989). First Investors does not proffer a valid excuse for its tardiness in the documents submitted to this Court and the time periods detailed by Liberty Mutual regarding notice far exceed what a reasonable person could determine is "practicable" under Section IV, Paragraph 2 of the insurance policies. See State of N.Y. v. Blank, 27 F.3d 783, 795 (2d Cir.1994) (noting that New York courts have held that reasonableness of time for notice may be determined as question of law).

Liberty Mutual's submission on this point, however, trips before crossing the finish line. "[A]n insurer who fails to timely disclaim liability or deny coverage `as soon as is reasonably possible,' when required by Insurance Law § 3420(d), waives its affirmative defense of late notice." Matter of Allcity Ins. Co. and Jimenez, 78 N.Y.2d 1054, 576 N.Y.S.2d 87, 88, 581 N.E.2d 1342, 1343 (1991). For example, in the Wilson claim, First Investors initially became aware of the claim in November of 1990, Liberty Mutual was provided notice on January 20, 1993, but coverage was not denied until March 24, 1994. As I find the time periods described by both parties unreasonable, Liberty Mutual cannot prevail on this point.

III.

Whether an insurer has a duty to defend in a certain case is a question of law. "[T]he duty of the insurer to defend the insured rests solely on whether the complaint alleges any facts or grounds which bring the action within the protection purchased." Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 486 N.Y.S.2d 873, 876, 476 N.E.2d 272 (1984). "[A]n insurer seeking to avoid its duty to defend bears a heavy burden." Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1204 (2d Cir.1989), cert. denied, 496 U.S. 906, 110 S.Ct. 2588, 110 L.Ed.2d 269 (1990). Nonetheless, though an insurer's duty to defend is independent of and broader than its duty to indemnify, "it is not absolute." Keating v. National Union Fire Ins. Co. of Pittsburgh, Pa., 995 F.2d 154, 156 (9th Cir.1993).

Here, the question of consequence is whether the Complaint alleges "bodily injury" as that term is defined in Liberty Mutual's CGL and Umbrella policies. Lavanant v. General Accident Ins. Co., 79 N.Y.2d 623, 584 N.Y.S.2d 744, 595 N.E.2d 819 (1992), is cited repeatedly by First Investors as controlling in this litigation because of the court's holding that a policy insuring "bodily injury, sickness or disease" allows for recovery for nonphysical harm (e.g., emotional trauma) in the absence of physical manifestations. Though at first glance seemingly analogous, I cannot concur with First Investors' attempt to stretch the Lavanant holding to a securities fraud case. Clearly, Lavanant cannot be said to extend to all cases involving economic loss. Indeed, some legal writers have seriously questioned the entire reasoning behind the decision's foundation. See Kevin M. LaCroix, Emotional Distress, Mental Anguish and Bodily Injury Coverage, 4 NO. 4 Coverage 10, *13-14 (July/Aug.1994).

In Lavanant, a portion of the ceiling collapsed in an apartment rented by the underlying claimants from the insured, who was the owner and managing agent of a four-story brownstone located in Manhattan. The underlying claimants sought damages from the insured for personal injury and property damage, alleging negligence, intentional infliction of emotional distress, assault, and breach of warranty of habitability. The Lavanant court, in determining that the ambiguity of "bodily injury" in ...