Financial Management v. American Intern. Speciality
| Decision Date | 05 November 2007 |
| Docket Number | No. 06-55001.,06-55001. |
| Parties | FINANCIAL MANAGEMENT ADVISORS, LLC, Financial Management Advisors, Inc. and Kenneth D. Malamed, Plaintiffs-Appellants, v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
David M. Roberts and Jenner C. Tseng, Roberts, Raspe & Blanton LLP, Los Angeles, CA, for the plaintiffs-appellants.
Andrew J. Waxler and Gretchen S. Carner, Waxler, Carner, Weinreb, Brodsky LLP, El Segundo, CA, for the defendant-appellee.
Appeal from the United States District Court for the Central District of California; Ronald S.W. Lew, District Judge, Presiding. D.C. No. CV 04-10463-RSWL (MANx).
Before: ALEX KOZINSKI and JOHNNIE B. RAWLINSON, Circuit Judges, and MIRIAM GOLDMAN CEDARBAUM,* Senior District Judge.
Financial Management Advisors, LLC and Financial Management Advisors, Inc. (collectively, "FMA") and Kenneth D. Malamed appeal from the district court's grant of summary judgment in favor of American International Specialty Lines Insurance Company ("AISLIC"). For the reasons that follow, we reverse that summary judgment and remand for proceedings consistent with this opinion.
FMA is a firm that provides investment advice and portfolio management services. 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 AISLIC an Investment Management Insurance Policy to cover claims made against the FMA Parties for "Wrongful Acts" in the rendering of, or failure to render, investment advisory services. A "Wrongful Act" is defined as "any breach of duty, neglect, error, misstatement, misleading statement, omission or other act wrongfully done or attempted by the Insured." 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 is subject to a $2 million limit of liability.
The dispute in this case arises from the effect of two provisions, one in each of the AISLIC policies. 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.
(emphasis added). 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.
(emphasis added). Pursuant to these provisions, a claim brought under Policy II that arises out of the same or related Wrongful Acts as a claim brought under Policy I will be treated as having been brought under Policy I, and will receive coverage only to the extent that the $2 million limit of Policy I was not exhausted by the earlier claim.
FMA and Malamed (collectively, the "FMA Parties") seek insurance coverage for two separate lawsuits brought against them by unrelated investors who received financial advice from Malamed.
The Sitricks are a family of investors who invested in traditional equities and fixed income products managed by FMA. In December of 2002, when the value of their investments began to decline, the Sitricks filed a lawsuit against the FMA Parties in Los Angeles Superior Court 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)1 managed by FMA in order to induce the Sitricks to invest in those funds. The FMA Parties tendered the Sitrick Claim to AISLIC for coverage, and AISLIC agreed to assume the defense. In May of 2004, the Sitricks and the FMA Parties 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 the CBO II fund. When his investment declined materially, Steinman sought recovery on the ground that Malamed had misrepresented the riskiness of CBO II and, moreover, had placed Steinman's investment into a tranche of the fund different from and riskier than the tranche he had agreed to invest in. Thus, Steinman alleged not only that FMA and Malamed misled him, but also that they breached their agreement with him. After reviewing the pertinent materials and comparing the Steinman and Sitrick Claims, 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 the FMA Parties. 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 in Los Angeles Superior Court. 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, the FMA Parties 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 the FMA Parties' motion and granted AISLIC's motion for summary judgment. The district court agreed with AISLIC that the Sitrick and Steinman Claims were "related" because both involved material misrepresentations made by the same financial advisor about the risk of investing in CBO II. 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.
We review a district court's grant of summary judgment de novo. Olympic Pipe Line Co. v. City of Seattle, 437 F.3d 872, 877 n. 11 (9th Cir.2006). Findings of fact are reviewed for clear error. Metropolitan Life Ins. Co. v. Parker, 436 F.3d 1109, 1113 (9th Cir.2006). Conclusions of law are reviewed de novo. Conestoga Servs. Corp. v. Exec. Risk Indem., 312 F.3d 976, 981 (9th Cir.2002).
This case turns on whether the Sitrick and Steinman Claims "arise[] out of the same or related Wrongful Acts." We hold that they do not....
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