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

• Decision Date: 06 August 1998
• Docket Number: Docket Nos. 97-9407,97-9435
• Citation: 152 F.3d 162
• Parties: FIRST INVESTORS CORPORATION, First Investors Management Company, Inc., First Investors Consolidated Corporation, First Investors High Yield Fund, Inc., and First Investors Fund for Income, Inc., Plaintiffs-Appellants-Cross-Appellees, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

Page 162

152 F.3d 162

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

Docket Nos. 97-9407, 97-9435.

United States Court of Appeals Second Circuit.

Argued July 17, 1998.

Decided Aug. 6, 1998.

Philip R. Forlenza, Patterson, Belknap, Webb & Tyler LLP, New York City (Stephen P. Younger, Roosevelt N. Nesmith, on the brief), for Appellants.

Marshall T. Potashner, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (Herbert Dicker, on the brief), for Appellee.

Before: CABRANES, POOLER, and REAVLEY, ^* Circuit Judges.

JOSE A. CABRANES, Circuit Judge:

First Investors Corporation and its affiliates (collectively, "First Investors") brought this action seeking insurance coverage under policies it purchased from Liberty Mutual Insurance Company ("Liberty Mutual"). The coverage sought included Liberty Mutual's duty to defend First Investors against multiple claims of emotional distress arising out of investors' economic losses. Liberty Mutual denied coverage, asserting that the claims fell outside the terms of the policies it issued to First Investors. On February 28, 1997, the United States District Court for the Southern District of New York (Kevin T. Duffy, Judge ), granted summary judgment in Liberty Mutual's favor and dismissed First Investors's complaint. See First Investors Corp. v. Liberty Mut. Ins. Co., 955 F.Supp. 274 (S.D.N.Y.1997). On October 28, 1997, the district court granted summary judgment for First Investors and dismissed Liberty Mutual's counterclaim for breach of contract. First Investors appeals from the district court's order granting summary judgment in Liberty Mutual's favor and dismissing First Investors's complaint, and Liberty Mutual cross-appeals from the district court's dismissal of its counterclaim.

I.

The following facts are undisputed for the purposes of this appeal. First Investors sells mutual funds to investors, and for many years it purchased comprehensive general liability ("CGL") insurance policies ¹ and umbrella excess liability insurance policies (the "excess policies") ² from Liberty Mutual. In the early 1990s, First Investors was sued in twelve actions (the "underlying actions") filed in state courts across the country by purchasers of funds sold by First Investors's representatives. ³ The complaints in the underlying actions essentially allege that First Investors fraudulently targeted unsophisticated investors, mostly retirees, and sold them highly volatile "junk bond" mutual funds while assuring them that the investments were safe for purchasers living on a fixed income. Several of the complaints allege that First Investors selected inexperienced representatives to sell the funds and trained them to use "scripts" in their sale presentations, that included such phrases as "completely safe," "absolutely no risks," "conservative," "stable," and "you can't lose." Each of the claimants alleged losses of thousands of dollars and resulting emotional distress.

Concerned that one of its claims examiners had misled First Investors regarding the availability of coverage, Liberty Mutual agreed to provide coverage for two suits, Hanley and Barbosa, subject to the terms and conditions of a settlement agreement. The settlement agreement provided, in pertinent part:

The transfer of the $3,450,000.00 from Liberty Mutual Insurance Company to [Liberty Mutual's escrow agent] for the settlement of the above captioned lawsuits shall not be considered an admission of any nature by Liberty Mutual Insurance Company as to the availability of insurance coverage or insurance proceeds with respect to any other claims or lawsuits pending against First Investors Corporation, or others, similar in any manner to the allegations contained in the Hanley or Barbosa lawsuits, and the payment of the Settlement Funds shall not be admitted into evidence in any proceeding regarding the applicability of insurance coverage under any policy of insurance issued by Liberty Mutual Insurance Company or its affiliated companies.

Joint Appendix at 901-92 (emphasis added).

First Investors settled all of the remaining underlying claims with the claimants except for the Bonner ⁴ and Parsons suits. ⁵ In January 1995, First Investors sued Liberty Mutual in district court seeking defense costs and indemnification in the ten remaining underlying actions pursuant to the terms of the CGL and excess policies. Because First Investors included in its complaint information concerning Liberty Mutual's payment of the settlement funds in Hanley and Barbosa, Liberty Mutual amended its answer and counterclaimed against First Investors for breach of the settlement agreement.

In August 1995, First Investors moved for partial summary judgment solely on Liberty Mutual's duty to defend. On February 28, 1997, the district court denied First Investors's motion and, sua sponte, searched the record and granted summary judgment in Liberty Mutual's favor, dismissing First Investors's complaint in its entirety because "the documents before this Court show that First Investors has no case." First Investors Corp., 955 F.Supp. at 279. The district court noted, however, that the case was not closed due to the existence of Liberty Mutual's counterclaim. See id.

On June 17, 1997, Liberty Mutual moved for summary judgment on its counterclaim, alleging breach of the settlement agreement, and First Investors cross-moved for summary judgment dismissing Liberty Mutual's counterclaim. On October 28, 1997, the district court granted First Investors's motion and dismissed Liberty Mutual's counterclaim. The district court held that, as a matter of law, the settlement agreement did not preclude First Investors from referencing Liberty Mutual's agreement to fund the settlement of Hanley and Barbosa in its complaint or its motion for summary judgment--First Investors had merely agreed not to seek its "admi[ssion] into evidence." The district court had explicitly stated that it did not consider the settlements in its February 28, 1997 ruling on First Investors's motion for summary judgment on whether Liberty Mutual had a duty to defend. See First Investors Corp., 955 F.Supp. at 276. Accordingly, the district court concluded that the terms of the settlement agreement had not been breached.

On appeal, First Investors challenges the district court's grant of summary judgment in favor of Liberty Mutual and dismissal of First Investors's complaint. On cross-appeal, Liberty Mutual challenges the district court's ruling granting First Investors's motion for summary judgment and dismissing Liberty Mutual's counterclaim for breach of contract.

II.

A district court's grant of summary judgment is reviewed de novo. See Westport Bank & Trust Co. v. Geraghty, 90 F.3d 661, 668 (2d Cir.1996). Because this is an action based on diversity of citizenship, we apply New York law. See, e.g., J.Z.G. Resources, Inc. v. King, 987 F.2d 98, 102 (2d Cir.1993), cert. denied, 510 U.S. 993, 114 S.Ct. 553, 126 L.Ed.2d 454 (1993). If New York law is "uncertain or ambiguous, the job of the federal courts is carefully to predict how the highest court of the ... state would resolve the uncertainty or ambiguity." Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir.1994). We give the "fullest weight to the pronouncements of the New York Court of Appeals." Id. Where that court has not spoken, we "apply what [we] find to be the state law after giving 'proper regard' to relevant rulings of other courts of the State." New York v. Blank, 27 F.3d 783, 788 (2d Cir.1994) (quoting Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967)). "Finally, we may also consider relevant cases from other jurisdictions." Id.

III.

Whether Liberty Mutual has a duty to defend First Investors against the emotional distress claims asserted in the underlying actions turns on whether the CGL and excess policies provide coverage for such claims. It is well settled under New York law that an insurer's duty to defend is "exceedingly broad," and broader than its duty to indemnify. Continental Cas. Co. v. Rapid-American Corp., 80 N.Y.2d 640, 648, 593 N.Y.S.2d 966, 609 N.E.2d 506 (1993). It is not, however, without limits. Cf. Keating v. National Union Fire Ins. Co., 995 F.2d 154, 156 (9th Cir.1993). Determining whether an insurer has a duty to defend "requires an examination of the policy language and the allegations of the complaint," Smith Pontiac-GMC Truck Ctr., Inc. v. Hartford Accident Indem. Co., 194 A.D.2d 906, 907, 599 N.Y.S.2d 308 (3d Dep't 1993), to see if " 'the underlying complaint alleges any facts or grounds which bring the action within the protection purchased.' " Blank, 27 F.3d at 790 (quoting Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873, 476 N.E.2d 272 (1984)). In so doing, however, a "court should not attempt to impose the duty to defend on an insurer through a strained, implausible reading of the complaint that is linguistically conceivable but tortured and unreasonable." Northville Indus. Corp. v. National Union Fire Ins. Co., 89 N.Y.2d 621, 634-35, 657 N.Y.S.2d 564, 679 N.E.2d 1044 (1997) (internal quotation marks omitted).

The first question presented is whether the emotional distress arising out of the economic losses sustained by the underlying claimants constitutes "bodily injury" under the CGL policies. First Investors asserts that Liberty Mutual had a duty to defend it in the underlying actions because, in its view, the New York Court of Appeals has authoritatively held in Lavanant v. General Accident Ins. Co. of America, 79 N.Y.2d 623, 584 N.Y.S.2d 744, 595 N.E.2d 819 (1992), that emotional distress constitutes "bodily injury" under CGL policies. Liberty...