MBIA Inc. v. Certain Underwriters at Lloyd's
| Decision Date | 16 July 2014 |
| Docket Number | No. 14–cv–1769.,14–cv–1769. |
| Parties | MBIA INC., Plaintiff, v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Lexington Insurance Company and Wurttembergische Versicherung AG, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Robin L. Cohen, Esq., Kenneth H. Frenchman, Esq., Kasowitz, Benson, Torres & Friedman LLP, New York, NY, for Plaintiff.
Edward J. Kirk, Esq., Bryce K. Guingrich, Esq., Clyde & Co U.S. LLP, New York, NY, for Defendants.
I. INTRODUCTION
MBIA, Inc. (“MBIA”) brings this diversity action against certain underwriters at Lloyd's, London (“Lloyd's”), Lexington Insurance Company (“Lexington”), and Wurttembergische Versicherung AG (“WurttVers”) (collectively, known as the “Underwriters”) for breach of contract and declaratory judgment.
Underwriters now move to dismiss the Complaint for lack of subject matter jurisdiction and failure to state a claim. MBIA cross moves for judgment on the pleadings with respect to one of its causes of action—declaratory relief for duty to pay defense costs for the Transformation Claims. For the following reasons, Underwriters' motion to dismiss is GRANTED in part and DENIED in part and MBIA's cross motion is GRANTED.
II. BACKGROUND
MBIA is a corporation organized and existing under the laws of Connecticut, with its principal place of business in Armonk, New York.1 The members of Syndicates 2987 and 1274 are underwriters at Lloyd's, whose principal place of business is London, England2 and registration is in the United Kingdom.3 These underwriters have substantial business in New York, but are not citizens of New York.4 Lexington is a corporation organized and existing under the laws of Delaware, with its principal place of business in Massachusetts, and it has conducted substantial business in New York.5 WurttVers is incorporated in Germany, with its principal place of business in Stuttgart, Germany, and it has conducted substantial business in New York.6
MBIA purchased a Primary Financial Institutions Professional Indemnity Policy (No. 07GPOM2520)7 and an Excess Financial Institutions Professional Indemnity Policy (No. 07GPOM2521)8 for Claims made from August 31, 2007 to August 31, 2008.9 MBIA renewed the Policies (Primary Policy No. 08GPOM252010 ; Excess Policy No. 08GPOM252111 ) from August 31, 2008 to August 31, 2009.12 WurttVers did not subscribe to the 08–09 Policies.13 The 07–08 Primary Policy and the 08–09 Primary Policy14 have a limit of liability of $15 million.15 The 07–08 Excess Policy and the 08–09 Excess Policy16 have a limit of liability of $15 million excess of the Primary Policy covering the same period.17
The Primary Policies provide: “Underwriters shall pay on the behalf of the Assureds for Loss resulting from any Claim first made during the Policy Period for a Wrongful Act in the performance of Professional Services.”18
A “Claim” is “any judicial, administrative proceeding (including any appeal therefrom) and written demands for monetary, non-monetary or injunctive relief against any of the Assureds in which they may be subjected to a binding adjudication of liability or any settlement agreed by Underwriters for damages or other relief.”19 “More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim...”20
“Wrongful Act” is “any actual or alleged error, omission or act or breach of professional duty in rendering or failing to render the Professional Services.”21 “Interrelated Wrongful Acts” means “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of facts, circumstances, situations, events or transactions.”22 “Professional Services” includes “any past or present activities allowed under the law and regulations governing services provided by the Assureds which are or were performed for [MBIA and/or its Subsidiaries] and, in addition those activities, which are declared in the Application Form or which are commenced during the Policy Period.”23
“Loss” includes “Costs, Charges and Expenses incurred by any of the Assureds,” with several exceptions not applicable here.24 “Costs, Charges and Expenses” are “reasonable and necessary legal fees and expenses ... incurred by the Assureds in defense of any Claim ...” with several exceptions not applicable here.25 “Underwriters shall reimburse Loss only upon the final disposition of any Claim; provided, however, that Underwriters at their sole discretion agree to advance Costs, Charges and Expenses every 90 days.”26
The Preamble to the Primary Policies states: “This policy does not provide for any duty by Underwriters to defend any of the Assureds.”27 The Primary Policies' “Settlements and Defense” states: “It shall be the duty of the Assured and not the duty of Underwriters to defend Claims.”28
“No action shall lie against Underwriters unless, as a condition precedent thereto, the Assureds shall have fully complied with all of the terms of this Policy, nor until the amount of the Assureds' obligation to pay shall have been fully and finally determined either by judgment against them or by written agreement between them, the claimant and Underwriters.”29
MBIA writes financial guarantee policies through its subsidiaries—MBIA Insurance Corporation (“MBIA Insurance”) and National Public Finance Guarantee Corporation of Illinois (“National”)—for structured finance products (e.g., collateralized debt obligations or mortgage-backed securities) and public finance bonds (e.g., municipal bonds), respectively.30 In February 2009, MBIA separated their subsidiaries31 to provide municipal and state issuers frozen out of the public finance market with financial guarantee policies, while attracting capital investment to the benefit of the holding company and all policyholders (the series of transactions that implemented this change is referred to as the “Transformation”).32 This action was subsequently approved by the New York State Insurance Department (“NYID”),33 which is the body that regulates the insurance services provided by MBIA.
In July 2008, MBIA was named as a defendant in a number of lawsuits by several public entities and others who had purchased bond insurance from MBIA (collectively, the “Bond Cases”).34 In these suits plaintiffs alleged that MBIA committed negligence, among other things, in the sale and underwriting of financial guarantee insurance for the plaintiffs' public finance bonds as well as wrongful acts in the bidding for and sale of municipal derivatives to plaintiffs.35 On March 11, 2010, MBIA was named as a defendant in City of Phoenix v. Ambac Financial Group, Inc., et al. (“Phoenix”) based on improper credit ratings resulting in unfair insurance premiums.36 Many of the Bond Cases are still pending.37 MBIA sought coverage for the Bond Cases as a single Claim under the 07–08 Policies.38
In July 2008, lawsuits were filed against MBIA alleging that MBIA and others allocated the municipal derivatives market among themselves and rigged the bidding system through which plaintiffs purchased municipal derivatives and assigned plaintiffs lower interest rates, charged them higher fees, and subjected them to unnecessarily high risks (collectively, “Derivatives Cases”).39 The Derivatives Cases remain pending in the consolidated proceeding In re Municipal Derivatives Antitrust Legislation.40 MBIA submitted all of the Derivative Cases as a single Claim under the 07–08 Policies.41
MBIA has incurred millions of dollars in defense costs defending the Bond Cases, the Phoenix Case, and the Derivatives Cases (collectively, the “Municipal Claims”).42 MBIA has settled two of the Municipal Claims for approximately $1.2 million.43 All of the other underlying lawsuits are still pending.44
MBIA, MBIA Insurance, and National were named defendants in lawsuits alleging that MBIA's Transformation was improper because it deprived plaintiffs of the benefits of the financial guarantee insurance MBIA sold to the plaintiffs and lowered the credit rating of MBIA Insurance (collectively, “Transformation Cases”):45 Plaintiffs alleged that this had the effect of decreasing the value of the structured finance instruments MBIA guaranteed.46 Moreover, plaintiffs alleged that following the Transformation, MBIA lacked the necessary assets to perform its obligations under the structured finance guarantee policies and MBIA favored its public finance bond insurance clients over its structured finance clients.47 The lawsuits include: (1) Aurelius Capital Master, Ltd., et al. v. MBIA, Inc., et al. (“Aurelius Action”); (2) ABN Amro Bank N.V., et al. v. MBIA, Inc., et al. (“ABN Amro Action”); (3) ABN Amro Bank N.V., et al. v. Dinallo, et al. (“Article 78 Action”). The New York Supreme Court rendered judgment in favor of MBIA in the Article 78 Action.48
MBIA submitted all of the Transformation Cases as a single Claim under the 08–09 Policies.49 A few years later a similar lawsuit was filed against MBIA, MBIA Insurance, and National.50 The rest of the Transformation Cases, except the CQS Claim, were settled or dismissed by the time the Complaint was filed.51 On May 2, 2014, after the Complaint was filed, the CQS Claim was settled and dismissed with prejudice.52 MBIA's counsel informed Underwriters of this fact on May 2, 201453 and Underwriters acknowledged this notice.54 MBIA has incurred tens of millions of dollars defending against the Transformation Cases,55 an amount greater than the limits of the 08–09 Policies.56
Underwriters issued insurance policies to MBIA to provide insurance coverage for MBIA and its subsidiaries for losses from services which MBIA provides.57 Underwriters have refused to advance MBIA money for their defense costs or settlement, arguing that the Policies only require the Underwriters to...
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