Opinion
CIVIL ACTION NO. 3:03-CV-0269-G
March 10, 2004
MEMORANDUM ORDER
Before the court are the following motions: (1) the motion of the plaintiff Executive Risk Indemnity, Inc. ("Executive Risk") for summary judgment; (2) the motion of the defendants Integral Equity, L.P. ("Integral Equity"), Integral Hedging Offshore, Ltd. ("Integral Offshore"), and Conrad Seghers ("Seghers") for expedited consideration of Executive Risk's summary judgment motion; and (3) the motion of the defendant Daniel Jackson ("Jackson"), as receiver for Integral Hedging, L.P. ("Integral Hedging") and Integral Arbitrage, L.P. ("Integral Arbitrage"), for a continuance of Executive Risk's summary judgment motion. For the reasons discussed below, Jackson's motion for a continuance is denied, Executive Risk's motion for summary judgment is granted, and the motion for expedited consideration of the motion for summary judgment is denied as moot.
I. BACKGROUND
A complete statement of the factual and legal background of this case can be found in the recent memorandum order of this court denying defendant the Art Institute of Chicago ("the Art Institute")'s motion to dismiss, or in the alternative, to stay, and denying defendant Jackson's motion to abstain. See Memorandum Order (February 6, 2004) ¶ I. In its summary judgment motion, Executive Risk seeks a declaratory judgment regarding its rights and obligations under an insurance policy: the BermudaPLUS Global Financial Services/Investment Company Professional and Management Liability Policy No. 8165-8871 ("the Policy"), attached to Executive Risk's Complaint for Declaratory Judgment ("Complaint") as Exhibit C. Executive Risk is the underwriter of the Policy, which provides liability insurance to six parties — Integral Hedging, Integral Arbitrage, Integral Equity, Integral Offshore, Seghers, and James Dickey ("Dickey") — sued, along with other related parties (collectively, "the Art Institute defendants"), by the Art Institute in the 298th Judicial District Court of Dallas County, Texas ("the Art Institute action"). Integral Hedging and Integral Arbitrage, the first two parties mentioned above, were placed in receivership by the state court on August 19, 2002; the court appointed Jackson as the receiver. See Order Appointing Receiver ("Receivership Order"), attached to Complaint as Exhibit B. Trial in the state case has been postponed several times, and is now set for July 2, 2004.
II. ANALYSIS A. Applicable Law
"A federal court must follow the choice-of-law rules of the state in which it at." St. Paul Mercury Insurance Company v. Lexington Insurance Company, 78 F.3d 202, 205 (5th Cir. 1996). The Fifth Circuit has held that, under Texas choice-of-law rules, "when the issues of a case require the construction and application of insurance policies, . . . the relevant inquiry is what contacts the state has with the insurance dispute, and not [what contacts the state has] with the underlying lawsuit." Id.; see also Schneider National Transport v. Ford Motor Company, 280 F.3d 532, 536 (5th Cir. 2002) (noting, in dicta, that Texas choice-of-law principles dictated that a suit on an insurance contract be governed by "the law of the state with the most significant relationship to the particular substantive issue") (quoting W.R. Grace Company v. Continental Casualty Company, 896 F.2d 865, 873 (5th Cir. 1990)); 43 AM. JUR. 2D Insurance § 349 (2003).
In the case sub judice, the state of Texas has the most contacts with the insurance dispute: almost all of the insured parties reside in and do business in Texas, see Plaintiff the Art Institute of Chicago's Second Amended Original Petition and Application for Receivership and Temporary and Permanent Injunction ("Petition") ¶¶ 2-17, included in Appendix of Evidence for Brief in Support of Defendant the Art Institute of Chicago's Response to Executive Risk Indemnity's Motion for Summary Judgment ("Appendix for the Art Institute's Response") at 67-90, the insurance coverage dispute arises out of a lawsuit in a Texas state court, and the Policy does not contain a forum selection or choice-of-law clause that would militate against the application of Texas law to disputes regarding the Policy. Finally, none of the non-Texas parties has asserted that Texas law does not apply. See, e.g., Executive Risk Indemnity Inc.'s Reply Brief in Support of its Motion for Summary Judgment ("Reply Brief") at 3, 6 (citing to Texas case law); Brief in Support of Defendant the Art Institute of Chicago's Response to Executive Risk Indemnity's Motion for Summary Judgment ("The Art Institute's Response") at ii (listing Texas state cases referenced in the response). Therefore, this court will use Texas law to determine the substantive issues in this case.
B. Jackson's Motion For a Continuance
Jackson requests the court to postpone consideration of Executive Risk's summary judgment motion under Federal Rule of Civil Procedure 56(f) to allow the parties some discovery before the motion is decided. See generally Defendant Daniel Jackson's Motion for Continuance of Executive Risk Indemnity, Inc.'s Motion for Summary Judgment ("Jackson's Motion for Continuance"). Rule 56(f) states:
On March 31, 2003, the Art Institute also filed a Motion for Continuance Pursuant to Rule 56(f), which has since been denied as moot. See Order (June 13, 2003).
Should it appear from the affidavits of a party opposing the [summary judgment] motion that the party cannot for reasons stated present by affidavit facts essential to justify the party's opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just.
As stated earlier, Executive Risk is seeking declaratory relief from this court, asking the court to interpret an insurance policy underwritten by Executive Risk. The only contested issues in this case relate to the interpretation of certain provisions in the Policy. Jackson points out that there has been "no discovery whatsoever" in this case, and asserts that "[i]f courts have deigned to grant motions for continuance in situations where discovery has begun but has not yet been received, then surely it is appropriate to grant such a continuance when no discovery has begun." Jackson's Motion for Continuance ¶ V. Contrary to Jackson's assertion, however, the Fifth Circuit has held that "Rule 56 does not require that any discovery take place before summary judgment can be granted." Washington v. Allstate Insurance Company, 901 F.2d 1281, 1285 (5th Cir. 1990).
To obtain a continuance under Rule 56(f), the nonmovant "must demonstrate (1) why additional discovery is needed and (2) how the additional discovery will likely create a genuine issue of material fact." Brown v. Mississippi Valley State University, 311 F.3d 328, 333 n. 5 (5th Cir. 2002) (citing Stearns Airport Equipment Company, Inc. v. FMC Corporation, 170 F.3d 518, 534-35 (5th Cir. 1999)); see also Washington, 901 F.2d at 1285 ("the nonmovant must present specific facts explaining his inability to make a substantive response as required by Rule 56(e) and by specifically demonstrating how postponement of a ruling on the motion will enable him, by discovery or other means, to rebut the movant's showing of the absence of a genuine issue of fact.") (quotations omitted). Although Rule 56(f) motions "are generally favored, and should be liberally granted," Brown, 311 F.3d at 333 n. 5 (quoting Stearns, 170 F.3d at 534), "[v]ague assertions that discovery will produce needed, but unspecified, facts" are not sufficient. Washington, 901 F.2d at 1285.
Under Texas law, insurance policies are subject to the same rules of construction and interpretation as are applicable to contracts generally. Valmont Energy Steel, Inc. v. Commercial Union Insurance Company, ___ F.3d ___, 2004 WL 238334 (5th Cir. February 10, 2004) at *3; Mid-Continent Casualty Company v. Swift Energy Company, 206 F.3d 487, 491 (5th Cir. 2000); National Union Fire Insurance Company of Pittsburgh, Pennsylvania v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. 1995). A court's primary concern in interpreting an insurance policy is to ascertain the true intent of the parties as expressed in the written instrument. Mid-Continent, 206 F.3d at 491 (citing National Union, 907 S.W.2d at 520). Whether a policy is ambiguous is a question of law for the court to decide. Mid-Continent, 206 F.3d at 491 (citing National Union, 907 S.W.2d at 520). If the court can give an insurance policy a definite legal meaning, the policy is unambiguous as a matter of law. Valmont Energy Steel, 2004 WL 238334 at *3; State Farm Fire Casualty Company v. Vaughan, 968 S.W.2d 931, 933 (Tex. 1998). In such a case, parol evidence is not admissible for the purpose of creating an ambiguity. Valmont Energy Steel, 2004 WL 238334 at *3; National Union, 907 S.W.2d at 520.
In his motion for continuance, Jackson provided the court with a non-exclusive list of discovery he would like to obtain if his motion were granted. Jackson's Motion for Continuance at 4-5. This list includes documents ("1. The original Underwriting Agreements" between Executive Risk and the insured parties; "2. The offers and rejections between the underwriter and the insureds; and 3. Any Reservation of Rights letters executed by the underwriter pertaining to the policy at issue."), depositions (of " 1. The underwriting agent or other representative who executed the policy at issue; 2. The soliciting agent that negotiated the terms of the policy between the underwriter and the insureds; and 3. The insureds or their corporate representatives."), and interrogatories "to the insurer and the various insureds on the multiple [Executive Risk] policies to determine what was negotiated between them." Id. at 5. Jackson asserts that this discovery "will establish that the named insureds on the [Policy] are separate entities, and therefore the claims against the named insureds are not `related,' which means that [Executive Risk] has liability on the policy of $5 million per insured ($20 million)" and "will also establish that some or all of the named insureds are not covered by the policy at issue, and are, therefore, not entitled to an advancement of defense costs." Id. at 6. In other words, Jackson is seeking discovery of parol evidence to show that certain relevant portions of the Policy are ambiguous. As stated earlier, however, this evidence is not admissible unless the court determines, as a matter of law, that the Policy is ambiguous. See National Union, 907 S.W.2d at 520.
Parol evidence, also known as extrinsic evidence, is "[e]vidence relating to a contract but not appearing on the face of the contract because it comes from other sources, such as statements between the parties or the circumstances surrounding the agreement." BLACK'S LAW DICTIONARY 578 (7th ed. 1999); see also id. at 579 (giving the second definition of "parol evidence" as "extrinsic evidence").
Accordingly, the court must first determine whether the Policy is ambiguous. For the reasons discussed below, the court ultimately concludes that the Policy is not ambiguous. Therefore, the evidence Jackson seeks to discover is inadmissible, see National Union, 907 S.W.2d at 520, and his motion for continuance is denied.
C. Executive Risk's Motion for Summary Judgment
Texas law requires a court to construe an insurance policy against the insurer, see The Art Institute's Response at 3, but such a construction is necessary only if the policy at issue is subject to more than one reasonable interpretation. See Performance Autoplex II Ltd. v. Mid-Continent Casualty Company, 322 F.3d 847, 854 (5th Cir. 2003); State Farm, 968 S.W.2d at 933. Not every difference in interpretation of an insurance policy amounts to ambiguity — the emphasis is on whether more than one reasonable interpretation exists. See State Farm, 968 S.W.2d at 933; see also Valmont Energy Steel, 2004 WL 238334 at *3 ("The fact that the parties disagree as to coverage does not create an ambiguity"); Performance Autoplex, 322 F.3d at 854 ("Mere disagreement over the interpretation of a provision does not make the provision ambiguous or create a question of fact."). If the court can give an insurance policy a definite legal meaning, the policy is unambiguous as a matter of law. State Farm, 968 S.W.2d at 933.
1. Evidentiary Burdens on Motions for Summary Judgment
Summary judgment is proper when the pleadings and evidence on file show that no genuine issue exists as to any material fact and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). The movant makes such a showing by informing the court of the basis of its motion and by identifying the portions of the record which reveal there are no genuine material fact issues. Celotex Corporation v. Catrett, 477 U.S. 317, 323 (1986). "[T]he substantive law will identify which facts are material." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. The pleadings, depositions, admissions, and affidavits, if any, must demonstrate that no genuine issue of material fact exists. FED. R. Civ. P. 56(c).
The disposition of a case through summary judgment "reinforces the purpose of the Rules, to achieve the just, speedy, and inexpensive determination of actions, and, when appropriate, affords a merciful end to litigation that would otherwise be lengthy and expensive." Fontenot v. Upjohn Company, 780 F.2d 1190, 1197 (5th Cir. 1986).
Once the movant makes this showing, the nonmovant must then direct the court's attention to evidence in the record sufficient to establish that there is a genuine issue of material fact for trial. Celotex, 477 U.S. at 323-24. To carry this burden, the "opponent must do more than simply show . . . some metaphysical doubt as to the material facts." Matsushita Electric Industrial Company, Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 586 (1986). While all of the evidence must be viewed in a light most favorable to the nonmovant, Anderson, 477 U.S. at 255 (citing Adickes v. S.H. Kress Company, 398 U.S. 144, 158-59 (1970)), neither conclusory allegations nor unsubstantiated assertions will satisfy the non-movant's summary judgment burden. Calbillo v. Cabender Oldsmobile, Inc., 288 F.3d 721, 725 (5th Cir. 2002) (citing Little v. Liquid Air Corporation, 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc)). Instead, the nonmovant must show that the evidence is sufficient to support a resolution of the factual issue in its favor. Anderson, 477 U.S. at 249.
2. Genuine Issues of Material Fact Asserted by Jackson and the Art Institute
Executive Risk has requested that this court make four declarations with respect to the Policy: first, that Executive Risk is authorized to advance "Defense Expenses" to Integral Equity, Integral Offshore, and Seghers in connection with the Art Institute action; second, that the Art Institute action is a single "Claim" under the Policy, to which a single $5 million limit of liability applies; third, that any Defense Expenses advanced by Executive Risk will deplete that $5 million limit of liability; and fourth, that advancement of Defense Expenses to Integral Equity, Integral Offshore, and Seghers is consistent with the Receivership Order and applicable law. Executive Risk's First Amended Complaint for Declaratory Judgment ("Amended Complaint") ¶ 38. Executive Risk asserts that it is entitled to summary judgment on these claims based on the "unambiguous terms of the Policy." Executive Risk Indemnity Inc.'s Brief in Support of Its Motion for Summary Judgment ("Summary Judgment Motion") at 9.Jackson and the Art Institute contend that several genuine issues of material fact exist that preclude summary judgment for Executive Risk. Jackson argues that there are genuine issues of material fact regarding which of the Policy's "Coverage Parts" apply to the Art Institute action. See Defendant Daniel Jackson's Brief in Support of His Response to Executive Risk Indemnity, Inc.'s Motion for Summary Judgment ("Jackson's Response") at 15-17. Both Jackson and the Art Institute argue that there are genuine issues of material fact regarding: (1) the number of Claims involved in the Art Institute action; (2) the relatedness of those Claims, if there are more than one; and (3) whether the Policy limits apply to each Art Institute defendant separately. Id. at 17-19; Brief in Support of Defendant the Art Institute of Chicago's Response to Executive Risk Indemnity's Motion for Summary Judgment ("Art Institute's Response") at 8-12. In addition, the Art Institute argues that there are genuine issues of material fact regarding (1) whether Defense Expenses are subject to the $5 million limit of liability and (2) how the Policy proceeds should be allocated. Art Institute's Response at 12-13.
For the reasons discussed below, the court finds that no genuine issues of material fact exist. Therefore, Executive Risk's motion for summary judgment is granted.
a. The Number of Coverage Parts That Apply to the Art Institute Action
The first issue this court will address is Jackson's assertion that the three "Coverage Parts" included in the policy, along with the first section of the policy (which includes endorsements and general terms and conditions), are separate policies in and of themselves. See Jackson's Response at 16 ("The insureds . . . have sued [Executive Risk] on four policies."); Third-Party Petition ¶ 8, included in the Appendix to Jackson's Response at D-00043, D-00045. This argument is meritless. The first page of the Policy, titled "Declarations: BermudaPLUSSM Global Financial Services/Investment Company Professional and Management Liability Policy," lists the three coverage parts included in the policy as Item 3 of the Declarations, "Insuring Agreements; Limits of Liability." See Policy at 1 ("Declarations"). In addition, that same page gives the policy number, 8165-8871, and refers not to four separate policies but to one "claims made policy." Id. (emphasis added). It also states that "[t]he coverage afforded under this policy differs in some respects from that afforded under other policies. Please read the entire policy carefully." Id. (emphasis added). Clearly, there is but one Policy at issue, albeit a Policy that contains three separate "Coverage Parts."
Jackson words this issue as a question of how many policies are at issue in the Art Institute action, although his arguments instead address the applicability of the separate Coverage Parts under the Policy. See Jackson's Response at 16 n. 44 (supporting assertion that there are "four policies" with a citation to the Policy itself and the three separate Coverage Parts).
Jackson also argues that there is a genuine issue of material fact regarding which or how many of the Coverage Parts are at issue in this case. Jackson's Response at 16-17 ("[Executive Risk] still could not show an absence of any genuine issues of material fact simply by unilaterally claiming that only one coverage part of the policy in question is at issue."). Here, Jackson is referring to Executive Risk's assertion that the Mutual Fund Coverage Part is "the only potentially applicable coverage part of the Policy to the Art Institute Action." Amended Complaint ¶ 17. Executive Risk supports this assertion in its Reply Brief by explaining why the other Coverage Parts do not apply to any of the defendants in the Art Institute action. Reply Brief at 9-10. As stated earlier, the first section of the Policy contains declarations, endorsements, and a section entitled "General Terms and Conditions," which applies to the entire Policy. See generally Policy, General Terms and Conditions. In these General Terms, the Policy provides that the terms "Insured" and "Insured Person" "shall have the meaning ascribed to that term in each COVERAGE PART attached hereto." Policy, General Terms and Conditions (A)(4), (A)(6). In addition, the term "Insured Entity" "means any Company, Fund, or Plan, as those terms are defined in each COVERAGE PART attached hereto." Policy, General Terms and Conditions (A)(5).
Turning to the first Coverage Part, the "Investment Advisers and Financial Services Providers Professional Liability Coverage Part" ("Professional Liability Coverage Part"), "Insured" is defined as "the Company and any Insured Persons." Policy, Professional Liability Coverage Part II(E). "Company" is then defined as "the Named Insured and any Subsidiary. . . ." Policy, Professional Liability Coverage Part II(B). The "Named Insured" is defined in the General Terms and Conditions as "the entity designated in ITEM 1 of the Declarations." Policy, General Terms and Conditions (A)(8). The entity so designated is Winchester Global Trust Co., Ltd. ("Winchester"). Policy, Declarations. Therefore, Winchester is both the "Named Insured" under the General Terms and Conditions, and the "Company" under the Professional Liability Coverage Part, as well as the "Insured" under the Professional Liability Coverage Part. In other words, under the Policy definitions, the Professional Liability Coverage Part applies only to Winchester and its partners, principals, officers, directors, members, trustees, or employees, none of which is a defendant in the Art Institute action. It is clear, therefore, that the Professional Liability Coverage Part does not apply to this case.
The "Insured" under the Professional Liability Coverage Part also include "any Insured Persons," defined as "any past, present or future partner, principal, officer, director, member, trustee or employee of the Company." Policy, Professional Liability Coverage Part II(D).
Under the second coverage part — the "Investment Advisers and Financial Services Providers Directors and Officers Liability Coverage Part" ("D O Coverage Part") — "Insured" is again defined as "the Company and any Insured Person." Policy, D O Coverage Part II(B). "Company" is also then defined as "the Named Insured and any Subsidiary. . . ." Policy, D O Coverage Part II(A). As already established, the "Named Insured" on the Policy is Winchester. See Policy, General Terms and Conditions at 2; Policy, Declarations. "Insured Person" is defined under the D O Coverage Part as "any past, present or future director or officer of the Company." Policy, D O Coverage Part II(C). Again it is clear that the D O Coverage Part does not apply to this case since neither Winchester nor its officers or directors are defendants in the Art Institute action.
The third coverage part — the "Mutual Fund Professional Liability, Including Directors, Officers and Trustees Liability, Coverage Part" ("Mutual Fund Coverage Part") — defines "Insured" as "each Fund and any Insured Persons." Policy, Mutual Fund Coverage Part II(E). "Fund" is defined as:
1. any investment company or trust registered under the Companies Act of 1981 (as amended), Investment Company Act of 1940 or under similar international law governing such investment company or trust which is listed in the Schedule of Funds attached to and forming part of this COVERAGE PART, and which is not otherwise excluded from coverage by endorsements to this policy; and
2. any series or portfolios of any such investment company or trust existing as of the effective date of this COVERAGE PART or created during the Policy Period; and
3. any investment company or trust created or sponsored by any Fund during the Policy Period.
Policy, Mutual Fund Coverage Part II(C). The Schedule of Additional Named Assureds Fund Entities Administered by Olympia Capital ("Schedule of Funds") lists Integral Hedging, Integral Arbitrage, Integral Equity, and Integral Offshore among its 300 funds. Policy, Mutual Fund Coverage Part, Schedule of Funds ll. 90, 109, 110, 111. Therefore, those entities fall under the Mutual Fund Coverage Part definition of "Insured." The Mutual Fund Coverage Part defines "Insured Person" as "any past present or future director, officer, member, trustee or employee of a Fund." Policy, Mutual Fund Coverage Part II(D). Seghers, as a director of Integral Offshore, and Dickey, as a member of Integral Arbitrage and Integral Hedging, are "Insured Persons" under the Mutual Fund Coverage Part definitions and, therefore, also fall under the Mutual Fund Coverage Part definition of "Insured." See Amended Complaint ¶ 9; Original Answer of Integral Equity, LP, Integral Hedging Offshore, Ltd., and Conrad Seghers ¶ 9; Petition in Intervention of James Dickey (May 2, 2003) ¶ 7. In the light of these Policy provisions and definitions, it is clear that only one Coverage Part within the Policy — the Mutual Fund Coverage Part — applies to the Art Institute action.
The Schedule actually lists Integral Equity as "Genesis Market Neutral Index Fund, L.P. (Integral Equity)." Genesis Market Neutral Index Fund, L.P. is the former name of Integral Equity. See Memorandum Order (February 6, 2004) at 2 n. 1.
b. The Number of Claims involved in the Art Institute Action
Both Jackson and the Art Institute contend that there are multiple Claims involved in the Art Institute action. See Jackson's Response at 17-19; The Art Institute's Response at 3-8. The Art Institute first attacks Executive Risk's contention that, under the Policy, a "Claim" is equivalent to a lawsuit. The Art Institute's Response at 3-8. The Art Institute argues that the term "Claim" should be given its "ordinary meaning," specifically, "[i]n the context of litigation, `claim' is commonly used to refer to a cause of action." Id. at 7.
Executive Risk has taken the position that the Art Institute action is a single Claim under the Policy. See Summary Judgment Motion at 12 ("Because the Art Institute Action is a single lawsuit, it constitutes one Claim under the Policy."); Reply Brief at 11 ("The plain meaning of the term `Claim' clearly establishes that the Art Institute Action constitutes a single `Claim.'").
Under Texas law, courts must strive to give effect to the intentions of parties to a contract as those intentions are expressed in their agreement. Mustang Tractor Equipment Company v. Liberty Mutual Insurance Company, 76 F.3d 89, 91 (5th Cir. 1996). When interpreting a contract, courts are therefore required to read all provisions of an agreement together, so that each provision is given its intended meaning, and no provision is rendered meaningless. See id. at 91; Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002).
There are four main provisions in the Policy relating to the meaning of the word "Claim" as that word is used in the Policy (and with some bearing on the issues raised in this suit). First, "Claim" is defined in the Policy as, inter alia, "(a) any civil proceeding in a court of law or equity." Policy, General Terms and Conditions (A)(2). Second, the Policy defines "Related Claims" as:
Under Texas law, "when terms are defined in an insurance policy, those definitions control." Trinity Universal Insurance Company v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997); see also Harken Exploration Company v. Sphere Drake Insurance PLC, 261 F.3d 466, 472 (5th Cir. 2001) (noting that terms in an insurance policy are to be given their "plain, ordinary, and generally accepted meaning" only if those terms are not defined in the policy). Unfortunately, the Policy's definition of "Claim" is not very helpful, as the term "proceeding" can mean anything from an entire lawsuit to one act within a lawsuit. See BLACK'S LAW DICTIONARY 1221 (7th ed. 1999) (defining "proceeding" as both " 1. The regular and orderly progression of a lawsuit, including all acts and events between the time of commencement and the entry of judgment" as well as "3. An act or step that is part of a larger action.") (emphasis added). A reading of the Policy as a whole, however, does provide a clear picture of what the parties intended by the term "Claim."
all Claims for Wrongful Acts based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events.
Policy, General Terms and Conditions (A) (10). Third, clarifying the relationship between "Claims" and "Related Claims," the Policy states that "[a]ll Related Claims will be treated as a single Claim made when the earliest of such Related Claims was first made, or when the earliest of such Related Claims is treated as having been made. . . ." Policy, General Terms and Conditions (B)(4). Fourth, the Policy anticipates that one Claim could "include both covered and uncovered matters." Policy, General Terms and Conditions (D)(5). Finally, each Coverage Part also contains a list of "Exclusions." The Exclusions section in the Mutual Fund Coverage Part provides, inter alia:
III. EXCLUSIONS
This Coverage Part does not apply to any Claim:
(D) for any actual or alleged invasion of privacy, malicious use or abuse of process, malicious prosecution, wrongful entry or eviction, false arrest, false imprisonment, assault or battery;
(E) for any bodily injury, emotional distress, mental anguish, sickness, disease or death of any person, or loss of consortium, support, companionship or services of any kind resulting therefrom; . . .
Policy, Mutual Fund Coverage Part III(D), III(E) (emphasis added).
As the Art Institute points out, if the term "Claim" is interpreted to mean "lawsuit," these exclusions would appear to deny coverage to any lawsuit involving a cause of action for invasion of privacy or personal injury. The Art Institute's Response at 6. However, as Executive Risk notes, the General Terms and Conditions allow for Claims involving both covered and uncovered matters. Reply Brief at 15 (citing Policy, General Terms and Conditions (D)(5)).
"When the provisions of a contract appear to conflict, they should be harmonized if possible to reflect the intentions of the parties." Ogden v. Dickinson State Bank, 662 S.W.2d 330, 332 (Tex. 1983). In this case, giving the term "Claim" the meaning suggested by the Art Institute — "a cause of action" — harmonizes the provisions of this Policy, without rendering any of the provisions meaningless, and most clearly reflects the parties' intentions. See 17.5. Quest Limited v. Kimmons, 228 F.3d 399, 405 (5th Cir. 2000) (citing Ogden, 662 S.W.3d at 332, in finding that a certain interpretation of a contract "harmonize[d] the provisions of the contract, which otherwise would be in conflict, and most probably reflects the intention of the parties."). Using this interpretation of the word "Claim," — the only reasonable interpretation under the Policy — a lawsuit could contain several Claims. If one Claim in such a lawsuit fell under an Exclusion, the entire lawsuit would not necessarily be excluded from the Policy. Instead, the loss allocation provisions of the Policy would come into play ( i.e., the lawsuit could "include both covered and uncovered matters"). See Policy, General Terms and Conditions (D)(5). At the same time, if none of the Claims in such a lawsuit fell under any of the Exclusions and if all of the Claims were considered Related Claims under the Policy, the entire lawsuit would then be treated as consisting of one Claim. See Policy, General Terms and Conditions (B)(4).
The Art Institute action consists of twelve separate causes of action. Petition ¶¶ 39-100. Therefore, under the only reasonable interpretation of the Policy, the Art Institute action is not one Claim, but twelve Claims. This conclusion raises the next crucial issue: whether the twelve Claims that make up the Art Institute action are Related Claims under the Policy.
The specific causes of action listed in the Petition are: statutory-securities fraud; Texas Securities Act violations; fraud; breach of fiduciary duty and constructive fraud; inducement of breach of fiduciary duty; conspiracy to commit common law and statutory securities fraud; conspiracy to induce breach of fiduciary duty; the imposition of a constructive trust over the assets of Integral Hedging and Integral Arbitrage; an accounting of the Art Institute defendants' assets, income, and liabilities; the appointment of a receiver; dissolution of the Integral Hedging and Integral Arbitrage partnerships; and attorney's fees. Petition ¶¶ 39-100.
c. The Relatedness of the Claims in the Art Institute Action
The twelve Claims that make up the Art Institute action are all based on related facts, or, at least, a related series of facts: the alleged inducement by the Art Institute defendants of the Art Institute to invest in certain funds, the alleged mishandling of those funds by the Art Institute defendants, the alleged continuing misrepresentations by the Art Institute defendants about the performance of those funds, the resultant loss to the Art Institute, and the alleged resultant enrichment of the Art Institute defendants. See Petition ¶¶ 39-100. In other words, under the broad definition of Related Claims given in the Policy, 1 the twelve Claims in the Art Institute action are Related Claims; they are all "based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events." See Policy, General Terms and Conditions (A) (10). There is no genuine issue of material fact as to whether the Art Institute action Claims are Related Claims. Therefore, under the terms of the Policy, the Art Institute action claims are to be treated as one Claim. See Policy, General Terms and Conditions (B)(4).
The definition of "Related Claims" under the Policy is much broader than the definition of related claims in the policy at issue in the case highlighted by the Art Institute, Kopelowitz v. Home Insurance Company, 977 F. Supp. 1179 (S.D. Fla. 1997). See The Art Institute's Response at 10-12; comp are Kopelowitz, 977 F. Supp. at 1188 ("Related acts, errors or omissions shall be treated as a single claim."), with Policy, General Terms and Conditions (A)(10) (defining Related Claims as "all Claims for Wrongful Acts based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events.").
d. Whether the Policy Limits Apply to Each Art Institute Defendant Separately
Jackson and the Art Institute both urge that the Policy applies separately to each Insured Art Institute action defendant. Jackson's Response at 17-19; The Art Institute's Response at 8. The ineluctable conclusion of this contention is that each Insured would have its own $5 million maximum aggregate limit of liability. When the relevant provisions of the Policy are read together as a consistent whole, however, see Mustang Tractor, 76 F.3d at 91; Stine, 80 S.W.3d at 589, the fallacy in this argument becomes apparent.
Jackson specifically names the four mutual funds listed in the Schedule of funds and states that "[a]t a minimum, then, there are four separate entities to be covered." Jackson's Response at 17 (emphasis in original). The Art Institute states simply that "every insured" is separately entitled to "at least $5 million in indemnity and all defense expenses." The Art Institute's Response at 8. To be entirely accurate, however, if the Policy were intended to cover each Insured separately, there would be at least six persons or entities covered separately by the Policy: Integral Equity, Integral Offshore, Integral Hedging, Integral Arbitrage, Seghers, and Dickey. See supra at 2.
First, Item 3 of the Declarations in the Policy sets out the limit of liability as to each Coverage Part and to the Policy as a whole. Section (c) sets out the limit for the Mutual Fund Coverage Part, providing for "$5,000,000.00 Mutual Fund Professional Liability, Including Directors, Officers and Trustees Liability, Coverage Part maximum aggregate limit of liability (inclusive of Defense Expenses) for each Claim." Policy, Declarations, Item 3(c). Section (d) sets out the limit for the Policy as a whole: "$25,000,000.00 maximum aggregate limit of liability for all Claims under the Policy." Of course, as noted earlier, all Related Claims — i.e., "all Claims . . . in any way involving the same or related facts, circumstances, situations, transactions or events . . ." — are treated as a single Claim. Policy, General Terms and Conditions (A)(10), (B)(4). Therefore, all Related Claims must first be grouped together as one Claim, pursuant to section (B)(4) of the General Terms and Conditions; then the $5,000,000.00 limit of liability will be applied to that aggregated "Claim."
This interpretation is supported by the limit of liability provision found in section (C)(1) of the General Terms and Conditions, which states:
The amount stated in ITEM 3 of the Declarations as the maximum aggregate limit of liability with respect to each COVERAGE PART shall be the maximum aggregate limit of liability of the Underwriter under such COVERAGE PART for all Loss, including Defense Expenses, from all Claims made or deemed made under such COVERAGE PART during the Policy Period.
Policy, General Terms and Conditions (C)(1). Loss is defined as
damages, judgments, awards, settlements, and Defense Expenses which an Insured is legally obligated to pay as a result of a Claim. . . .
Policy, General Terms and Conditions (A)(7). The court has already determined that the Claims in the Art Institute action are Related Claims and thus must be treated as one Claim under the Policy. It is clear that any damages, judgments, awards, settlements, and Defense Expenses that any of the Art Institute defendants (Insureds under the Policy) are legally obligated to pay as a result of the Art Institute action fall under the Policy definition of Loss. Because Related Claims are treated as one Claim, and because the Claims in the Art Institute action are Related Claims, all Loss resulting from the Art Institute action must, under the terms of the Policy, be deemed Loss from one Claim. Therefore, under section (C)(1) of the General Terms and Conditions and under Item 3(c) of the Declarations, one $5 million limit of liability must be applied to any Loss resulting from the Art Institute action, without regard to how many individual Insureds or Insured Persons are involved in that action.
e. Whether Defense Expenses are Subject to the $5 Million Limit of Liability
The Art Institute asserts that there is a genuine issue of material fact as to whether Defense Expenses are subject to the $5 million limit of liability. The Art Institute's Response at 12-13. The Art Institute boldly concludes that "[a]lthough the Policy states that Defense Expenses are to be subtracted from the $5 million cap in determining the amount available for indemnity, it does not state that Defense Expenses that exceed $5 million are not reimbursable." In fact, the Policy makes it quite clear that Defense Expenses in excess of $5 million are not reimbursable.
Defense Expenses are defined as "reasonable legal fees and expenses incurred by or on behalf of any Insured in the defense or appeal of any Claim Policy, General Terms and Conditions (A)(3).
First, the introductory paragraph of both the Declarations section and the General Terms and Conditions section of the Policy states in block letters:
THE LIMIT OF LIABILITY AVAILABLE TO PAY DAMAGES OR SETTLEMENTS UNDER THIS POLICY WILL BE REDUCED BY THE PAYMENT OF "DEFENSE EXPENSES," AND "DEFENSE EXPENSES" WILL BE APPLIED AGAINST THE RETENTION.See Policy, Declarations at 1; Policy, General Terms and Conditions at 1. Second, the Policy's definition of Loss includes Defense Expenses. Policy, General Terms and Conditions (A)(7) ("`Loss' means damages, judgments, awards, settlements and Defense Expenses.") (emphasis added). Third, the unambiguous intent of the parties to include Defense Expenses within "Loss" is emphasized in the limit of liability provisions. Item 3(c) of the Declarations provides that $5 million is the "Coverage Part maximum aggregate limit of liability ( inclusive of Defense Expenses). . . ." Policy, Declarations, Item 3(c) (emphasis added). The General Terms and Conditions state that the maximum aggregate limit of liability for each Coverage Part given in Item 3 "shall be the maximum aggregate limit of liability of the Underwriter under such Coverage Part for all Loss, including Defense Expenses. . . ." Policy, General Terms and Conditions (C)(1) (emphasis added). And, finally, to make sure that there is no question of whether Defense Expenses are to be capped by the $5 million limit of liability, the General Terms and Conditions further provide:
Defense Expenses will be part of and not in addition to the Underwriter's limit of liability, and payment of Defense Expenses by the Underwriter will reduce and may exhaust its limit of liability.
Policy, General Terms and Conditions (C)(2) (emphasis added). Therefore, under the only reasonable interpretation of the Policy, Defense Expenses are to be subtracted from the $5 million limit of liability, and Defense Expenses that exceed $5 million are not reimbursable.
f. Allocation of Proceeds
Finally, the Art Institute contends that there is also a fact issue regarding allocation of the Policy. The Art Institute's Response at 13. This argument is apparently directed at the first declaration Executive Risk seeks in its summary judgment motion — that Executive Risk is authorized to advance Defense Expenses to Integral Equity, Integral Offshore, and Seghers in connection with the Art Institute action. See Amended Complaint ¶ 38. Because Executive Risk has not proposed specific monetary amounts that it seeks to advance to each Art Institute action defendant, the Art Institute argues that there is a question of fact as to what these amounts should be. The Art Institute's Response at 13 ("Because [Executive Risk] has failed to state its position on the allocation of Defense Expenses — other than to request a declaration that it may advance some unidentified portion — there is an inherent question of fact regarding allocation of the Policy."). However, Executive Risk is not seeking a declaration as to what specific amounts it should be allowed to advance to Integral Equity, Integral Offshore, or Seghers; it is only seeking a declaration that it is, in fact, authorized to advance Defense Expenses. See Amended Complaint ¶¶ 35-36, 38; Summary Judgment Motion at 10-12; Reply Brief at 17. Furthermore, the Policy provides that the allocation of Defense Expenses is to be determined by the Underwriter, the Insured, and the Insured Persons. Policy, General Terms and Conditions (D)(5). Under the Policy, therefore, this court clearly has no part in such a determination. It is true that the specific amounts to be advanced to each insured has not yet been determined — in that sense, there is a question of fact as to those amounts — but that question is not one that this court can answer for the parties, and it will not preclude summary judgment.Having determined that there are no genuine issues of material fact precluding summary judgment, the court next turns to the declaratory relief sought by Executive Risk in its complaint and summary judgment motion.
3. Specific Declaratory Relief Sought by Executive Risk
As stated earlier, Executive Risk seeks, in its complaint and summary judgment motion, four declarations from this court: first, that Executive Risk is authorized to advance Defense Expenses to Integral Equity, Integral Offshore, and Seghers in connection with the Art Institute action; second, that the Art Institute action is a single Claim under the Policy, to which a single $5 million limit of liability applies; third, that any Defense Expenses advanced by Executive Risk will deplete that $5 million limit of liability; and fourth, that the advancement of Defense Expenses to Integral Equity, Integral Hedging, and Seghers is consistent with the Receivership Order and applicable law. Amended Complaint ¶ 38. The court will discuss each of these requested declarations in turn.
a. Executive Risk is Authorized to Advance Defense Expenses Under the Policy
The Policy not only authorizes Executive Risk, as the Underwriter, to pay the Defense Expenses covered by the Policy, but it also provides a procedure to determine how those expenses should be advanced. The Policy first sets out Executive Risk's duty to pay covered Defense Expenses: ". . . the Underwriter will, upon written request, pay on a current basis Defense Expenses for which this Policy provides coverage." Policy, General Terms and Conditions (D)(3). If both covered and uncovered Loss(es) are incurred, the Policy recites that, first, "the Insured and the Underwriter agree to use their best efforts to determine a fair and proper allocation of all such amounts." Policy, General Terms and Conditions (D)(5). If, however, the parties are not able to determine an allocation, the Policy provides that "the Underwriter shall [then] be obligated to make an interim payment of the amount of Loss, including Defense Expenses, which the parties agree is not in dispute until a final amount is agreed upon or determined pursuant to the provisions of th[e] Policy and applicable law." Id. In addition, the Policy allows Executive Risk — "[a]s a condition of any payment of Defense Expenses" — to "require a written undertaking on terms and conditions satisfactory to [Executive Risk] guaranteeing the repayment of any Defense Expenses paid to or on behalf of any Insured if it is finally determined that Loss incurred by such Insured would not be covered." Policy, General Terms and Conditions (D)(4). Executive Risk is, therefore, authorized to advance Defense Expenses, in accordance with the terms of the Policy, to the Insured and Insured Persons involved in the Art Institute action.b. The Art Institute Action is Treated as a Single Claim Under the Policy
As discussed earlier in this order, the Art Institute action consists of twelve Related Claims rather than one single Claim under the only reasonable interpretation of the Policy. See supra ¶¶ IIC.2.b., IIC.2.c. Although this is a different interpretation than that offered by the Art Institute (twelve Claims treated as one Claim, as opposed to simply one Claim), the effect is the same. The twelve Related Claims are treated as one Claim under the Policy terms, and a single $5 million limit of liability applies to the Art Institute action as a whole. Therefore, although the Art Institute action consists of more than one Claim, the entire action must be treated as one Claim under the Policy.
c. Defense Expenses Will Deplete the $5 Million Limit of Liability
As discussed earlier in this order, the Policy is quite clear on this point. See supra ¶ IIC.2.e. Under the terms of the Policy, Defense Expenses are to be subtracted from the $5 million limit of liability, and Defense Expenses that exceed $5 million are not reimbursable. In other words, Defense Expenses will deplete the $5 million limit of liability available for all of the Related Claims in the Art Institute action.
d. Advancement of Defense Expenses Is Consistent With the Receivership Order and Applicable Law
The issue at the heart of this last declaration is this: whether proceeds of a liability insurance policy that covers two groups of coinsureds — one group in receivership, and one not — may be distributed to the insureds that are not in receivership without violating receivership law. The parties' briefs did not discuss — and this court's research could not find — any cases that addressed this issue in the specific context of a receivership. However, there is clear Fifth Circuit precedent on a closely related issue — the treatment of liability insurance proceeds in the context of bankruptcy.The rule consistently applied by the Fifth Circuit in that context is this: whether, in the absence of the bankruptcy, the proceeds of the policy would belong to the debtor once the insurer pays a claim. See, e.g., In re Equinox Oil Company, Inc., 300 F.3d 614, 618-19 (5th Cir. 2002) (holding that the proceeds from an oil company-debtor's well-control insurance policy were property of the bankruptcy estate because the policy provided coverage for the losses of the bankrupt company through payment to the bankrupt company itself in that (1) the policy named the debtor-company as the assured, and (2) the underwriter agreed "to reimburse the Assured" under the policy for expenses incurred in relation to well blowouts); Matter of Vitek, Inc., 51 F.3d 530, 533-36 (5th Cir. 1995) (reversing on other grounds the district court's order to extend injunctive relief to protect non-bankrupt coinsureds of a bankrupt company while noting that the Fifth Circuit has not yet addressed the issue of how to distribute liability insurance proceeds when one of two or more coinsureds seeks bankruptcy protection); Matter of Edgeworth, 993 F.2d 51, 55-56 (5th Cir. 1993) (finding that a doctor-debtor's bankruptcy estate had no cognizable interest in the proceeds of a medical malpractice liability insurance policy as those proceeds "could not be made available for distribution to the creditors other than victims of medical malpractice and their relatives"); In re Louisiana World Exposition, Inc., 832 F.2d 1391, 1400 (5th Cir. 1987) (holding that directors' and officers' liability insurance policy proceeds belonged to the directors and officers of the company, and were not part of the bankrupt company's estate); see also Landry v. Exxon Pipeline Company, 260 B.R. 769, 786 (Bankr. M.D. La. 2001) ("In the liability insurance context the debtor has no cognizable claim to the proceeds paid by an insurer on account of a covered claim. . . . The insured debtor cannot ask the insurance company to pay him, or determine on its own how the proceeds of the policy should be distributed, nor can any creditor of the insured seize the proceeds in satisfaction of a claim not falling within the terms of the insurance contract."). By way of illustration, the Fifth Circuit in Matter of Edgeworth noted that:
Examples of insurance policies whose proceeds are property of the estate include casualty, collision, life, and fire insurance policies in which the debtor is a beneficiary. Proceeds of such insurance policies, if made payable to the debtor rather than a third party such as a creditor, are property of the estate. . . . But under the typical liability policy, the debtor will not have a cognizable interest in the proceeds of the policy. Those proceeds will normally be payable only for the benefit of those harmed by the debtor under the terms of the insurance contract.993 F.2d at 56.
The Policy at issue in this case clearly states that there is no coverage for "salaries, wages, fees, overhead or benefit expenses of [any Insured's] directors, officers or employees," nor is there coverage for "salaries or compensation of any partner, principal, director, trustee, officer or employee of an Insured." Policy, General Terms and Conditions (A)(3), (A)(7). There is only coverage for "reasonable legal fees and expenses incurred . . . in the defense or appeal of any Claim" and for "damages, judgments, awards, settlements and Defense Expenses which an Insured is legally obligated to pay as a result of a Claim." Policy, General Terms and Conditions (A)(3), (A)(7) (emphasis added). In other words, any proceeds from the Policy — whether they are first paid to the Insured or not — are owed not to the Insured but to successful third-party claimants against the Insured, as well as to the Insured's attorneys defending against those claims. Like the doctor-debtor in Matter of Edgeworth, the individual Insured Entities — including Integral Hedging and Integral Arbitrage, the two Insured Entities which are currently in receivership — have no cognizable interest, in and of themselves, in the proceeds of the Executive Risk policy. See Matter of Edgeworth, 993 F.2d at 56. Therefore, payment by Executive Risk of the Defense Expenses and any subsequent additional Loss from a settlement or judgment in the Art Institute action will not violate the Receivership Order or applicable law.
IV. CONCLUSION
The court has determined that the Policy is not ambiguous as a matter of law. Therefore, parol evidence cannot be considered by the court in its determination of this declaratory judgment action. Jackson's motion for continuance is DENIED.
For the reasons discussed above, Executive Risk's motion for summary judgment is GRANTED. The motion of defendants Integral Equity, Integral Offshore, and Seghers for expedited consideration of the summary judgment motion is DENIED as moot.
Within ten days of this date, counsel for Executive Risk shall submit a proposed form of judgment conforming to this memorandum order.