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M.D. SASS INVESTORS SERVS. v. RELIANCE INS. CO.

November 6, 1992

M.D. SASS INVESTORS SERVICES, INC., a corporation, and M.D. SASS ASSOCIATES, INC., a corporation, Plaintiffs,
v.
RELIANCE INSURANCE COMPANY OF ILLINOIS, a corporation, Defendants.



The opinion of the court was delivered by: SAMUEL CONTI

 I. INTRODUCTION

 Plaintiffs, M.D. Sass Investment Services, et al. ("Sass"), brought suit in this court against its liability insurer, defendant Reliance Insurance Company of Illinois ("Reliance"). Reliance has denied coverage under its policy and refused to defend Sass in a series of lawsuits (the "Underlying Lawsuits"). Sass is seeking declaratory relief obligating Reliance to defend and cover Sass in the Underlying Lawsuits. Sass is also seeking damages for breach of contract, bad faith, breach of fiduciary duty, fraud, and negligent misrepresentation.

 Sass now moves the court for partial summary judgment, asking for a declaration that Reliance is obligated to defend Sass in the Underlying Lawsuits. Reliance has filed a cross-motion for partial summary judgment on Sass's claims of bad faith, breach of fiduciary duty, fraud, and negligent misrepresentation. Sass also has filed a motion for leave to amend its complaint, and a motion to stay the proceedings on the coverage issue pending resolution of the Underlying Lawsuits.

 II. FACTS

 A. The Underlying Lawsuits

 Sass is a registered investment advisor under the Investment Advisors Act of 1940. Beginning in 1986, Sass began purchasing taxable municipal bonds (the "Bonds"), for several of its clients. These bonds were triple A rated at the time, and also were backed by guaranteed investment contracts issued by Executive Life Insurance Company ("Executive Life"). In April of 1991, however, the California Department of Insurance placed Executive Life into receivership, and the Bonds went into default soon thereafter.

 In October, 1991, Sass was sued by one of its pension fund clients, the Alameda County Employees' Retirement Association ("ACERA"). ACERA is seeking damages of approximately $ 17,000,000 for its losses on the Bonds. Four other pension fund clients have filed similar actions against Sass in other federal courts around the country. These actions make up the Underlying Lawsuits. *fn1" The Multidistrict Panel on Litigation has consolidated all of the Underlying Lawsuits, including the one by ACERA, for pretrial proceedings in the Eastern District of Louisiana.

 B. The Insurance Policy

 Sass brought this action against Reliance seeking, among other things, a declaration that it is covered under the terms of its Investment Advisors Liability Insurance Policy (the "Policy"). The Policy was issued on December 27, 1988, and was renewed for a one year term on December 27, 1989, and December 27, 1990. Under the Policy, Reliance agreed:

 To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages resulting from any claim(s) first made against the Insured during the Policy Period . . . for any Wrongful Act of the Insured or of any other person for whose actions the Insured is legally liable, but only if such Wrongful Act first occurs during or prior to the policy period.

 Reliance also agreed "to defend any claim made against the Insured seeking damages on account of a Wrongful Act, even if such claim is groundless, false, or fraudulent."

 The Policy also includes a "prior knowledge" exclusion clause. Exclusion E of the Policy provides that the policy does not apply "to any Wrongful Act committed prior to the beginning of the Policy Period, if on or before the inception date of this Policy the Insured knew or could have reasonably known that such Wrongful Act could lead to a claim." (Emphasis supplied.)

 C. Reliance's Denial of Coverage

 Reliance does not contend that the Underlying Lawsuits are not covered under the terms of the Policy. Instead, Reliance bases its denial of coverage on Exclusion E, stating that "the basis of such disclaimer here was that the Plaintiffs had knowledge of a wrongful act, or wrongful acts, prior to the inception of [the 1991] renewal policy, which might result in such claims being made against them." (Reliance's Answer to Sass's Complaint, P 43.) Reliance argues that its disclaimer was justified for two reasons: First, according to Reliance, Sass knew or should have known during late 1990 about Executive Life's financial difficulties and the Bonds' market decline. Second, in June, 1990, Sass received a letter from a client threatening to hold it responsible for any losses from the Bonds, *fn2" which Reliance claims put Sass on notice of other possible claims.

 D. This Court's Previous Order Denying Summary Judgment

 On June 18, 1989, this court entered an Order re Summary Judgment (the "Order"). The court addressed cross-motions for summary judgment by Sass and Reliance on the issue of whether Reliance is liable to indemnify Sass under the Policy.

 The court construed, as a matter of law, the term "inception date" in Exclusion E as referring to the renewal date of the Policy and not to the date of the original Policy. Thus, the court concluded, "the Underlying factual issue on which Reliance's liability for coverage depends is whether Sass knew or could reasonably have known of Wrongful Acts prior to December 27, 1990." (Order, at 16). The court stated that "the answer to this question is one of fact which must be reserved for the trier of fact." The court held that:

 When the evidence is viewed in the light most favorable to Sass, a reasonable fact finder could conclude that Sass could not have reasonably known of Wrongful Acts, and Reliance would consequently be liable for coverage under the Policy . . .

 When viewed the opposite way, a fact finder could easily conclude that Sass was on sufficient notice of potential claims against it that coverage is properly disclaimed pursuant to Exclusion E.

 (Order, at 17.) The court therefore denied both motions for summary judgment.

 The court also addressed Sass's argument that Reliance was estopped from denying coverage. Sass based its estoppel theory on alleged representations by Reliance in its renewal application that Sass need not disclose certain prior wrongful acts, which then turned out to the basis for Reliance's disclaimer under Exclusion E. The court found, however, that:

 In this case . . . Reliance never made an affirmative representation that prior Wrongful Acts, of which Sass knew or could reasonably be expected to know, were covered. Certainly the renewal application made no such representation.

 (Order, at 14.) Accordingly, the court held that "the first element of estoppel, a material misrepresentation, is not proved." (Order, at 15.)

 E. The Motions Currently Before the Court

 Sass now moves for summary judgment on its claim for declaratory relief, seeking a declaration that Reliance has a duty to defend Sass in the Underlying Lawsuits pending the resolution of the coverage dispute. Reliance has filed a cross-motion seeking summary judgment on Sass's claims of bad faith, breach of fiduciary duty, fraud, and negligent ...


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