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Executive Risk Indemnity, Inc. v. Jones

February 20, 2009


(City & County of San Francisco Super. Ct. No. CGC-05-444352). Trial Judge: Hon. Mary E. Wiss.

The opinion of the court was delivered by: Ruvolo, P.J.



Respondent Executive Risk Indemnity, Inc. (ERII) issued a $10 million insurance policy to STARS Holding Company, Inc. (STARS, formerly known as myCFO, Inc.), providing coverage for claims arising from investment advice and financial planning services. Appellant Reese M. Jones (Jones), a former client of STARS, brought an arbitration proceeding against STARS to recover damages for faulty investment and financial planning advice STARS gave him. From the start, ERII was aware of Jones's claim, and was repeatedly requested and encouraged to participate in the proceedings. ERII refused to do so, resting on the fact that its policy did not promise STARS a defense, only reimbursement of defense costs subject to a $250,000 retention. STARS was insolvent, a fact known to ERII, and was unable to mount a defense in the proceedings. Jones ultimately received an arbitration award against STARS for over $22 million following an uncontested hearing, which was judicially confirmed. ERII refused to pay any portion of the judgment, instead, bringing this coverage action claiming that it had no obligations under the policy issued to its insured STARS.

This appeal arises out of the ensuing coverage action between Jones-to whom STARS assigned its rights under the insurance policy-and ERII. We focus on the pivotal issue of whether the arbitration award and resulting judgment obtained by Jones constitute a "Loss," for the purposes of the insurance policy ERII issued to STARS. The policy obligates ERII to pay for a "Loss" occasioned by a wrongful act which the insured becomes "legally obligated to pay," subject to the applicable terms and conditions of its policy.*fn1 The trial court concluded the arbitration award and judgment could not be considered to be a "Loss," even though STARS, the insured, was legally obligated to pay the amount, because ERII had not been a party to the arbitration proceeding nor was it in privity with any party to that proceeding. Therefore, the court concluded that under principles of collateral estoppel "ERII is not bound by the result obtained in the prior arbitration between Jones and S[TARS]."

The court then reopened the issues of STARS's liability and Jones's damages for an entirely new trial, in which evidence of the arbitration award and confirming judgment that Jones had previously obtained against STARS were ruled inadmissible. After an abbreviated court trial, the court found that ERII had no obligation to STARS under the policy based on its conclusion that "there is no showing that S[TARS] is liable to Jones or that S[TARS] caused resulting damage to Jones." Jones appeals, claiming the court erred in holding that any determination of ERII's coverage obligations under the policy should include, in addition to the factual questions affecting coverage defenses, a complete retrial of the issues of STARS's liability to Jones for the faulty investment advice and the extent of Jones's damages.*fn2

We reverse, finding the trial court erred in its application of the collateral estoppel doctrine. Under the facts of this case, ERII was bound by the results of the arbitration proceeding between its insured, STARS, and the injured party, Jones. Consequently, ERII cannot contest the validity of STARS's liability to Jones or the amount of damages as established by the judgment. Therefore, the court erred in precluding Jones, as STARS's assignee, from utilizing the arbitration award and judgment as a basis for recovering under the terms of the policy and requiring Jones to prove for a second time that STARS was liable for faulty investment advice that caused Jones's financial loss.


ERII issued a Global Financial Services/Investment Company Professional and Management Liability Policy to STARS, effective April 1, 2002, to April 1, 2003, with a $10 million limit of liability (the policy). STARS paid ERII a $280,000 premium for the policy, plus an additional $420,000 for an extended coverage period.

On March 12, 2003, Jones initiated an arbitration with the American Arbitration Association (AAA) against his investment advisor, STARS, for the faulty investment advice it provided him. At the time of the arbitration demand, STARS had already declared itself insolvent and had assigned its assets for the benefit of creditors to Sherwood Partners, Inc. (Sherwood).*fn3 As assignee for the benefit of creditors, Sherwood tendered Jones's arbitration demand to ERII on March 23, 2004. ERII accepted the tender subject to a reservation of rights, but denied that it had a duty to defend STARS. ERII's position was based on the policy language which expressly disclaimed a duty to defend, but provided that, after satisfaction of the $250,000 retention, ERII was obligated to pay the insured's defense expenses on a current basis.*fn4

ERII claimed that, until its receipt of the $250,000 retention, it had no obligation to make any payment towards the defense of the underlying action. On a number of occasions thereafter, Sherwood informed ERII of STARS's insolvency and requested that ERII defend against Jones's claim, pointing out that STARS lacked funds to defend itself.

On May 16, 2005, the arbitration hearing was held before the Honorable Richard A. Hodge (Ret.). Although neither STARS nor ERII appeared at the arbitration, it was not a default proceeding. Rather, the arbitrator accepted evidence, admitted documents, and received testimony from witnesses.

On July 5, 2005, the arbitrator issued a written decision finding STARS liable and awarding Jones $22,618,481.78 in damages, plus 10 percent post-award interest (the award). On July 13, 2005, Jones served the "Notice of Award of Arbitrator" on ERII. Two weeks later, having received no response from ERII to the notice of award, Jones filed and served on ERII a petition in San Francisco County Superior Court to confirm the award.

On August 25, 2005, the Honorable James L. Warren of the San Francisco County Superior Court granted Jones's motion to confirm the award and entered judgment against STARS in the amount of $22,934,520.84 plus 10 percent post-award interest (the judgment). Although given notice, neither STARS nor ERII appeared or opposed the motion to confirm the award.

On August 24, 2005, the day before entry of the judgment, ERII brought a declaratory action against Jones, Sherwood, and STARS, seeking a determination of coverage under the policy for loss in connection with the underlying litigation against STARS. In its complaint, ERII sought a declaration, among other things, that the award and judgment against STARS did not bind ERII under principles of collateral estoppel. In response, Jones cross-complained against ERII, seeking, among other things, a determination of "the rights and duties of the parties under the policy, and the extent to which amounts are owed therein . . . ."*fn5

After Jones's cross-complaint was filed, STARS, acting through Sherwood, assigned to Jones "[a]ny and all rights, Claims, causes of action and/or choses of action arising from or related to [ERII's] failure to defend, pay policy benefits or indemnify" under the policy or in connection with the award and judgment. Thus, in this case Jones asserts not only whatever claims inured to him as a ...

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