United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY
Dennis Saylor IV United States District Judge
an insurance coverage dispute, essentially involving whether
an insurer was obligated to defend an investment fund accused
of mismanagement and self-dealing.
Advisors Funds was, apparently, an investment advisor. It
purchased a Business and Management Indemnity Policy from
plaintiff Scottsdale Insurance Company. Defendants Timothy
Byrne and Robert Bolton are co-chairs of the Board of
Trustees for the Plumbers and Pipefitters Local 51 Pension
and Annuity Funds (the “Pension Funds”).
Pension Funds invested in WARF Realty Fund I, LLC
(“WARF”), an investment fund of Wellesley
Advisors. WARF mismanaged the investments and engaged in
self-dealing, precipitating a law suit alleging negligence
and an ERISA violation. Scottsdale declined to defend WARF,
citing various coverage exclusions. WARF subsequently went
into receivership and did not defend the suit; the court
eventually entered a default judgment against it for
approximately $5 million.
Pension Funds then requested that Scottsdale pay the judgment
(at least up to the coverage limit) pursuant to the insurance
policy it had issued to Wellesley Advisors, which Scottsdale
declined to do. Scottsdale now seeks a declaratory judgment
stating that it had no duty to defend or indemnify WARF, and
the Pension Funds have counterclaimed for the amount of the
default judgment. The parties have cross-moved for summary
dispute principally concerns three exclusions under the
policy, which govern the scope of Scottsdale's duties.
For the following reasons, the Court finds that coverage was
not clearly excluded, and Scottsdale had a duty to defend.
Accordingly, plaintiff's motion for summary judgment will
be denied, and defendants' motion for partial summary
judgment will be granted.
following facts are as set forth in the record and appear to
Advisors Funds was, apparently, an investment adviser located
in Massachusetts. Wellesley Advisors created a real-estate
investment fund called Wellesley Advisors Realty Fund I, LLC
(“WARF”), which was organized as a limited
liability company. (Kessler Aff. Ex. A ¶ 11).
7, 2005, the Board of Trustees of the Pension Funds approved
a $5 million investment in WARF. (Id. ¶ 13).
WARF used the funds to invest in real property in
Massachusetts and Rhode Island. (Id. ¶ 14). One
such investment was “Stone House, ” a hotel
resort property in Little Compton, Rhode Island.
(Id. ¶ 15). WARF improperly collected the
hotel's revenues as management fees and failed to make
necessary mortgage payments on the property. (Id.
¶ 20). In February 2014, the successor-in-interest to
the bank holding the mortgage filed suit in the Rhode Island
Superior Court to recover $5.6 million in damages.
(Id.). It appears that WARF had also failed to make
tax payments on various property investments. (Id.
¶ 22). Because of WARF's mismanagement, Realty Fund
I failed, and the Pension Funds lost the entirety of their $5
million investment. (Id.).
2013, Scottsdale Insurance Company had issued a Business and
Management Indemnity Policy to Wellesley Advisors Funds.
(Zartman Aff. Ex. A at 1). The policy was effective from
November 15, 2013, to November 15, 2014, and had a coverage
limit of $3 million. (Id.). On November 6, 2014, the
parties entered into Endorsement No. 26, which extended the
policy's effective period one month to December 15, 2014.
(Id. at 50).
policy provided coverage for certain losses that Wellesley
Advisors or other “Insureds” were obligated to
Under the section titled “Management Insureds and
Company Coverage, ” subsection (F), titled
“Settlement and Defense, ” states as follows:
It shall be the duty of the Insurer and not the duty of the
Insureds to defend any Claim. Such duty shall exist even if
any of the allegations are groundless, false or fraudulent.
The insurer's duty to defend any Claim shall cease when
the Limits of Liability have been exhausted by the payment of
Loss including Costs, Charges, and Expenses.
(Id. at 18). The term “Claim” is defined
in subsection B(1)(b) as encompassing “[a] civil
proceeding against any Insured seeking monetary damages or
nonmonetary or injunctive relief, commenced by the service of
a complaint or similar pleading. (Id. at 10). The
term “Loss” is defined in subsection (B)(8) as
including “damages, judgments, settlements,
pre-judgment or post-judgment interest awarded by a court,
and Costs, Charges and Expenses incurred by [WARF or other
Insureds] . . . .” (Id. at 11).
(C)(1), titled “Exclusions Applicable to All Insuring
Clauses, ” states that Scottsdale shall not be liable
for losses attributable to various causes. (Id. at
13). As relevant here, there are three potentially applicable
first is the “ERISA Exclusion.” Subsection
(C)(1)(d) provides that Scottsdale shall not be responsible
for covering losses attributable to:
[A]ny actual or alleged violation of the responsibilities,
obligations or duties imposed by [the] Employee Retirement
Income Security Act of 1974, as amended, or any rules or
regulations promulgated thereunder, or similar provisions of
any federal, state or local statutory or common law.
(Id. at 14).
second is the “Intentional Conduct Exclusion.”
Subsection (C)(1)(f) provides that Scottsdale shall not be
responsible for covering losses attributable to:
[A]ny dishonest, deliberately fraudulent or criminal act of
an Insured; provided, however this exclusion [ ] shall not
apply unless and until there is a final judgment against such
Insured as to such conduct; or
[T]he gaining of any profit, remuneration or financial
advantage to which any Management Insureds were not legally
entitled; provided, however this exclusion [ ] shall not
apply unless and until there is a final judgment ...