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FIRST INVESTORS CORP. v. LIBERTY MUT. INS. CO.

February 28, 1997

FIRST INVESTORS CORPORATION, FIRST INVESTORS MANAGEMENT COMPANY, INC., FIRST INVESTORS CONSOLIDATED CORPORATION, FIRST INVESTORS FUND FOR INCOME, INC., and FIRST INVESTORS HIGH YIELD FUND, INC., plaintiffs, against LIBERTY MUTUAL INSURANCE COMPANY, Defendant.


The opinion of the court was delivered by: DUFFY

 KEVIN THOMAS DUFFY, U.S.D.J.:

 Plaintiffs (collectively, "First Investors") initiated this litigation seeking insurance coverage from Defendant ("Liberty Mutual") for various securities fraud claims asserted against First Investors regarding its sale of mutual funds and related products. Pending before this Court are three motions -- First Investors' partial summary judgment motion on Liberty Mutual's duty to defend; Liberty Mutual's partial summary judgment motion concerning First Investors' demand for attorneys fees and First Investors' fourth cause of action for breach of the duty of good faith and fair dealing; and Liberty Mutual's objections to the Orders of U.S. Magistrate Judge Nina Gershon, dated June 6, 1996, and June 12, 1996. For the following reasons, First Investors' partial summary judgment motion regarding Liberty Mutual's duty to defend is denied, rendering any review of the other two motions moot.

 I.

 From July 1, 1987, through July 1, 1993, Liberty Mutual provided First Investors with Comprehensive General Liability ("CGL") and Umbrella Excess Liability ("Umbrella") policies. The insuring clause in the CGL policies, after inserting a New York modification, states that Liberty mutual must:

 
pay those sums that . . . [First Investors] becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance policy applies. . . . This insurance applies only to "bodily injury" and "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence". . . . [Liberty Mutual] will have the right and duty to defend any "suit" seeking those damages even if the allegations of the suit are groundless, false or fraudulent.

 The CGL policies define "bodily injury" as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time" and "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

 The Umbrella policies, broader in coverage than the CGL policies, provide protection for "bodily injury; property damage; personal injury; or advertising injury liability." "Personal injury" is defined as "injury to the feelings or reputation of a natural person." Further, the Umbrella policies contain a Banks and Financial Institutions Endorsement, which provides in part that:

 
This policy does not apply to bodily injury, property damage, personal injury or advertising liability arising out of:
 
...
 
3. The loss, depreciation in value, or damage to any real or personal property, including, but not limited to, money, securities, negotiable instruments or contracts representing money, held by or in the care, custody or control of the insured.
 
4. Errors or omissions committed or alleged to have been committed by or on behalf of the insured in the conduct of the insured's business activities as a Bank or Financial Institution.

 Beginning in 1990, First Investors was named as a defendant in suits filed by individual plaintiffs alleging that First Investors negligently, recklessly or otherwise fraudulently sold mutual funds. The instant case was commenced by First Investors due to Liberty Mutual's refusal to defend and indemnify under the insurance policies. First Investors allegedly marketed mutual funds, apparently specializing in junk bond securities, to retirees with fixed incomes and to residents of nursing homes. (Potashner Aff. in Opp'n at 2.) After sustaining economic losses, twelve separate actions were brought against First Investors ("Underlying Actions") seeking recovery for various injuries, for which First Investors has incurred substantial defense costs.

 Liberty Mutual agreed to fund the settlement of two of the twelve actions -- the Hanley and Barbosa claims, which are the focus of Liberty Mutual's counterclaims. (See Am. Answer and Countercl. PP 107-43). On February 3, 1994, First Investors and Liberty Mutual entered into an agreement, whereby the parties memorialized that "the settlement of the [two] lawsuits shall not be considered an admission of any nature by Liberty Mutual . . . and payment of the [settlement] shall not be admitted into evidence in any proceeding regarding the applicability of insurance coverage." Because Liberty Mutual raises the improper conduct of one of its agents as a reason for entering into the settlement agreement and First Investors ...


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