UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
April 13, 1998
MORGAN STANLEY GROUP, INC., and MORGAN STANLEY & CO., INCORPORATED, Plaintiffs, against NEW ENGLAND INSURANCE CO. and ITT NEW ENGLAND MANAGEMENT CO., INC., Defendants.
The opinion of the court was delivered by: STEIN
SIDNEY H. STEIN, U.S. District Judge.
This action stems from events beginning in 1985, when Morgan Stanley Mortgage Capital, an affiliate of plaintiffs Morgan Stanley Group, Inc., and Morgan Stanley & Co., Inc. (collectively, "Morgan Stanley"), was involved in the sale and purchase of participation interests in a $ 56 million loan from Siscorp, an Oklahoma corporation, to Fourth and Broadway Associates Ltd., made for the acquisition and renovation of a ten-story department store building in downtown Los Angeles. Morgan Stanley's role in the transaction is disputed. Morgan Stanley was previously sued by two banks which purchased participation interests in the loan, Whitestone Savings and The Banking Center; both actions settled prior to trial. Plaintiffs brought this action seeking insurance coverage pursuant to an Investment Counselors' Errors and Omissions and Fiduciary Liability insurance policy it purchased from defendant New England Insurance Co. Plaintiffs allege that defendant ITT New England Insurance Management Co., Inc., is the successor in interest to New England Insurance Co.
The parties have cross-moved for summary judgment. The crux of their dispute is whether the claims made against plaintiffs for their actions in connection with the Siscorp transaction are covered by the investment counselors' insurance policy issued by defendants.
Defendants also, in the alternative, seek an order declaring that plaintiffs' claims for coverage were made in 1986, and are covered, if at all, by policy FW000186; plaintiffs cross-move for an order declaring that the policy covering the period March 5, 1987 to March 5, 1988, policy FW000262, applies to their claims. These two policies both contain the same provision for investment counselors' coverage.
The policies provide, inter alia, that the insurer, New England Insurance Co., agrees to pay "loss which the Insured shall become legally obligated to pay, from any claim made against the Insured during the Policy Period, by reason of any actual or alleged negligent act, error or omission committed in the scope of the Insured's duties as investment counselors." (Compl., Exh. A; Exh. 3 in Support of Defendants' Motion for Summary Judgment). The term "investment counselors" is undefined in the policies.
I. The Cross-Motions for Summary Judgment
"Summary judgment may be granted only when the moving party demonstrates that 'there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (quoting Fed. R. Civ. P. 56(c)).
In Uniroyal v. Home Ins. Co., 707 F. Supp. 1368 (E.D.N.Y. 1988), Judge Jack Weinstein provided a step-by-step analysis of the interpretation of insurance contracts at the summary judgment stage. First, as with any other contract, "if the policy is unambiguous, its interpretation is strictly a question of law for the court" and summary judgment is proper. Id. at 1374; see also Brass v. American Film Technologies, Inc., 987 F.2d 142, 148-49 (2d Cir. 1993). Whether a contract is ambiguous is a question of law for the Court. Brass, 987 F.2d at 149.
If the policy is ambiguous, "the court should afford the parties an opportunity to adduce extrinsic evidence as to their intent." Uniroyal, 707 F. Supp. at 1374. The opportunity to produce extrinsic evidence "might result in three outcomes relevant under New York law: extrinsic evidence offered that raises a question of credibility or presents a choice among reasonable inferences; extrinsic evidence offered that fails to raise credibility or present such a choice; or no extrinsic evidence offered. New York law requires submission to the factfinder in the first situation, but a construction by the court as a matter of law in the second and third situations." Id.
A. Defendants' Motion
Defendants seek summary judgment on the grounds that plaintiffs' actions in the underlying transaction, as a matter of law, are not covered by the policies they issued. Defendants contend that the term "investment counselors" was meant to refer to Morgan Stanley's role in providing services pursuant to a contract and for a fee, and that the term cannot reasonably encompass Morgan Stanley's role in the Siscorp transactions because plaintiffs judicially admitted in the prior litigation that they acted solely as brokers in the Siscorp transactions.
Defendants' motion for summary judgment is denied on the grounds that even if, as defendants contend, plaintiffs have judicially admitted that they acted solely as brokers in the Siscorp loan transactions, the policies could arguably still cover plaintiffs' claims since by their terms, the policies refer to "any claim made against the Insured during the Policy Period, by reason of any actual or alleged negligent act, error or omission committed in the scope of the Insured's duties as investment counselors." (Compl., Exh. A; Exh. 3 in Support of Defendants' Motion for Summary Judgment) (emphasis added). Defendants do not contend that plaintiffs have judicially admitted that the claims made against them by Whitestone and The Banking Center do not constitute allegations of negligence committed by Morgan Stanley in the capacity of investment counselor.
B. Plaintiffs' Motion
Plaintiffs, in support of their cross-motion for summary judgment, contend that the policy language unambiguously covers the allegations in the Whitestone and The Banking Center cases, since both banks "claimed, with substantial factual support, that Morgan Stanley advised them to purchase an investment that went bad." (Plaintiffs' Mem. in Support of Their Motion for Summary Judgment, at 26).
In the alternative, Morgan Stanley maintains that if the Court should find the term "investment counselors" to be ambiguous, the term should be construed against the drafter, New England Insurance Co., and interpreted broadly, as urged by Morgan Stanley.
Plaintiffs' motion for summary judgment is also denied. The term "investment counselors" is undefined in the policies and is susceptible of at least the two interpretations offered by the parties. As noted above, the policy covers actual or alleged acts, errors, or omissions "committed in the scope of the Insured's duties as investment counselors." (Compl., Exh A; Exh. 3 in Support of Defendants' Motion for Summary Judgment). On the one hand, since the term "investment counselors" refers to a role, it would seem to imply that the policy covers actions taken in the course of such a role, as opposed to isolated instances of investment counseling. On the other hand, it is conceivable that "the Insured's duties as investment counselors" might arise in the context of roles or relationships which do not primarily consist of investment counseling.
Both parties have submitted extrinsic evidence. Defendants have submitted evidence that plaintiffs purchased the policy because it was required by a contract for the provision of investment management services to the Central States Pension Fund, which suggests that the "investment counselors'" policy may have been meant to refer to counseling services performed in the course of investment management services. (Defendants' Reply Mem. in Support of their Motion for Summary Judgment, at 9-10; Exh. 5 in Support of Defendants' Motion for Summary Judgment).
Plaintiffs, however, have submitted evidence that Albert Salvatico, a Vice-President at Marsh & McLennan, the broker, wrote to Morgan Stanley that "the term 'investment counseling' is undefined . . . and this is done with the purpose of allowing the policy to be as flexible as possible especially when one considers the wide array of different advisory services that a firm as large as Morgan Stanley can provide. P As a practical observation, the only limitations that exist are defined within the context of the policy exclusions . . ." (Affidavit of Nancy B. Ludmerer, Exh. 16B). Further, Salvatico submitted in an affidavit that although he did not recall "specific communications with representatives of New England Insurance Co.," he is "confident that [he] would not have made these statements if they were inconsistent with such communications." (Ludmerer Aff., Exh. 16, P 4).
The extrinsic evidence submitted by the parties, including but not limited to that described above, "presents a choice among reasonable inferences" and precludes granting summary judgment in plaintiffs' favor. See Uniroyal, 707 F. Supp. at 1374. This Court declines to apply the contra proferentem doctrine to resolve the ambiguity presented by the insurance policies themselves and the extrinsic evidence of the parties' intent. The traditional justification for the rule -- that it affords a measure of protection for unsophisticated or unrepresented insureds from the harsh consequences of adhesion contracts -- is lacking here. See United States Fire Ins. Co. v. General & Reinsurance Corp., 949 F.2d 569, 574 (2d Cir. 1991).
Plaintiffs' motion is denied.
II. The cross-motions for orders regarding the applicable policy
Defendants seek an order that the Whitestone and The Banking Center claims are deemed to have been made in 1986, and thus are covered, if at all, by policy number FW000186. Plaintiffs cross-move for an order that policy number FW000262, the policy for the following year, applies. Both policies, as noted above, cover "loss which the Insured shall become legally obligated to pay, from any claim made against the Insured during the Policy Period..." (Compl., Exh. A; Exh. 3 in Support of Defendants' Motion for Summary Judgment). Both policies also provide that
the Insured shall, as a condition precedent to any right to coverage under this Insurance, give to the Company immediate notice in writing (a) of any claim made against them during the Policy Period; (b) of any circumstances which may subsequently give rise to a claim for which coverage is provided hereunder. If any claim for which coverage is provided hereunder is subsequently made against the Insured arising out of the circumstances reported under this subdivision (b), it shall be deemed to have been made during the Policy Period.
(Compl., Exh. A; Exh. 3 in Support of Defendants' Motion for Summary Judgment, at 4). It is undisputed that the actions by Whitestone and The Banking Center against Morgan Stanley were commenced in 1987, and that defendants were notified of these claims in 1987, during the FW000262 policy period. (Defendants' Mem. in Support of their Motion for Summary Judgment, at 38, 42).
Defendants' motion for a declaration that FW000186 is the applicable policy, and that FW000262 is inapplicable, is denied. Policy FW000186 does provide that if the insured notifies the insurer of "any circumstances which may subsequently give rise to a claim," such a claim will be deemed to have been made during the policy period for policy FW000186. Even if defendants are correct that plaintiffs gave notice, during the 1986 policy period, of the circumstances which gave rise to the 1987 actions by Whitestone and The Banking Center, it cannot be said as a matter of law that policy FW000186 applies, and that a subsequent policy (FW000262), which on its face clearly provides for coverage of "any claim made . . . during the Policy Period," does not.
Plaintiffs' motion for an order declaring that FW000262 applies to its claim is granted. Policy FW000262 unambiguously provides that it covers "loss which the Insured shall become legally obligated to pay, from any claim made against the Insured during the Policy Period. . ." As noted above, it is undisputed that the Whitestone and The Banking Center actions against Morgan Stanley were brought during the FW000262 policy period, and that defendants were notified of these claims during that policy period. The fact that a provision in a prior policy may provide for coverage when the circumstances giving rise to a claim were brought to the insurer's attention during that prior policy period does not alter the plain language of policy FW000262.
Wherefore, it is hereby ordered that plaintiffs' motion for summary judgment is denied; defendants' motion for summary judgment is denied; defendants' motion for a declaration that policy FW000186 applies to plaintiffs' claim and FW000262 does not apply is denied; and plaintiffs' motion for a declaration that policy FW000262 is the applicable policy is granted.
Dated: New York, New York
April 13, 1998
Sidney H. Stein, U.S.D.J.