Cushman & Wakefield, Inc. v. Illinois National Insurance Company et al
Filing
354
Opinion and Order Signed by the Honorable Joan H. Lefkow on 4/20/2018: Cushman's motion for partial summary judgment (dkt. 221) is granted in part and denied in part, Illinois National's motion for partial summary judgment (dkt. 207) is granted in part and denied in part, ACE's motion for summary judgment (dkt. 210) is denied, Liberty's motion for summary judgment (dkt. 203) is denied, and RLI's motion for summary judgment (dkt. 220) is denied. The case will be called for status hearing on May 22 at 11:00 a.m. to set a date for trial. Before the status hearing, the parties are directed to discuss the possibility of settlement. Mailed notice(mad, )
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CUSHMAN & WAKEFIELD, INC.,
Plaintiff,
v.
ILLINOIS NATIONAL INSURANCE
COMPANY, ACE AMERICAN
INSURANCE COMPANY, LIBERTY
MUTUAL INSURANCE COMPANY, and
RLI INSURANCE COMPANY,
Defendants.
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Case No. 14 C 8725
Judge Joan H. Lefkow
OPINION AND ORDER
Cushman & Wakefield, Inc. (“Cushman”) filed a twelve-count complaint against Illinois
National Insurance Company (“Illinois National”), ACE American Insurance Company
(“ACE”), Liberty Mutual Insurance Company (“Liberty”), and RLI Insurance Company (“RLI”)
(collectively, “Defendants”) seeking a declaration of insurance coverage with respect to certain
underlying matters. 1 (Dkt. 1.) Cushman has also brought claims against Illinois National and
ACE for breach of contract and breach of the implied covenant of good faith and fair dealing,
some of which have been dismissed. 2 (Id.; dkt. 63.) Illinois National asserted twelve affirmative
1
The counts in the complaint include: count I, declaratory relief against Illinois National for
certain “underlying claims;” count II, declaratory relief against Illinois National for certain “other
claims;” count III, declaratory relief against ACE; count IV, declaratory relief against Liberty; count V,
declaratory relief against RLI; count VI, breach of contract against Illinois National as to the underlying
claims; count VII, breach of contract against Illinois National as to the other claims; count VIII, breach of
contract against Illinois National as to certain standstill agreements; count IX, breach of contract against
ACE as to the underlying claims; count X, breach of contract against ACE as to the standstill agreements;
count XI, breach of the implied covenant of good faith and fair dealing against Illinois National; and
count XII, breach of the implied covenant of good faith and fair dealing against ACE. (Dkt. 1.)
2
ACE moved to dismiss three of the four claims brought against it—count III for declaratory
relief, count IX for breach of contract, and count XII for breach of the implied covenant of good faith and
defenses and counterclaimed for declaratory relief and recoupment. (Dkt. 84.) ACE similarly
asserted thirteen affirmative defenses and counterclaimed for recoupment. (Dkt. 115.) Liberty
and RLI also asserted certain affirmative defenses. (Dkts. 108, 112.) Defendants now move for
summary judgment in four separate motions, each seeking slightly different relief, as discussed
further below. (Dkts. 203, 207, 210, 220.) Cushman also moves for partial summary judgment
requesting entry of an order granting judgment in its favor as to counts I, III, IV, V, and VI and
dismissing the counterclaims and corresponding affirmative defenses filed by Illinois National
and ACE. (Dkt. 221.) 3 For the reasons stated below, Cushman’s motion for partial summary
judgment is granted in part and denied in part, Illinois National’s motion for partial summary
judgment is granted in part and denied in part, ACE’s motion for summary judgment is denied,
Liberty’s motion for summary judgment is denied, and RLI’s motion for summary judgment is
denied.
fair dealing. (Dkt. 63.) ACE also moved to strike Cushman’s request for consequential damages,
attorneys’ fees, and punitive damages. (Id.) The court dismissed without prejudice the portion of count III
directed at ACE’s indemnity obligation in connection with a pertinent case (the Gibson Action), but
otherwise denied the motion to dismiss as to count III. (Dkt. 109.) The court dismissed counts IX and XII
with prejudice and denied ACE’s motion to strike with respect to consequential damages in connection
with count X (the only remaining claim against ACE apart from count III) and granted the motion with
respect to attorneys’ fees in connection with count X. (Id.) Illinois National also filed a motion to dismiss
for lack of subject matter jurisdiction (dkt. 58), but the court denied the motion. (Dkt. 79.)
3
The court’s jurisdiction rests on 28 U.S.C. § 1332. Venue is proper pursuant to 28 U.S.C.
§ 1391(b).
2
BACKGROUND 4
I.
The Insurance Policies
Cushman is the world’s largest privately held commercial real estate services firm,
offering, among other things, real estate appraisal services for a variety of property types. (Dkt.
225, Cushman’s Local Rule 56.1 Statement of Material Facts (“Cushman Stmt.”) ¶¶ 35–36.)
Between 2009 and 2013, Cushman purchased a series of real estate professional liability
insurance policies (collectively, the “Policies”) from Defendants. (Id. ¶ 1.) The Policies were
arranged in tiers, with each policy tier designed to kick in when the coverage provided by the
lower-tier insurance policy was exhausted. Nottingham Indemnity, Inc. (“Nottingham”),
Cushman’s primary insurer during this time period, provided an initial $2 million layer of
coverage subject to a $50,000 deductible pursuant to a series of nearly identical annual or biannual policies (collectively, the “Nottingham Policies”). 5 (Id. ¶ 2.) Illinois National served as
4
Unless otherwise noted, the facts in this section are taken from the parties’ Local Rule 56.1
statements and are construed in the light most favorable to the non-moving party. The court cites to
Cushman’s statement of material facts where facts are relevant to all parties, and brings in Defendants’
statements where necessary to add to or clarify the factual record. The court will address many but not all
of the factual allegations in the parties’ submissions, as the court is “not bound to discuss in detail every
single factual allegation put forth at the summary judgment stage.” Omnicare, Inc. v. UnitedHealth Grp.,
Inc., 629 F.3d 697, 704 (7th Cir. 2011). In accordance with its regular practice, the court has considered
the parties’ objections to the statements of fact and includes in this background only those portions of the
statements and responses that are appropriately supported and relevant to the resolution of this motion.
Any facts that are not controverted as required by Local Rule 56.1 are deemed admitted.
5
These policies include, (1) Policy No. 437-1-09-PL01, which was in effect from May 31, 2009
to May 31, 2010 and provided $2 million in coverage, subject to a $50,000 deductible (the “2009-2010
Nottingham Policy”) (Dkt. 225, Pl. Ex. 1); (2) Policy No. 437-1-10-PL01, which was in effect from May
31, 2010 to May 31, 2011 and provided $2 million in coverage, subject to a $50,000 deductible (the
“2010-2011 Nottingham Policy”) (Id., Pl. Ex. 6); (3) Policy No. 437-1-11-PL01, which was in effect from
May 31, 2011 to October 21, 2011 and provided $2 million in coverage, subject to a $50,000 deductible
(the “2011-2012A Nottingham Policy”) (Id., Pl. Ex. 8A); (4) Policy No. 437-1-11-PL01, which was in
effect from October 21, 2011 to May 31, 2012 and provided $2 million in coverage, subject to a $50,000
deductible (the “2011-2012B Nottingham Policy”) (Id., Pl. Ex. 8B); and (5) Policy No. 437-1-12-PL01,
which was in effect from May 31, 2012 to June 30, 2013 and provided $2 million in coverage, subject to a
$50,000 deductible (the “2012-2013 Nottingham Policy”) (Id., Pl. Ex. 10.)
3
Cushman’s first-level excess insurer between 2009 and 2013 and sold Cushman four insurance
policies during that time period (collectively, the “Illinois National Policies”). 6 (Id. ¶ 3.) The
Illinois National policies for the 2009–2010, 2010–2011, and 2011–2012 policy years each
provided $23 million in coverage for sums exceeding $2 million. The policy for 2012–2013
provided $15 million in coverage for sums exceeding $2 million. (Id.; Dkt. 225, Pl. Exs. 2, 7, 9,
11.) ACE served as Cushman’s second-level excess insurer for the 2009–2010 policy year and
sold Cushman Policy No. XEO G23658495 002 (the “ACE Policy”), which was in effect from
May 31, 2009 to May 31, 2010. (Cushman Stmt. ¶ 3; Dkt. 225, Pl. Ex. 3.) The ACE Policy
provided $10 million in coverage for sums exceeding $25 million. (Id.) Liberty and RLI served
as Cushman’s third-level insurers for the 2009–2010 policy year. Liberty sold Cushman Policy
No. EO5N454658004 (the “Liberty Policy”), which was in effect from May 31, 2009 to May 31,
2010. (Cushman Stmt. ¶ 3; Dkt. 225, Pl. Ex. 4.) Similarly, RLI sold Cushman Policy
No. EPG0009165 (the “RLI Policy”), which was in effect from May 31, 2009 to May 31, 2010.
(Cushman Stmt. ¶ 3; Dkt. 225, Pl. Ex. 5.) Both the Liberty Policy and the RLI Policy provided
$7.5 million in coverage for sums exceeding $35 million, for a total of $15 million in coverage.
(Cushman Stmt. ¶ 3; Dkt. 225, Pl. Exs. 4, 5.) The Cushman insurance tower for the 2009–2010
policy year is illustrated as follows 7:
6
These policies include, (1) Policy No. 01-911-84-71, which was in effect from May 31, 2009 to
May 31, 2010 and provided $23 million in coverage for sums exceeding $2 million (the “2009-2010
Illinois National Policy”) (Dkt. 225, Pl. Ex. 2); (2) Policy No. 01-877-33-21, which was in effect from
May 31, 2010 to May 31, 2011 and provided $23 million in coverage for sums exceeding $2 million (the
“2010-2011 Illinois National Policy”) (Id., Pl. Ex. 7); (3) Policy No. 01-880-59-08, which was in effect
from May 31, 2011 to June 30, 2012 and provided $23 million in coverage for sums exceeding $2 million
(the “2011-2012 Illinois National Policy”) (Id., Pl. Ex. 9); and (4) Policy No. 0230588092, which was in
effect from June 30, 2012 to August 31, 2013 and provided $15 million in coverage for sums exceeding
$2 million (the “2012-2013 Illinois National Policy”) (Id., Pl. Ex. 11.)
7
Cushman brought this action against Illinois National, ACE, RLI and Liberty under the 2009–
2010 policy year and Illinois National under the 2009–2013 policy years.
4
Level of Insurance
Insurance Company
Coverage Amount for 2009–
2010 Policy Year
Primary Insurer
Nottingham
$2 million
First-Level Excess Insurer
Illinois National
$23 million for sums exceeding
$2 million
Second-Level Excess Insurer
ACE
$10 million for sums exceeding
$25 million
Third-Level Excess Insurer
Liberty
$7.5 million for sums
exceeding $35 million
Third-Level Excess Insurer
RLI
$7.5 million for sums
exceeding $35 million
Nottingham agreed to indemnify Cushman for “all sums in excess of the Deductible
which the Insured shall become legally obligated to pay as Damages and Claims Expenses for
claims first made against the Insured during the Policy Period . . . as a result of a Wrongful Act
of the Insured . . . aris[ing] out of the rendering or failure to render Professional Services.”
(Cushman Stmt. ¶ 5; Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at § 1.) 8 Nottingham also agreed to defend
Cushman and provided that it had “the sole right to appoint counsel and the right and duty to
defend any Claim or Suit brought against the Insured seeking Damages on account of a
Wrongful Act even if such Claim or Suit is groundless, false or fraudulent.” 9 (Cushman Stmt.
8
Slight alterations to the quoted language appear in Pl. Exs. 8B and 10; these changes are
inconsequential to resolution of the instant motions.
9
With respect to defense obligations, the Illinois National Policies provided, “[t]he Insurer shall
have the right, in its sole discretion, but not the obligation, to associate effectively with the Company and
the Insureds in the defense and settlement of any Claim. . . .The Insurer does not assume any duty to
defend any Claim, unless the terms and conditions of the Followed Policy state otherwise, and in such
event only to the extent permitted or required by the terms of the Followed Policy.” (Cushman Stmt. ¶ 15,
Dkt. 225, Pl. Exs. 2, 7, 9, 11 at § VI.) The ACE policy provided, “[t]he Insurer shall have the right, but
not the duty, and shall be given the opportunity to effectively associate with the Insureds in the . . .
defense of any Claim even if the Underlying Limit has not been exhausted.” (Cushman Stmt. ¶ 15, Dkt.
225, Pl. Ex. 3 at § V(E).)
5
¶ 14; Pl. Exs. 1, 6, 8A–B, 10 at § 2.) Further, the Nottingham Policies defined certain relevant
terms as follows 10:
•
“Damages” means “[a]ny compensatory sum which an Insured is legally
obligated to pay for any Claim” including judgments and settlements.
(Cushman Stmt. ¶ 6; Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at Defin. 3.)
•
“Claims Expenses” are expenses incurred in the “investigation, adjustment,
negotiation, arbitration, defense and appeal of any Suit or Claims for
Damages.” (Cushman Stmt. ¶ 7; Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at Defin. 2.)
•
“Wrongful Act” means “[a]ny actual or alleged act, error or omission
committed in connection with the conduct of the Insured’s Professional
Services.” (Cushman Stmt. ¶ 8; Dkt. 225, Pl. Exs. 1, 6, 8A at Defin. 9.) 11
•
“Professional Services” means “[a]ll services rendered or to be rendered by
the Insured for or on behalf of customers or clients.” (Cushman Stmt. ¶ 10;
Dkt. 225, Pl. Exs. 1, 6 at Defin. 6.) 12
•
“Claim” means “[a] written demand for money or services naming any
Insured and alleging a Wrongful Act to which this policy applies,” and “[f]or
purposes of this definition, knowledge of a Claim or of a Wrongful Act that
could reasonably be expected to result in a Claim shall mean knowledge by
the General Counsel and Risk Manager of the Named Insured.” (Cushman
Stmt. ¶ 12; Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at Defin. 1.) 13
Defendants’ Policies “follow[ed] form to” or adopted the terms and conditions of the
Nottingham Policy for its year, unless expressly stated otherwise. (Cushman Stmt. ¶ 4.)
10
Unless otherwise noted, the definitions are taken from the 2009-2010 Nottingham Policy given
that the terms at issue are materially identical in all four years.
11
“Wrongful Act” in the 2011-2012 and 2012-2013 Nottingham Policies was defined as “[a]ny
actual or alleged act, error or omission, breach of duty or event committed in connection with the conduct
of the Insured’s Professional Services.” (Cushman Stmt. ¶ 9; Dkt. 225, Pl. Exs. 8B, 10 at Defin. 11.)
12
“Professional Services” in the 2011-2012 and 2012-2013 Nottingham Policies was defined as
“all services rendered or to be rendered to by the Insured for or on behalf of third parties or that inure to
the benefit of the insured.” (Cushman Stmt. ¶ 11; Dkt. 225, Pl. Exs. 8A–B, 10 at Defin. 6.)
13
Slight alterations to the quoted language appear in Pl. Exs. 8B and 10; these changes are
inconsequential to resolution of the instant motions.
6
In addition to laying out indemnification and defense obligations, certain policies also
contained exclusions to coverage. Two such exclusions are relevant to the present case. The
first—Endorsement # 5, Section 1 (“Endorsement 5” 14) of the Illinois National Policies—states:
This policy does not apply to any Claim alleging, arising out of, based upon,
resulting from, directly or indirectly, or in any way involving . . . (a) the exercise
of any authority or discretionary control by an Insured with respect to any client’s
funds or accounts; (b) any actual or alleged commingling of funds or monies; (c)
an Insured selecting an investment manager, investment advisory or custodial
firm; (d) any Insured advising as to, promising or guaranteeing the future value of
any investment or any rate of return or interest; or (e) the failure of any
investment to perform as expected or desired. 15
(Id. ¶ 18; Dkt. 225, Pl. Exs. 2, 7, 9 at Endmt. 5; Pl. Ex. 11 at Endmt. 13.)
The second—the “Prior Knowledge Exclusion” to the Nottingham Policies—states:
This Policy does not apply . . . to any Claim arising from any Wrongful Act
committed prior to the beginning of the Policy Period, if on or before the
inception date of this Policy any Insured knew of such Claim or the occurrence of
a Wrongful Act that could reasonably be expected to result in such Claim.
(Cushman Stmt. ¶ 30; Dkt. 225, Pl. Exs. 1, 6 at Excl. 8; Pl. Exs. 8A–B, 10 at Excl. 7.)
The Nottingham Policies and the Illinois National Policies also contained provisions
delineating when certain Wrongful Acts would be considered the same as or related to another
Wrongful Act (the “Related Wrongful Act Provisions”). The Nottingham Policies provide:
14
Cushman refers to Endorsement 5 as the Investment Advisor Exclusion, while Illinois National
refers to Endorsement 5 as the Miscellaneous Exclusion. The title of this endorsement is relevant to
resolution of the issues before the court, so the court refers to Endorsement 5 by its generic name, rather
than the titles provided by the parties. The court recognizes that the Illinois National Policies refer to this
endorsement as both Endorsement # 5 and the Miscellaneous Exclusions Endorsement. Further, any
mention of Endorsement 5 in this opinion refers to Endorsement 5, Section 1, unless otherwise noted.
15
This exclusion does not apply to Cushman &Wakefield Securities, Inc., a Cushman brokerdealer subsidiary. (Cushman Stmt. ¶ 19; Dkt. 225, Pl. Exs. 2, 7, 9 at Endmt. 5; Pl. Ex. 11 at Endmt. 13.)
7
If additional Claims are subsequently made which arise ou[t] of the same
Wrongful Act as Claims already made and reported to the Company, all such
Claims, whenever made, shall be considered first made when the earliest Claim
arising out of such Wrongful Act was made and all such Claims shall be subject
to one such Limit of Liability.
For purposes of the Limits of Liability, a series of continuous, repeated or
interrelated Wrongful Acts shall be considered as one Wrongful Act.
(Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at Limits of Liability.) The Illinois National Policies also state:
If during the Policy Period . . . (i) written notice of a Claim has been given to the
Insurer . . . or (ii) . . . written notice of circumstances that may reasonably be
expected to give rise to a Claim has been given to the Insurer, then any Claim that
is subsequently made against the Insureds and reported to the Insurer alleging,
arising out of, based upon or attributable to the facts alleged in the Claim or
circumstances of which such notice has been given, or alleging any Wrongful Act
which is the same as or related to any Wrongful Act alleged in the Claim or
circumstances of which such notice has been given, shall be considered made at
the time such Claim or circumstances has been given to the Insurer.
(Cushman Stmt. ¶ 31; Dkt. 225, Pl. Exs. 2, 7, 9, 11 at § V(b).)
II.
The Underlying Claims
From 2004 to 2007, certain Credit Suisse AG entities (“Credit Suisse”) retained various
Cushman subsidiaries to perform real estate appraisals in connection with loans made to
developers of large, master-planned residential communities (“MPCs”). (Cushman Stmt. ¶¶ 38–
39.) In preparing the appraisals, Cushman used a Total Net Value (“TNV”) methodology. 16 (Id. ¶
40.) TVN is defined as “the sum of the market value of the bulk lots of the entire planned
community, as if all of the bulk lots were complete (in terms of backbone and infrastructure) and
available for sale to merchant builders, as of the date of the appraisal. . . . It does not reflect the
deduction for developers profit or the time value of money.” (Id. ¶ 44; See, e.g., Dkt. 225, Pl. Ex.
42 at 2.) Between 2008 and 2010, several of the loans went into default and lawsuits surrounding
the use of the TNV appraisal method were brought against Cushman, certain of its subsidiaries,
16
This methodology was later renamed the Total Net Proceeds methodology.
8
and others. (Cushman Stmt. ¶¶ 67–68.) Cushman’s alleged role was to appraise the MPCs
improperly using the TNV definition, which resulted in a higher valuation than a more standard
“market value” appraisal. (Id. ¶ 73.) Credit Suisse could then allegedly earn fees by originating
and servicing large syndicated loans using the MPCs as collateral. (Id. ¶ 72.) The claims included
four specific claims (the “Underlying Claims”) as well as a handful of additional claims arising
out of the Credit Suisse appraisals (the “Other Claims”). (Id.) The Underlying Claims included
(1) a January 3, 2010 putative class action lawsuit filed in the District of Idaho on behalf of
property owners in various MPCs, Gibson v. Credit Suisse AG, No. 1:10-cv-00001 (the “Gibson
Action”) 17; (2) a November 2010 demand by a hedge fund that purchased shares of syndicated
loans Credit Suisse originated using the appraised properties as collateral (the “Highland
Demand”) 18; (3) a February 14, 2012 lawsuit filed in the District of Colorado by a shareholder in
a MPC developer, Blixseth v. Cushman & Wakefield of Colorado, Inc., No. 1:12-cv-00393 (the
“Blixseth Action”); and (4) a January 25, 2013 third-party lawsuit filed in the United States
Bankruptcy Court for the District of Nevada by a MPC developer, Rhodes v. Credit Suisse AG,
No. 2:12-cv-01272 (the “Rhodes Action”). (Id. ¶¶ 67–71, 75; Dkt. 225, Pl. Exs. 12, 16, 19, 23.)
More specifically, plaintiffs in the Gibson Action are individuals and entities that
purchased homes or lots at four MPCs: Lake Las Vegas, Yellowstone Club, Tamarack, and Ginn
sur Mer. (Dkt. 208, Illinois National’s Local Rule 56.1 Statement of Material Facts (“Illinois
National Stmt.”) ¶ 26.) Timothy Blixseth, founder; manager; and developer of Yellowstone, filed
17
The Fifth Amended Complaint is the operative complaint in the Gibson Action. (See Dkt. 225,
Pl. Ex. 14.)
18
This demand did not result in the filing of a lawsuit against Cushman or its subsidiaries.
9
the Blixseth Action. 19 (Id. ¶ 47.) The Highland Demand involved plaintiffs whose claims arose
out of loans involving, among others, Yellowstone Club, Ginn Clubs & Resorts, and Rhodes
Ranch. (Id. ¶ 37.) Finally, the Rhodes Action was brought by certain borrowers, including
Rhodes Ranch. Not only did the Underlying Claims involve overlapping properties, but all
Underlying Claims also alleged that Credit Suisse and Cushman conspired to intentionally
overvalue the MPCs so Credit Suisse could generate fees and that the TNV appraisals were
inherently misleading. (Id. ¶ 55; Cushman Stmt. ¶¶ 72–73.) Plaintiffs in the Gibson Action
claimed that the alleged scheme began at Lake Las Vegas and was repeated at various properties
around the country. (Dkt. 225, Pl. Ex. 14 ¶ 53.)
The court in the Gibson Action granted Cushman’s motion for summary judgment and
dismissed the case with prejudice as to Cushman. (Cushman Stmt. ¶ 83; Dkt. 225, Pl. Ex. 15.)
Plaintiffs appealed to the Ninth Circuit and the case was argued on February 9, 2018. See Gibson
v. Credit Suisse Group Securities, No. 16-35705 (9th Cir. Aug. 29, 2016). The parties await a
decision from the appellate court. The court in the Blixseth Action dismissed the case in a
decision subsequently upheld by the Tenth Circuit. (Cushman Stmt. ¶ 86; Dkt. 225, Pl. Exs. 17–
18.) The Highland Demand was settled for $12 million while the Rhodes Action was settled for
$362,500. (Cushman Stmt. ¶ 87; Dkt. 225, Pl. Exs. 22, 24.)
III.
Notice of and Communications Related to the Underlying Claims
A.
The Gibson Action
Cushman provided notice to Defendants of the Gibson Action on January 12, 2010,
during the 2009–2010 policy period. (Cushman Stmt. ¶ 90; Dkt. 225, Pl. Ex. 45.) After receiving
notice, Illinois National sent Cushman a reservation of rights letter on February 9, 2010,
19
On July 22, 2011, Blixseth attempted to intervene in the Gibson Action, but the motion for
intervention was denied. (Id. ¶¶ 42, 44, 46.)
10
accepting the Gibson Action as a Claim under the 2009-2010 Illinois National Policy. (Cushman
Stmt. ¶ 91; Dkt. 225, Pl. Ex. 46.) The letter also contained the following statement: “This letter is
not, and should not be construed as a waiver of any terms, conditions, exclusions or other
provisions of the [Illinois National] Policy, or any other policies of insurance issued by Illinois
National or any of its affiliates.” (Dkt. 225, Pl. Ex. 46.)
B.
The Highland Demand
In October 2010, Cushman advised Illinois National of claims alleged by Highland
Capital in an email noting that Cushman was providing some “supplemental information related
to the L.J. Gibson and Beau Blixseth legal action.” (Cushman Stmt. ¶ 90, Dkt. 225, Pl. Ex. 47;
Illinois National Stmt. ¶ 64.) On October 7, 2010, Cushman’s Risk Manager emailed Cushman’s
broker and informed her that since the Highland matter “is directly related to the Credit Swiss
[sic] claim reported to underwriters in the 2009-2010 policy year, please treat the Highland
Capital matter as a continuation of the same claim and report to the underwriters under the 20092010 program.” (Illinois National Stmt. ¶ 65; Dkt. 209, Illinois National Ex. FF.) Cushman also
reached out to Illinois National in March 2011 to confirm that its insurers agreed that the
Highland matter should be treated as related to the Gibson Action, and Cushman explained to
Illinois National in April 2011:
The Highland Capital claim was categorized as a subset of the Credit Suisse claim
because its genesis is [] many of the same loans made by Credit Suisse based
upon the appraisal work performed by [Cushman], all at issue in the Gibson
lawsuit. Highland Capital funds were members of the syndicates established by
Credit Suisse in connection with the syndication of the various resort loans.
(Illinois National Stmt. ¶¶ 68–70; Dkt. 209, Illinois National Exs. GG, HH, II.) Cushman and
Highland also entered into a tolling agreement in 2010 in an attempt to find an amicable
resolution and avoid litigation; this agreement was terminated on June 11, 2013. (Illinois
11
National Stmt. ¶¶ 35–36, 95; Dkt. 209, Illinois National Ex. QQ.) Just before this termination,
Cushman’s loss run (as of May 31, 2013) listed the Gibson Action, the Highland Demand, and
the Blixseth Action under the 2009–2010 policy year, and bracketed the three matters together.
(Illinois National Stmt. ¶ 103; Dkt. 209, Illinois National Ex. UU.) Similarly, on June 14, 2013,
Cushman asked that the insurers be notified that the “Highland Capital claim, reported in the
2009/2010 claim year,” was no longer dormant and that Highland Capital affirmatively stated it
would bring suit against Cushman. (Illinois National Stmt. ¶ 100; Dkt. 209, Illinois National Ex.
TT.) The email also asked that notice to the insurer be provided “for that particular claim year.”
(Id.) But by July 23, 2013, Cushman asserted, “[U]pon reviewing the Highland lawsuits and
other documents, we noted numerous distinguishing characteristics of Highland’s claims as
compared to Gibson/Blixseth’s claims that lead us to believe that the claims should be paid out
of the 2010/11 claim year based on the timing of Highland’s notice of the claims to
[Cushman].” 20 (Illinois National Stmt. ¶ 99; Dkt. 209, Illinois National Ex. SS.)
C.
The Blixseth Action
Cushman also put Illinois National on notice of Timothy Blixseth’s intervening
complaint in the Gibson Action on July 25, 2011, noting that the “factual background for the new
complaint is substantively identical to that of the existing Gibson action.” (Illinois National Stmt.
¶ 43; Dkt. 209, Illinois National Ex. W.) On April 24, 2012, Cushman’s risk management
department asked that the insurers be put on notice of the Blixseth Action and advised that it “is
related to the Gibson/Credit Suisse claim filed in the 2009–2010 year.” (Illinois National Stmt. ¶
73, Dkt. 209, Illinois National Ex. JJ.)
20
In or around May 2013 in a series of letters and emails, Cushman began disagreeing that the
TNV appraisals related back to the 2009–2010 policy year. (See Dkt. 278 ¶ 11.)
12
D.
The Notice of Circumstances and Supplemental Reservation of Rights
In June 2012, approximately two years after receiving notice of the Gibson Action,
Illinois National requested that Cushman provide it with a notice of circumstances (“NOC”) for
all other TNV appraisals. (Cushman Stmt. ¶ 95; Dkt. 225, Pl. Ex. 50.) Cushman sent a NOC
letter on June 28, 2012, which attached a list of appraisals done using the TNV method of which
Cushman was aware and stated that with regard to future claims based on TNV appraisals, “to
the extent a ‘Claim’ is ultimately made against the ‘Insureds’ for an alleged ‘Wrongful Act’ as
discussed below, you shall treat the ‘Claim’ as having been made during the currency of policy
no. 01-880-59-08 for the 2011–2012 policy year.” (Cushman Stmt. ¶ 95; Dkt. 225, Pl. Ex. 51.)
Illinois National acknowledged receipt of the NOC on July 9, 2012, and provided an initial
coverage position, reserving rights under the 2011–2012 Illinois National Policy. (Cushman
Stmt. ¶ 96; Dkt. 225, Pl. Ex. 52.)
On August 7, 2012, Illinois National issued a supplemental reservation of rights letter,
which pointed out potential defenses based on Endorsement 5, the Prior Knowledge Exclusion,
and fortuity. (Cushman Stmt. ¶ 99; Dkt. 225, Pl. Ex. 53.) The letter also asserted that the
Underlying Claims all related to the Gibson Action, and thus fell within coverage of the 2009–
2010 Policies, “because the appraisals performed on the four MPC projects all used the [TNV]
method.” (Cushman Stmt. ¶ 102; Dkt. 225, Pl. Ex. 53 at 5.) In November 2012, Illinois National
further notified Cushman that any appraisal listed in the NOC would be deemed to fall under the
2009–2010 policy period, and that the 2011–2012 claim file would be closed. (Cushman Stmt. ¶
106; Dkt. 225, Pl. Ex. 54.) On May 21, 2013, Cushman sent a letter to Illinois National stating
that it disagreed with Illinois National’s conclusion that “all claims which may be made in the
future that claim some damages resulting from Total Net Value Appraisals are related to the
13
Gibson class action suit and the Blixseth suit and should be considered as one claim under the
2009-2010 policy.” (Dkt. 225, Pl. Ex. 57.) On January 24, 2014, Illinois National again issued a
supplemental reservation of rights letter, stating that it had “discovered” additional factual bases
for its assertion that coverage for the Underlying Claims was barred by the Prior Knowledge
Exclusion and/or because they were “fortuitous.” (Id.¶ 112; Dkt. 225, Pl. Ex. 64.)
D.
The Rhodes Action
Meanwhile, on April 1, 2013, Cushman gave notice of the Rhodes claim. (Cushman Stmt.
¶ 107; Dkt. 225, Pl. Ex. 55.) On April 7, 2013, Illinois National acknowledged receipt of the
notice of claim, citing to the 2012–2013 Illinois National Policy. (Cushman Stmt. ¶ 107; Dkt.
225, Pl. Ex. 56.) Four months later, on July 26, 2013, Illinois National determined that “[u]pon
further review of the Rhodes Complaint,” it related to the Gibson Action, and thus would be
considered under the 2009–2010 policy year. (Cushman Stmt. ¶ 108; Dkt. 225, Pl. Ex. 59.)
IV.
The Standstill Agreement
On April 14, 2014, Cushman, Illinois National, and ACE entered into a Standstill
Agreement in an effort to secure payment for the Highland and Rhodes settlements and to ensure
that defense costs for the Gibson and Blixseth Actions would continue to be paid. (Cushman
Stmt. ¶ 136; Dkt. 225, Pl. Ex. 69.) Illinois National and ACE agreed to equally split the ongoing
defense costs related to the Underlying Claims, Illinois National agreed to fund the Rhodes
settlement for $362,500, and Illinois National and ACE agreed to fund the Highland settlement,
with Illinois National paying $10 million and ACE paying $2 million. (Id.) The parties agreed to
table an ongoing issue of whether Illinois National and ACE had any rights to recoupment.
(Cushman Stmt. ¶ 136–37; Dkt. 225, Pl. Ex. 69.) To date, Illinois National has paid more than
$26 million and ACE has paid more than $7 million in defense and indemnity payments for the
14
Underlying Claims. (Cushman Stmt. ¶¶ 88–89; Dkt. 225, Pl. Exs. 70–71.)
V.
Overview of the Motions for Summary Judgment
Defendants and Cushman have each filed separate motions for summary judgment. Given
the complexity and disparate nature of the relief sought by the parties, the details of each motion
are outlined below.
A.
Illinois National’s Motion for Summary Judgment
Illinois National asks the court to declare that Endorsement 5 of the Illinois National
Policies and the Prior Knowledge Exclusion of the Nottingham Policies apply to preclude all
coverage under the Illinois National Policies for the Underlying Claims, and to grant judgment in
its favor on Illinois National’s counterclaim for recoupment of all defense costs and indemnity
payments in an amount to be determined by the court. (Dkt. 207.) In the alternative, Illinois
National seeks a declaration that the Blixseth Action, the Highland Demand, and the Rhodes
Action are related to the Gibson Action, which would trigger only the 2009–2010 Illinois
National Policy, and asks the court to order Cushman to reimburse Illinois National for all
payments of defense costs and indemnity in excess of the $23 million Illinois National limit. (Id.)
In the second alternative, Illinois National asks the court to find and declare that Endorsement 5
and the Prior Knowledge Exclusion apply to exclude coverage for the Blixseth Action, the
Highland Demand, and the Rhodes Action under the 2011, 2012, and 2013 Illinois National
Policies, and order that Cushman reimburse Illinois National for all payments of defense costs
and indemnity paid for the Blixseth Action, the Highland Demand, and the Rhodes Action. (Id.)
B.
ACE’s Motion for Summary Judgment
ACE moves for summary judgment on count III (declaratory relief against ACE), asking
the court to declare that the ACE Policy does not provide coverage for the matters described in
15
the Complaint. (Dkt. 210.) Unlike Illinois National, ACE contends that the Blixseth Action, the
Highland Demand, and the Rhodes Action are not related to the Gibson Action. In other words,
each action triggers coverage under a separate policy year and the ACE Policy is not triggered
because the primary and first-insurer policies have not been exhausted. (Dkt. 213.) ACE further
argues that the ACE Policy has not been triggered because all loss arising from the Gibson
Action, the Blixseth Action, and the Rhodes Action is precluded by Endorsement 5. (Id.) ACE
also moves for summary judgment on count X (breach of contract against ACE as it pertains to
the Standstill Agreement) under the theory that Cushman has failed to establish damages
attributable to ACE. (Id.) Finally, ACE asks the court to grant judgment on its counterclaim for
recoupment of amounts advanced pursuant to the Standstill Agreement because, according to
ACE, the ACE Policy has not been triggered. (Id.)
C.
Liberty Mutual’s Motion for Summary Judgment
Like ACE, Liberty Mutual requests a declaration that each of the Underlying Claims is
covered under a separate policy year because, among other reasons, the Blixseth Action, the
Highland Demand, and the Rhodes Action are not related to the Gibson Action. Such a
declaration would mean that the Liberty Policy is not triggered because the primary, first-insurer
and second-insurer policies have not been exhausted. Liberty Mutual also contends that no policy
exclusions apply to preclude coverage of the Underlying Claims.
D.
RLI’s Motion for Summary Judgment
RLI does not ask the court to determine whether the Underlying Claims are related. 21
Instead, it seeks a declaration that Endorsement 5 precludes coverage for the Highland Demand.
If true, even if the Underlying Claims are related, the RLI Policy would not be triggered.
21
RLI notes it does not dispute the position that the Underlying Claims are unrelated and
constitute claims made within different policy years.
16
E.
Cushman’s Motion for Summary Judgment
Cushman moves for partial summary judgment in its favor as to counts I, III, IV, V, and
VI and as to the counterclaims and corresponding affirmative defenses filed by Illinois National
and ACE. As to count I—declaratory relief against Illinois National—Cushman asks for a
declaration against Illinois National that: (1) the Underlying Claims are covered by the Policies;
(2) no exclusions apply to preclude coverage for any of the Underlying Claims; (3) the Highland
Demand is not related to the Gibson Action, the Blixseth Action, or the Rhodes Action; and (4)
Illinois National may not seek reimbursement of any amounts it has paid or in the future will pay
under any of the Illinois National Policies for any of the Underlying Claims. In counts III, IV,
and V, Cushman seeks declarations against ACE, Liberty, and RLI, respectively, that if the
Underlying Claims are related and thus trigger only the 2009–2010 policy year, ACE, Liberty,
and RLI must pay under the triggered 2009–2010 policies all amounts incurred in connection
with the Underlying Claims that are in excess of the 2009–2010 Illinois National Policy (as to
ACE) and the 2009–2010 ACE Policy (as to Liberty and RLI), up to their respective policy
limits. Cushman also asks the court to declare that no exclusions apply to preclude coverage for
any of the Underlying Claims with respect to these counts. In count VI, Cushman seeks to
recover damages from Illinois National for breach of contract as to the Underlying Claims.
Finally, Cushman seeks a declaratory judgment that Illinois National and ACE are not entitled to
recoupment.
LEGAL STANDARD
Summary judgment obviates the need for a trial where there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a). A genuine issue of material fact exists if “the evidence is such that a reasonable jury could
17
return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,
106 S. Ct. 2505 (1986). To determine whether any genuine fact issue exists, the court must
pierce the pleadings and assess the proof as presented in depositions, answers to interrogatories,
admissions, and affidavits that are part of the record. Fed. R. Civ. P. 56(c). In doing so, the court
must view the facts in the light most favorable to the non-moving party and draw all reasonable
inferences in that party’s favor. Scott v. Harris, 550 U.S. 372, 378, 127 S. Ct. 1769 (2007).
The party seeking summary judgment bears the initial burden of proving there is no
genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548
(1986). In response, “[a] party who bears the burden of proof on a particular issue may not rest
on its pleadings, but must affirmatively demonstrate, by specific factual allegations, that there is
a genuine issue of material fact which requires trial.” Day v. N. Ind. Pub. Serv. Co., 987 F. Supp.
1105, 1109 (N.D. Ind. 1997); see also Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir.
2000). If a claim or defense is factually unsupported, it should be disposed of on summary
judgment. Celotex, 477 U.S. at 323–24. “The interpretation of an insurance policy is a question
of law that is an appropriate subject for disposition by way of summary judgment.” Jupiter
Aluminum Corp. v. Home Ins. Co., 225 F.3d 868, 873 (7th Cir. 2000).
ANALYSIS
Although each party makes slightly different arguments, there are three primary issues at
play: (1) whether a policy exclusion precludes coverage for one or more of the Underlying
Claims; (2) whether the Underlying Claims are related, triggering only the 2009–2010 Illinois
National Policy, or whether one or more of the Underlying Claims sits within a different policy
year; and (3) whether Illinois National and/or ACE are entitled to recoupment or reimbursement.
The court will address each of these issues in turn, but first turns to choice of law.
18
I.
Choice of Law
At first blush, the parties appear to agree that New York law applies to the interpretation
of the Policies. Cushman, Illinois National, ACE, and RLI agree that New York law should
govern, and Liberty did not address choice of law in its motion for summary judgment. Given
that “we forego choice of law analysis when the parties agree on the law that governs a dispute
and there is a reasonable relation between the dispute and the forum whose law has been
selected,” the court could simply apply New York law. Home Valu, Inc. v. Pep Boys, 213 F.3d
960, 963 (7th Cir. 2000). Liberty, however, asserts for the first time in its response to the parties’
motions for summary judgment that Illinois law should govern questions of policy
interpretation. 22 (See Dkt. 262 at 2–5.) The court thus undertakes a choice of law analysis.
Federal courts sitting in diversity apply the choice-of-law rules of the forum state, in this
case Illinois. Hinc v. Lime-O-Sol Co., 382 F.3d 716, 719 (7th Cir. 2004). Under Illinois law, a
choice of law analysis is “required only when a difference in law will make a difference in the
outcome.” Townsend v. Sears, Roebuck & Co., 879 N.E.2d 893, 898, 227 Ill.2d 147, 316 Ill.
Dec. 505 (Ill. 2007). “The party seeking the choice-of-law determination bears the burden of
demonstrating a conflict.” Bridgeview Health Care Ctr., Ltd. v. State Farm Fire & Cas. Co., 10
N.E.3d 902, 905, 2014 IL 116389, 381 Ill. Dec. 493 (Ill. 2014). Illinois National identifies one
such conflict—Illinois law does not generally recognize a right of recoupment of defense costs
22
Having not addressed the choice of law issue in its opening brief, Liberty asserts for the first
time in its response to the parties’ motions for summary judgment that Illinois law should govern
questions of policy interpretation. (See Dkt. 262 at 2–5.) Liberty points out that Cushman, ACE, and RLI
identify no conflict between Illinois and New York law. (Id. at 2.) With regard to the conflict identified
by Illinois National, Liberty argues on one hand that “Illinois follows the doctrine of depecage, which
refers to the process of cutting up a case into individual issues, each subject to a separate choice-of-law
analysis,” and on the other that where “remedial issues are so bound up with substantive issues [] they
ought to be decided according to the same law that governs the substantive issues.” (Id. at 2, 4–5.) The
court agrees that resolution of the right of recoupment issues is bound up with resolution of the other
matters at issue and thus will apply the law governing the substantive issues, which, as identified in the
body of this opinion, is New York law.
19
while New York does. Compare Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods
Co., 828 N.E.2d 1092, 1102, 215 Ill.2d 146, 293 Ill. Dec. 594 (Ill. 2005) with United Specialty
Ins. Co. v. CDC Hous., Inc., 233 F. Supp. 3d 408 (S.D.N.Y. 2017).
When an insurance policy lacks a choice of law provision, Illinois courts employ a “most
significant contacts” test to determine the governing substantive law for the contract. Jupiter
Aluminum Corp. v. Home Ins. Co., 225 F.3d 868, 873 (7th Cir. 2000). Under this test, Illinois
courts consider “the location of the subject matter, the place of delivery of the contract, the
domicile of the insured or the insurer, the place of the last act to give rise to a valid contract, the
place of performance, or other place bearing a rational relationship to the general contract.”
Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 655 N.E.2d 842, 845, 166 Ill.2d 520,
211 Ill. Dec. 459 (Ill. 1995). Some courts have placed particular emphasis on “the law of the
State where the policy was issued or delivered or [] the law of the place of the last act to give rise
to a valid contract.” See, e.g., United States Fire Ins. Co. v. CNA Ins. Cos., 572 N.E.2d 1124,
1127, 213 Ill. App.3d 568, 157 Ill. Dec. 660 (Ill. 1991). Further, the location of the subject matter
of the contract, such as the location of the risk insured by an insurance policy, is entitled to little
weight when the subject matter of the risk is located in more than one state. Jupiter Aluminum
Corp., 225 F.3d at 873–74 (7th Cir. 2000).
Here, Cushman is a corporation organized under the laws of New York, with its principal
place of business in New York. The Policies were all addressed and delivered to Cushman’s
headquarters in New York. Further, the 2009–2010 and 2010–2011 Policies were negotiated by
Cushman’s insurance broker out of their offices in New York and both Illinois National and
ACE issued their policies from offices in New York. The policies cover nationwide risks and
thus given the aforementioned facts, New York bears a strong rational relationship to the general
20
contract. The court will therefore apply New York law.
II.
Insurance Policy Interpretation
Under New York law, the interpretation of a contract “is a matter of law for the court to
decide.” Int’l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002).
An insurance policy, like any contract, must be construed to effectuate the intent of the parties as
derived from the plain meaning of the policy’s terms. See Breed v. Ins. Co. of N. Am., 385
N.E.2d 1280, 1282 (N.Y. 1978). If the language of the insurance contract is unambiguous, the
court applies its terms. Andy Warhol Found. for Visual Arts, Inc. v. Fed. Ins. Co., 189 F.3d 208,
215 (2d Cir. 1999). Where its terms are reasonably susceptible to more than one interpretation,
the policy must be regarded as ambiguous. See Haber v. St. Paul Guardian Ins. Co., 137 F.3d
691, 695 (2d Cir. 1998). “When a court decides, after examination of the contractual language,
that an insurance policy is ambiguous, it looks outside the policy to extrinsic evidence, if any, to
ascertain the intent of the parties.” Andy Warhol, 189 F.3d at 215. If the ambiguities cannot be
resolved by examining the parties’ intentions, the court may apply other rules of contract
construction, including the rule that ambiguities in the policy should be construed in favor of the
insured, because as the drafter of the policy the insurer is responsible for the ambiguity. Morgan
Stanley Group Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275–76 (2d Cir. 2000). This rule is
especially applicable where the ambiguity appears in a clause excluding coverage. Breed, 385
N.E.2d at 1284. In order to “negate coverage by virtue of an exclusion, an insurer must establish
that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable
interpretation, and applies in the particular case.” Belt Painting Corp. v. TIG Ins. Co., 795
N.E.2d 15, 17 (N.Y. 2003). Policy exclusions are “given a strict and narrow construction, with
any ambiguity resolved against the insurer.” Id. While the insured bears the burden of
21
establishing coverage, the insurer bears the burden of establishing the applicability of exclusions.
See Consol. Edison Co. of N.Y. v. Allstate Ins. Co., 774 N.E.2d 687, 98 N.Y.2d 208, 218 (N.Y.
2002); AGCS Marine Ins. Co. v. World Fuel Servs., Inc., 187 F. Supp. 3d 428, 438 (S.D.N.Y.
2016).
III.
The Exclusions
A.
Endorsement 5
The parties argue differing interpretations of Endorsement 5 of the Illinois National
2009–2010 Policy. The terms of a contract are clear and unambiguous when the language used
has a definite and precise meaning and there is no reasonable basis for a difference of opinion.
Fernandez v. Price, 880 N.Y.S.2d 169, 172 (N.Y. App. Div. 2009). Conversely, contract
language is ambiguous when it is reasonably susceptible to more than one interpretation,
and extrinsic or parol evidence may then be permitted to determine the parties’ intent as to the
meaning of that language. Id. Here, two reasonable interpretations exist. Illinois National refers
only to parts (d) and (e) of Endorsement 5 and argues that the undefined term “investment” as
used in that endorsement must be given the dictionary definition of the term and thus applies to
real estate appraisals. 23 (See, e.g., Dkt. 209 at 25–26 (citing Merriam-Webster Dictionary
definition of “investment” as “the outlay of money usually for income or profit: capital outlay;
also: the sum invested or the property purchased.”)). 24 Cushman, in contrast, argues that
23
ACE and RLI make similar arguments, while Liberty maintains that no policy exclusions
apply.
24
RLI relies on a handful of cases in an attempt to demonstrate that the word “investment,” is
unambiguous. See Taylor v. Bar Plan Mut. Ins. Co., 457 S.W.3d 340 (Mo. 2015); Centerboard Sec., LLC
v. Benefuel, Inc., No. 3:15-CV-2611-G, 2017 WL 273881 (N.D. Tex. Jan. 20, 2017); Jasco Tools, Inc. v.
Am. Mfrs. Mut. Ins. Co., 673 N.Y.S.2d 864 (N.Y. Sup. Ct. 1998). None of these cases contain contractual
language directly parallel to the language at issue nor are they factually on all fours with the present case.
Thus, given the fact-intensive nature of the determination at hand, these cases are inapplicable.
22
“investment” cannot be read in a vacuum and when viewed in context of subsections (a)–(c), the
endorsement was intended to preclude coverage only for securities-related activities typically
undertaken by investment advisors. Given that “single clauses cannot be construed by taking
them out of their context,” there are two reasonable interpretations of the endorsement. 25 GMAC
Commercial Fin., LLC v. Ahn, No. 600673-2009, 2011 WL 2449024, at *3 (N.Y. Sup. Ct. June
15, 2011). The court thus looks to relevant extrinsic evidence to determine the parties’ intent as
to the meaning of the language in Endorsement 5. Both parties present a multitude of parol
evidence; the court considers all such evidence presented but discusses only the most pertinent
evidence below.
First, Illinois National has submitted regulatory filings in several states, which include an
“Investment Advisor Exclusion,” featuring nearly identical language to the exclusion at issue
here. 26 (See Dkt. 225, Pl. Exs. 39–41.) In certain of those filings, the purpose of the exclusion is
described as excluding Claims “arising from wrongful acts while providing professional services
as an investment advisor,” or from “professional services provided by an investment advisor.”
(Dkt. 225, Pl. Exs. 40–41.) Illinois National hangs its hat on the fact that in contrast to those
25
Illinois National’s broad interpretation of “investment” in the context of Endorsement 5,
Section 1(e), which precludes coverage for “any Claim alleging, arising out of, based upon, resulting
from, directly or indirectly, or in any way involving . . . the failure of any investment to perform as
expected or desired,” could render the provision illusory. (Dkt. 225, Pl. Ex. 2 at Endorsement 5, Section
1(e).) Such a reading creates ambiguity as it would essentially eliminate coverage for all Claims brought
in connection with Cushman’s appraisal business, including Claims brought by plaintiffs who objected to
how Cushman appraised the value of commercial property, regardless of the appraisal method used. The
court cannot accept an interpretation that would render superfluous the provision of coverage. See Nat’l
Union Fire Ins. Co. v. Am. Re-Ins. Co., 351 F. Supp. 2d 201, 210 (S.D.N.Y. 2005) (finding ambiguity
where a literal reading would be “limitless” and lead to an “absurd and unreasonable result”).
26
Illinois National notes that although it contains identical language, the regulatory filing in New
York is a directors & officers’ policy, rather than a professional liability policy, and that the Illinois
regulatory filing contains additional language distinct from that in the policy at issue. The court takes
these observations into account but notes that these differences are not dispositive given the overlapping
language at issue.
23
filings, Endorsement 5 is titled “Miscellaneous Exclusions Endorsement,” rather than
“Investment Advisor Exclusion.” This is simply a distraction. Unlike the stand-alone exclusions
in the regulatory filings, Endorsement 5 contains additional exclusions grouped under a single
endorsement. As Illinois National’s underwriter explained, Endorsement 5 is “a list of typical
exclusions . . . that aren’t contained in the Nottingham policy.” (Dkt. 225, Pl. Ex. 82 at 130:13–
16.) Given that Illinois National presents the relevant exclusionary language to its regulators in
multiple states as an exclusion pertaining to investment advisor activities, it is likely that the
same interpretation governs here.
Second, Cushman’s insurance industry custom and practice expert Tom Baker asserts that
“under the custom and practice in the liability insurance market, the exclusion would apply only
to claims that arise when a real estate company decides to dabble in the kinds of activities that
are conducted by investment advisors, not to claims that arise when the company engages in its
core real estate professional activities, such as conducting property appraisals.” 27 (Dkt. 225, Pl.
Ex. 90 ¶¶ 65–67.) Further, Illinois National’s underwriter testified that Endorsement 5, Section
1(a)–(e) is a “series of exclusions around investment activity,” that the exclusions are
“commonly used” and “should be used in any policy where we think an insured . . . can be giving
investment advice, that they can be guaranteeing the future value, comingling of funds,” and that
“we’re definitely not covering things an investment advisor would do.” (Dkt. 225, Pl. Ex. 82 at
131:3–132:18.) Despite Illinois National’s contention to the contrary, this testimony does not
indicate that Endorsement 5 pertains to activities other than those performed by an investment
advisor.
27
This court previously ruled that paragraphs 65–67 of Tom Baker’s expert report (dkt. 225, Pl.
Ex. 90) are appropriate expert opinions and admissible. (Dkt. 351 at 5.)
24
Third, Illinois National points to the fact that plaintiffs in the Underlying Claims referred
to their involvement with the relevant properties as “investments.” Such a reference, however,
does not lead to the conclusion that this is the type of investment contemplated by the language
of Endorsement 5.
Given the aforementioned evidence, the court finds that, to the extent they argue for
application of Endorsement 5, the insurers have not met their burden. They have failed to
“establish that the exclusion is stated in clear and unmistakable language,” and have not shown
that “it is subject to no other reasonable interpretation, and applies in the [present] case.” Belt
Painting, 795 N.E.2d at 17. Moreover, policy exclusions are “given a strict and narrow
construction, with any ambiguity resolved against the insurer.” 28 Id. Under these principles, as a
matter of law and undisputed fact Endorsement 5 does not bar coverage for the Underlying
Claims.
B.
Prior Knowledge Exclusion
Illinois National also argues that the Prior Knowledge Exclusion in the Nottingham
Policies, to which the Illinois National Policies follow form, bars coverage for the Underlying
Claims. No other insurer contends that this exclusion applies. In evaluating prior knowledge
exclusions, New York courts employ a two-pronged test, “first consider[ing] the subjective
knowledge of the insured and then the objective understanding of a reasonable [person] with that
knowledge.” Liberty Ins. Underwriters, Inc. v. Corpina Piergrossi Overzat & Klar LLP, 913
N.Y.S.2d 31, 33 (N.Y. App. Div. 2010); see also J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 51
28
RLI argues that the contra proferentem doctrine (construing an ambiguity against the insurer)
does not apply here because the parties are of equal bargaining power and Cushman was involved in
negotiating the policy and the inclusion of exclusions. There is no evidence that Cushman was involved in
negotiations related to Endorsement 5. The evidence RLI presents is inapposite; it relates to an exclusion
in the 2012–2013 policy year surrounding the exclusion of TNV appraisals.
25
N.Y.S.3d 369, 382 (N.Y. Sup. Ct. 2017). The burden is on the insurer to show the applicability
of the known-claims exclusion. Id. More specifically, Illinois National must show (1) that
Cushman subjectively knew that a Wrongful Act occurred prior to the policy’s effective date,
and (2) that a reasonable person with knowledge of the relevant facts might expect those facts to
be the basis of a claim. Illinois National has not met its burden.
As a threshold issue, the parties disagree about whose knowledge is at issue. The
Nottingham Policies state that they do not apply “[t]o any Claim arising from any Wrongful Act
committed prior to the beginning of the Policy Period, if on or before the inception date of this
Policy any Insured knew of such Claim 29 or the occurrence of a Wrongful Act that could
reasonably be expected to result in such Claim.” (Cushman Stmt. ¶ 30; Dkt. 225, Pl. Exs. 1, 6 at
Excl. 8; Pl. Exs. 8A–B, 10 at Excl. 7.) (emphasis added). Illinois National looks solely to the
language of the exclusion and contends that the knowledge of “any Insured” governs. Cushman,
on the other hand, points to the definition of “Claim”—“knowledge of a Claim or of a Wrongful
Act that could reasonably be expected to result in a Claim shall mean knowledge by the General
Counsel or Risk Manager of the Named Insured”—and reads the exclusion language to include
only the knowledge of Cushman’s General Counsel or Risk Manager. (See Cushman Stmt. ¶ 12;
Dkt. 225, Pl. Exs. 1, 6, 8A–B, 10 at Defin. 1.) The plain language of the Prior Knowledge
Exclusion makes clear that the knowledge of any Insured—defined as “any former, current, or
future partner, shareholder, officer, director or employee of the Insured, while acting on behalf of
29
Cushman and Illinois National present differing interpretations of which claims are at issue
under the Prior Knowledge Exclusion. Cushman contends that the exclusion can be triggered only by
prior knowledge of the specific Claim or underlying plaintiffs to which it relates. In other words, what
should be considered is whether Cushman knew the TNV appraisals were Wrongful Acts likely to result
in the Underlying Claims. Illinois National, in contrast, asserts that the exclusion bars coverage where
Cushman had knowledge of a Wrongful Act and the Wrongful Act could reasonably be expected to result
in a Claim. Given that Illinois National has not met its burden even under the broader view of the claims
applicable under the exception, the court need not reach this issue.
26
the Insured, in connection with the rendering of Professional Services”—is applicable.
Even applying the more expansive view of whose knowledge is at play, Illinois National
has not shown that the Prior Knowledge Exclusion bars coverage for the Underlying Claims.
Illinois National argues that Cushman appraisers knew as far back as 2006 that issuing TNV
appraisals was inherently misleading and might result in claims of professional malpractice or
misfeasance, but it submits no persuasive evidence to substantiate its assertion. It points to the
fact that Cushman changed the name of the appraisal method from Total Net Value to Total Net
Proceeds but ignores the October 6, 2006 internal memo from Brian Curry, the individual who
ordered the name change, that this was apparently done to “standardize the term and definition
for use in our reports,” (Dkt. 209, Illinois National Ex. NN) and his testimony that replacing
“value” with “proceeds” was a personal preference. (Dkt. 225, Pl. Ex. 78 at 166:10–17.)
Appraiser Michael Miller added that he believed Curry changed the name because “the word
‘value’ did not accurately represent the new type of analysis.” (Dkt. 209, Illinois National Ex.
MM ¶ 15.) Illinois National also contends that Cushman appraisers began taking issue with
conducting TNV appraisals as far back as 2006, pointing to an affidavit by Miller, which states,
The appraisers who were introduced to the new valuation premise questioned the
authenticity of this new “valuation premise.” As is typical in a non-conforming
assignment and typical of large institutional firms . . . executive compliance
managers discussed with the appraisers the premise, compliance, and the ability
for [Cushman] appraisers to perform these types of appraisals. . . .
[N]otwithstanding that the appraisals did not report market values, the parties in
the process [were] aware market value was not being reported and it was
explicitly stated in the appraisals that the value conclusions did not reflect market
value.
Because the valuation amounts being put on these new appraisal reports were
significantly higher than market value, concern as to liability and the compliance
approval required under FIRREA and USPAP was obviously present.
(Id. ¶¶ 12, 18.) But this ignores Miller’s testimony that after meeting with Credit Suisse about
27
such issues, he “walked away feeling comfortable that everything was being done properly and
these projects could continue forward.” (Dkt. 225, Pl. Ex. 76 at 127:10–12.) He also testified that
Cushman was “bound by the Uniform Standards of Professional Appraisal Practice [“USPAP”],
and we could not find anything under that state or federal regulation that we adhered to that
violated those requirements on appraisal.” (Dkt. 225, Pl. Ex. 73 at 116:4–12.)
True, appraisers may have had concerns, but this does not mean they knew issuing TNV
appraisals was inherently misleading, nor that a reasonable person with knowledge of the facts
surrounding these appraisals might expect such activity to be the basis of a claim. To the
contrary, Miller’s concerns were assuaged after speaking to Credit Suisse, and there was no
indication that Cushman was violating any USPAP requirements. Indeed, “mere knowledge of
‘some consequences’ of an act is inconsequential, which, standing alone, would not provide a
reasonable basis [for] the insured to believe that it had committed a wrongful act that foreseeably
will result in a claim.” J.P. Morgan, 51 N.Y.S.3d at 383; see also Title Indus. Assur. Co. v. First
Am. Title Ins. Co., 853 F.3d 876, 885–86 (7th Cir. 2017) (“[m]ere suspicion of questionable
transactions does not trigger the prior knowledge provision”). Under these facts, the Prior
Knowledge Exclusion does not bar coverage for the Underlying Claims.
As a fallback, Illinois National argues that at a minimum, the Prior Knowledge Exclusion
should bar coverage for the Highland Demand and the Blixseth and Rhodes Actions because each
of those actions followed the first-filed Gibson Action. Given that the Gibson Action alleges that
not only property owners but also developers and others were damaged, Illinois National
contends that Cushman could reasonably expect that developers and non-insider note holders
would bring a claim against it, which they did in the later-filed actions. But as the court in
Gibson explained when it dismissed the claims against Cushman, the appraiser did not owe a
28
duty to unrelated parties not mentioned in the appraisals. 30 Thus, it does not follow that Cushman
would have expected lawsuits from third parties to which it owed no duty. The Prior Knowledge
Exclusion is thus inapplicable.
IV.
Related Claims
A.
The Related Wrongful Act Provisions
Having disposed of the exclusion issues, the court must next determine whether certain
Related Wrongful Act Provisions apply such that the Underlying Claims are treated as though
they were made during the 2009–2010 policy year. Illinois National argues that because the
Underlying Claims are related, only the 2009–2010 policy is triggered, while Cushman and the
other defendants contend, often for differing reasons, that the Underlying Claims trigger the
policies in the policy year in which the specific claim was made.
The Policies generally provide coverage for claims that are first made against the insured
during the policy period and reported in writing to the insurer. The parties do not dispute that the
four Underlying Claims fall within the definition of “Claim” provided in the Nottingham Policies
and incorporated into the Illinois National Policies, nor that each Underlying Claim arose and
was reported during separate, consecutive policy years. Instead, Illinois National argues that all
Underlying Claims should be deemed related to the first-filed Gibson Action and treated as a
single claim under the 2009–2010 Illinois National Policy pursuant to the Related Wrongful Act
Provisions in the Nottingham and Illinois National Policies. The 2009–2010 Nottingham Policy
Limits of Liability provide, in relevant part:
If additional Claims are subsequently made which arise our [sic] of the same
30
More specifically, the court stated, “[p]laintiffs have not presented any authority or argument
showing Defendants owned a duty to Plaintiffs to use reasonable care in conducting the appraisals. For
these reasons, the court finds neither FIRREA nor USPAP imposed a duty of care on Defendants in favor
of Plaintiffs.” (Dkt. 225, Pl. Ex. 15 at *39.)
29
Wrongful Act as Claims already made and reported to the Company, all such
Claims, whenever made, shall be considered first made when the earliest Claim
arising out of such Wrongful Act was first made and all such Claims shall be
subject to one such Limit of Liability. 31
For purposes of the Limits of Liability, a series of continuous, repeated or
interrelated Wrongful Acts shall be considered as one Wrongful Act.
(Dkt. 225; Pl. Ex. 1) (emphasis added). The 2009–2010 Illinois National Policy similarly
provides:
[A]ny Claim that is subsequently made against the Insureds and reported to the
Insurer alleging, arising out of, based upon or attributable to the facts alleged in
the Claim or circumstances of which such notice has been given, 32 or alleging any
Wrongful Act which is the same as or related to any Wrongful Act alleged in the
Claim or circumstances of which such notice has been given, shall be considered
made at the time such Claim or circumstances has been given to the Insurer.
(Dkt. 225, Pl. Ex. 2) (emphasis added).
B.
Ambiguity of the Provisions
As a preliminary matter, Cushman contends that the terms “related” and “interrelated”
are ambiguous where, as here, they are undefined. “That the Policy does not have a specific
31
ACE contends that the relevant inquiry “is whether the Highland, Blixseth, or Rhodes Claims
arise out of the same Wrongful Act as Gibson,” because “the 2009 Nottingham Policy permits relation
only where the Wrongful Act is the same.” (Dkt. 213 at 10, 11–13.) This is so, ACE argues, because the
later “interrelated Wrongful Acts” language in the 2009 Nottingham Policy “protects the aggregate limits
of the policy by establishing a rule for batching together related Wrongful Acts” and thus “the policy
creates a higher hurdle for deeming a claim made during the policy period than it does for batching
together Wrongful Acts for purpose of the aggregate limits.” (Dkt. 328 at 10–11.) This interpretation is
belied by the plain language of the policy. The “interrelated Wrongful Acts” language begins with the
phrase “For purposes of Limits of Liability,” which implies that the language following that phrase
applies to the entire “Limits of Liability” section of the policy, not, as ACE contends, that “there is no
basis to read the later provision into the earlier provision.” Given the “interrelated Wrongful Acts”
language, ACE’s arguments related to the Illinois National Policy providing broader coverage than the
Nottingham Policy also fail.
32
Although Liberty analyzes both the “facts alleged” clause and the “wrongful act alleged”
clauses of the Illinois National Policy, the court need not reach the “facts alleged” clause to resolve the
related claims issue and thus focuses its analysis only on the “wrongful act alleged” clause in the 2009–
2010 Illinois National Policy.
30
definition of the phrase ‘related wrongful acts’ does not itself render that phrase ambiguous.
Rather, the Court asks whether the words are, in the context of the Policy, open to differing but
reasonable interpretations.” 33 Dormitory Auth. of New York v. Cont’l Cas. Co., No. 12 civ. 281,
2013 WL 840633, at *7 (S.D.N.Y. Mar. 5, 2013), aff’d in part, vacated in part, 756 F.3d 166 (2d
Cir. 2014). Here, Cushman’s bald assertion that the terms “related” and “interrelated” are
ambiguous simply because they are undefined fails. The parties have not presented differing but
reasonable interpretations of these words, and “[n]othing in the [policies] or the record of this
case suggests that the phrase ‘related to’ has been or should be given special meaning.” Id. at *8.
Thus, the court finds the language at issue unambiguous.
C.
Effectiveness of 2009-2010 Illinois National Policy
Liberty also raises a threshold issue—whether the Related Wrongful Act Provision in the
2009–2010 Illinois National policy was effective when the Highland, Blixseth, and Rhodes
Claims were made. 34 Liberty contends that because the 2010–2011 Illinois National Policy states
that it is a “replacement” of the 2009–2010 policy, while the 2012–2013 Illinois National Policy
states that it is a “renewal” of the 2011–2012 Illinois National Policy, the 2009–2010 policy,
including its Related Wrongful Act Provision, had been “replaced” and was therefore ineffective
at the time the Highland, Blixseth, and Rhodes Claims were made. Both Liberty and Illinois
National agree that the ordinary meaning of “replacement” is “a . . . thing that replaces . . .
something else,” and that the definition of “replace” is to “serve as a substitute for or successor
33
Courts interpreting similar provisions do not seem to agree whether “related” and “interrelated”
are unambiguous. See Dormitory Auth. of New York, 2013 WL 840633, at *7 (collecting cases and noting
that some find the relevant terms ambiguous while others determine such terms are unambiguous).
34
Liberty also contends that the court should find that the Highland Demand, the Blixseth Action,
and the Rhodes Action are covered under two separate policy years (i.e. the 2009–2010 policy as well as
the policy year in which each Claim was made and reported). Liberty provides no support for this
contention and the court finds no support in the record otherwise.
31
of.” (Dkt. 204 at 14; dkt. 268 at 26, citing Merriam-Webster Dictionary). Even if the 2009–2010
policy was “replaced,” it does not follow that the Related Wrongful Act Provision of that policy
is nullified or rendered ineffective. Indeed, that provision specifically contemplates that claims
made and reported after the policy year at issue may be implicated. Further, as Liberty pointed
out in Liberty Mut. Ins. Co. v. Treesdale, Inc., 418 F.3d 330, 343 (3d Cir. 2005), “in common
sense parlance, ‘renewal’ and ‘replacement’ mean essentially the same thing . . . Black’s Law
Dictionary . . . defines ‘renew’ as including ‘to replace.’” 35
D.
Relatedness of the Claims
Courts interpreting policies with similar provisions have explained that “[t]o establish
that a prior Claim is interrelated with a subsequent Claim, the Claims must share a ‘sufficient
factual nexus.’” 36 Quanta Lines Ins. Co. v. Investors Capital Corp., No. 06 Civ. 4624, 2009 WL
4884096, at *14 (S.D.N.Y. Dec. 17, 2009); accord Nomura Holding America, Inc. v. Federal
Ins. Co., 45 F. Supp. 3d 354, 370–71 (S.D.N.Y. 2014). “A sufficient factual nexus exists where
the Claims ‘are neither factually nor legally distinct, but instead arise from common facts’ and
where the ‘logically connected facts and circumstances demonstrate a factual nexus’ among the
Claims.” Quanta Lines, 2009 WL 4884096, at *14 (quoting Seneca Ins. Co. v. Kempter Ins. Co.,
35
Although Illinois National’s arguments related to extrinsic evidence are similarly persuasive
(see dkt. 268 at 26–27), the court need not reach these arguments given the unambiguous nature of the
terms at issue.
36
Cushman and Liberty argue that reliance on the factual nexus test is “misplaced” given that
some courts applying the test dealt with specific definitions of “Related Claims” found in the policies at
issue or different policy language altogether. (Dkt. 278 at 41; Dkt. 310 at 14.) True, the factual nexus test
has been applied to varying types of policy language, some of which is similar to that in the present case.
Thus, the factual nexus test is appropriate given the relevant policy language at issue. Further, use of the
factual nexus test is also supported by the distinction drawn by the Second Circuit in Nomura Holding
Am., Inc. v. Fed. Ins. Co., 629 F. App’x 38 (2d Cir. 2015). There, the court explained that the factual
nexus test need not be applied where “Related Claims” was defined in the policy at issue. It follows that
the test is presumably most applicable where, as here, such a phrase is not defined.
32
No. 02 Civ. 10088, 2004 WL 1445830, at *8–9 (S.D.N.Y. May 21, 2004)). To demonstrate a
sufficient factual nexus, the claims need not “involve precisely the same parties, legal theories,
Wrongful Acts, or requests for relief.” Zunenshine v. Exec. Risk Indem. Inc., No. 97 Civ. 5525,
1998 WL 483475, at *5 (S.D.N.Y. Aug. 17, 1998).
Courts have found a sufficient factual nexus after conducting a side-by-side review of the
factual allegations in the relevant complaints where the claims at issue had specific overlapping
facts. 37 See, e.g., Nomura, 45 F. Supp. 3d at 370–71 (S.D.N.Y. 2014) (finding “the relevant
complaints contain overlapping (and frequently identical) factual allegations, arising from
strikingly similar circumstances, alleging similar claims for relief” where plaintiffs in all actions
alleged they relied on certain misstatements in offering documents and registration statements
filed in connection with various RMBS offerings between 2005 and 2007); Quanta Lines, 2009
WL 4884096, at *14–15 (concluding that sufficient factual nexus existed between claims
accusing directors of failure to supervise the same representative’s sale of the same unregistered
securities); Zahler v. Twin City Fire Ins. Co., No. 04 Civ. 10299, 2006 WL 846352, at *6
(S.D.N.Y. Mar. 31, 2009) (“[a] side-by-side review of the Securities Complaint and ERISA
Complaint reveals that the facts alleged in the two actions are in many cases identical”);
Seneca, 2004 WL 1145830, at *9 (finding a factual nexus where the claims shared “numerous
logically connected facts and circumstances”); Zunenshine, 1998 WL 483475, at *5 (finding a
“strong factual nexus” where both lawsuits alleged “four of the same six plaintiffs made virtually
37
The parties on both sides cite numerous cases in support of their positions as to whether the
Underlying Claims are in fact related. The court notes that there appears to be some inconsistency in the
case law surrounding “related claims.” See John Zulkey, Related Acts Provisions: Patterns Amidst the
Chaos, 50 VAL. U. L. REV. 633, 636 (2016) (surveying “related claims” cases and noting that “an
imaginative attorney can scour up any number of factors that unite or divide the claims at issue, but the
challenge is finding binding or persuasive decisions stating that those factors are decisive”). For this
reason, the court has surveyed the relevant New York cases and analogized the facts of those cases to the
present case to help guide its determination on this issue.
33
identical false statements in reports, press releases, and other public statements” during the same
time period).
Similarly, the Underlying Claims at issue contain overlapping factual allegations and
arise from strikingly similar circumstances. They involve the same alleged course of conduct,
during the same time period, and involve many of the same MPCs. Specifically, plaintiffs in the
Underlying Claims each allege they were harmed in connection with appraisals done using the
Total Net Value methodology, which were misleading and artificially inflated the value of highend properties, to the benefit of Credit Suisse and Cushman. This is much more than a “tenuous
factual overlap.” See Glascoff v. OneBeacon Midwest Ins. Co., No. 13 Civ. 1013, 2014 WL
1876984, at *6 (S.D.N.Y. May 8, 2014) (finding no factual nexus because “the factual overlap
between the two Claims [was] tenuous at best” where first complaint alleged board members
failed in their control and oversight of CEO and second complaint alleged board failed to
investigate allegations of CEO’s misconduct). 38 Contrary to various arguments by Cushman,
ACE and Liberty, the claims need not involve “precisely the same parties, legal theories,
Wrongful Acts, or requests for relief.” 39 Zunenshine, 1998 WL 483475, at *5. Indeed, although
38
The factual nexus in the present case is much stronger than the other cases on which Cushman
relies. See Home Ins. Co. of Ill. (New Hampshire) v. Spectrum Info. Techs., Inc., 930 F. Supp. 825, 848
(E.D.N.Y. 1996) (concluding that wrongful acts were not “the same as, interrelated to, a continuation of,
or repetitious of” those in the original claim because the first wrongful act reported—misstatements
regarding a licensing agreement—represented a distinct act of wrongdoing from other wrongs alleged—
misstatements regarding earnings, trading based on material nonpublic information, and failure to disclose
a related SEC inquiry); Nat’l Union Fire Ins. Co. of Pittsburgh v. Ambassador Grp., Inc., 691 F. Supp.
618, 623–24 (E.D.N.Y. 1988) (concluding four claims against insured directors did not arise out of the
“same or interrelated acts” because they were “legally distinct claims that alleged different wrongs to
different people” where one alleged violations for failing to disclose information, another alleged
negligent mismanagement and breach of fiduciary duties through misstatements in annual statements,
another alleged inducement based on reliance on false financial statements, and the last alleged
mismanagement of a subsidiary company).
39
Cushman and ACE contend that while the Gibson Action complained about the TNV method,
the Highland Demand alleged that Cushman plugged bad data into the TNV method and thus the
34
differently situated, plaintiffs in the Underlying Claims appear to be various players affected by
the alleged scheme—property owners in MPCs, an owner and manager of an MPC, an MPC
developer, and a hedge fund that owned MPC debt. Plaintiffs in the original Gibson Action
recognized these players, alleging that not only property owners but developers and others were
affected by the alleged scheme.
That many of the same properties and appraisals were at issue in the Underlying Claims
further demonstrates the factual nexus. The Gibson Action was brought on behalf of persons and
entities that purchased property and homes in four MPCs—Lake Las Vegas, Yellowstone Club,
Tamarack, and Ginn Sur Mer; the Blixseth Action was brought by the owner and manager of
Yellowstone Club; 40 the Highland Demand involved plaintiffs whose claims arose out of loans
involving, among others, Yellowstone Club, Ginn Clubs & Resorts, and Rhodes Ranch; and the
Rhodes Action was brought by certain borrowers, including Rhodes Ranch. Indeed, plaintiffs in
the Gibson Action specifically pointed out that the alleged scheme began at Lake Las Vegas and
was repeated at various properties around the country:
Having perfected the appraisal and lending scheme on Lake Las Vegas, the coconspirators, Credit Suisse and Cushman embarked on a plan to employ these
same tactics . . . at each MPC thereafter at Tamarack, Yellowstone Club, Ginn sur
Highland Demand is not related to the Gibson Action. (Dkt. 221 at 40; Dkt. 210 at 14.) To the contrary,
Highland’s mediation statement specifically states that Cushman’s “appraisers knew that the Total Net
Value methodology did not reflect accepted industry standards or definitions,” and that “[i]n addition to
using the aberrant methodology, [Cushman] also adopted unsupported and unreasonable assumptions and
projections in its appraisal.” (Dkt. 225, Pl. Ex. 21 at 4–5.) Contrary to Cushman’s contention that the
Highland Demand involved different wrongs, the mediation statement also makes clear that Highland’s
claims “arise[] out of a series of appraisals C&W issued that purported to value five high-end residential
and resort developments,” that certain funds managed by Highland “rel[ied] upon C&W’s appraisals”
when investing in the subject loans, and that “C&W’s appraisals grossly overvalued the Developments
and, as a result, the Subject Loans were severely under-collateralized.” (Id. at 1–2.)
40
The plaintiff in the Blixseth Action was also the sole shareholder of Blixseth Group, Inc., which
owned all of the “A” voting shares of the Yellowstone Mountain Club, LLC, which owned the real estate
that the allegedly fraudulent appraisal were purportedly based on. (Dkt. 225, Pl. Ex. 16 ¶ 24.)
35
Mer and others with the exact same predictable and foreseeable result: default and
bankruptcies with the loss of contractual amenities, clubs and land values at
eighty (80%) percent or more.
(Dkt. 225, Pl. Ex. 14 ¶ 53.) Cushman is right to point out that each appraisal was a different work
product, providing a unique valuation analysis and conclusion by a different Cushman employee.
Certain appraisals, however, were at issue in multiple cases (e.g. the appraisal for Yellowstone
Club was implicated in the Gibson Action, the Highland Demand, and Blixseth Action) and the
unique appraisals were produced using the same allegedly misleading TNV appraisal method.
The claims are unmistakably based on much more than a “tenuous . . . factual overlap.” See
Glascoff, 2014 WL 187684, at *6. 41
IV.
Recoupment Counterclaims
Both Illinois National and ACE brought counterclaims for recoupment of certain defense
costs and money spent in settling certain of the Underlying Claims. Since neither Endorsement 5
nor the Prior Knowledge Exclusion bars coverage, the counterclaims for recoupment must be
denied. Given that the Underlying Claims are related, however, Illinois National is entitled to
reimbursement of amounts 42 paid in excess of Illinois National’s limit of $23 million for the
2009–2010 policy year. The Nottingham Policy provides, in relevant part:
If the Company has paid any amount in settlement or satisfaction of Claim or
41
Cushman and Illinois National present differing views of their treatment of the claims as
“related” during the 2009–2013 time period. Illinois National maintains that Cushman referred to the
Highland Demand and the Gibson Action as related from the beginning but changed course when it
realized that the potential exposure from the Underlying Claims might exceed the policy limits of one
policy period. Cushman, on the other hand, argues that Illinois National initially took the position that
TNV claims were not all related but has now changed course to argue that the Underlying Claims are
related. As both sides have shifted positions, these arguments add little to the determination at hand.
42
“Amounts” refers to that which is contained in Clause 8 of the 2009–2010 Nottingham Policy.
At the time it filed its answer (dkt. 84), Illinois National asserted that it had expended in excess of $27
million under the 2009–2010 Illinois National Policy and has since stated that this amount continues to
increase as it advances payments on the Gibson appeal.
36
judgments or Claims Expenses in excess of the Limits of Liability or within the
amount of the Deductible, the Insured shall be liable to the Company for such
amounts and, upon demand, shall promptly pay such amount to the Company. 43
(Dkt. 225, Pl. Ex. 1 at Clause 8.) Further, because the Underlying Claims are related, ACE,
Liberty and RLI must pay, to the extent the ACE, Liberty, and RLI 2009–2010 Policies are
triggered, all amounts incurred in connection with each Underlying Claim that are in excess of
the 2009–2010 Illinois National Policy (as to ACE) and the 2009–2010 ACE Policy (as to
Liberty and RLI), up to their respective policies’ limits.
V.
Breach of Contract Claims
Counts VI and VII allege that Illinois National breached its obligations by failing and
refusing to provide unqualified and timely coverage to Cushman for each of the Underlying
Claims and certain Other Claims (as defined in the Complaint) under the Illinois National policy
in effect at the time each such Claim was first made against Cushman. (Dkt. ¶¶ 111, 118.) Illinois
National argues that count VI should be dismissed, while Cushman asks the court to enter
judgment in its favor as to count VI. Illinois National contends that count VI should be dismissed
because Cushman does not specify which provision, if any, Illinois National breached. True, the
court previously dismissed count IX on this basis but determined that its own examination of the
ACE Policy did not reveal violation of a specific provision. Here Cushman presents no
additional evidence apart from the allegations in its complaint and that evaluated by the court in
its analysis of the declaratory judgment claims above. This does not raise a triable issue of fact
and Illinois National’s motion for summary judgment as to count VI is thus granted and
43
Cushman agrees that pursuant to Clause 8 of the Nottingham Policy, reimbursement “provides
the right to recover sums paid in excess of policy limits for allowed claims.” (Dkt. 346 at 28.)
37
Cushman’s motion is denied. 44
With respect to count VII, the parties have not briefed issues related to the Other Claims.
Cushman has not moved for summary judgment on them, and Illinois National’s motion does not
substantively address the Other Claims. As the Other Claims raise issues not addressed by the
motions before the court, Illinois National’s motion for summary judgment is denied as to count
VII. 45 MPM Silicones, LLC v. Union Carbide Corp., No. 111-cv-1542, 2016 WL 3962630, at
*35 (N.D.N.Y. July 7, 2016) (denying summary judgment because “[t]he Court need not decide
issues that are not adequately briefed”).
Counts VIII and X 46 allege that Illinois National and ACE breached their obligations
under the Standstill Agreement, which all parties agree requires Illinois National and ACE to
each pay 50% of the defense costs for the Underlying Claims. Cushman contends that Illinois
National and/or ACE have failed to pay $155,047.60 of defense costs incurred by Perkins Coie,
local counsel in certain of the Underlying Claims. Illinois National counters that it has paid its
50% with the exception of a May 31, 2017 invoice, 50% of which it intends to pay in ordinary
course. Although Illinois National seems to have made a good faith effort to pay its 50% share,
44
Illinois National argues in its memorandum of law that counts VI, VII, VIII, and XI should be
dismissed but does not specifically seek dismissal of the claims in its motion. Given that Illinois
National’s motion is styled as a “Motion for Partial Summary Judgment,” the court assumes Illinois
National moves for summary judgment as to counts VI, VII, VIII, and XI.
45
Cushman notes that Berger v. Cushman & Wakefield of Pa, Inc., No. 2:13-cv-05195 (E.D. Pa.
Sept. 5, 2013) is the only Other Claim pending, and that Illinois National does not argue that
Endorsement 5 or the Prior Knowledge Exclusion apply, but instead contends that Exclusion 1 (barring
coverage for fraud) applies.
46
This court previously granted ACE’s motion to strike “to the extent Cushman seeks attorney’s
fees in connection with count X.” (Dkt. 109.)
38
there appear to be some discrepancies in the amounts paid and the amounts owed. 47
ACE contends that Cushman has failed to meet its burden to show any consequential
damages or, if Cushman seeks to recover only unpaid defense costs for ACE’s breach of the
Standstill Agreement, count X is duplicative of count III and must therefore be dismissed. Count
X is not duplicative of count III as count III seeks declaratory relief in connection with the 2009–
2010 ACE Policy while count X seeks damages for breach of the Standstill Agreement. It also
appears that ACE has not made any payments on the relevant Standstill Agreement invoices.
(See Dkt. 278-1 ¶ 12; Dkt. 278, Pl. Exs. 98–99.) Further, Illinois National and ACE apparently
dispute the commencement date of ACE’s agreement to pay 50% of Cushman’s defense
expenses pursuant to the Standstill Agreement. These are disputes of fact. Given the record
before the court, a reasonable jury could find for Cushman, and thus summary judgment is
denied as to counts VIII and X.
Finally, count XI alleges that Illinois National breached the implied covenant of good
faith and fair dealing by, among other things, (a) asserting that the Underlying Claims fall within
the 2009–2010 Illinois National Policy; (b) asserting inapplicable and insupportable defenses to
coverage and threatening that it might not choose to renew coverage with Cushman in an effort
to compel Cushman to acceded to the treatment of the Underlying Claims as related claims all
falling under the 2009–2010 policy year; (c) demanding that Cushman agree to grant it a right of
recoupment; (d) taking inconsistent positions with respect to the scope and meaning of various
47
For example, the June 21, 2013 invoice is for $91,986.54. Illinois National’s 50% share
amounts to $45,993.27, but Illinois National paid $45,934.75, approximately $58.52 less than its share.
Similarly, the April 3, 2014 invoice is for $77,225.96. Illinois National’s 50% share amounts to
$38,612.98, but Illinois National paid $38,554.00, approximately $58.98 less than its share. Although
there may be a reasonable explanation for the discrepancies, the court has not been presented with any
such evidence. Further, Illinois National submitted its reply brief on September 15, 2017, several months
after the May 31, 2017 invoice was issued.
39
policy terms and exclusions, as well as which Illinois National Policies are trigged by each of the
Underlying Claims; (e) unreasonably delaying payment and/or refusing payment for the Other
Claims; and/or (f) demanding documents and/or information as a prerequisite to payments under
the Standstill Agreements. (Dkt. 1 ¶ 141.) New York law recognizes that the implied covenant of
good faith and fair dealing in an insurance contract encompasses the insurer’s duty to investigate
in good faith and pay covered claims. Bi-Econ. Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 886
N.E.2d 127, 131 (N.Y. 2008). Yet there remains a strong presumption “against a finding of bad
faith liability by an insurer,” and “[t]he presumption against bad faith liability can be rebutted
only by evidence establishing that the insurer’s refusal to defend was based on more than an
arguable difference of opinion and exhibited a gross disregard for its policy obligations.” Hugo
Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608, 625 (2d Cir. 2001). The court finds no such
evidence here. Many of the allegations are based on a mere difference of opinion. To the extent
they are not, there is no evidence that Illinois National exhibited gross disregard for its policy
obligations. To the contrary, even while coverage was in dispute, Illinois National has continued
to pay defense costs and agreed to fund $10 million to settle the Highland claim. Thus, Illinois
National’s motion for summary judgment as to count XI is granted, to the extent this count
relates to the Underlying Claims. This count survives as it relates to the Other Claims for the
reasons stated above in relation to count VII.
VI.
Affirmative Defenses
Cushman also requests that the court dismiss any affirmative defenses filed by Illinois
National and ACE that correspond to counts I, III, IV, V, and IV. 48 All such affirmative
48
Cushman does not identify which affirmative defenses “correspond” to counts I, III, IV, V, and
IV. Based on the courts review of all affirmative defenses, the court assumes that Illinois National’s
40
defenses, except Illinois National’s ninth defense and ACE’s twelfth defense, as they relate to the
Underlying Claims, will be dismissed for the reasons stated above. Illinois National (in its
twelfth affirmative defense) and ACE (in its ninth affirmative defense) also assert that
Cushman’s claims are barred by the doctrine of contingent loss/fortuity. Illinois National is
correct that it can assert the fortuity doctrine to disclaim coverage for the Underlying Claims in
addition to its defense based on the Prior Knowledge Exclusion. See Nat’l Union Fire Ins. Co. of
Pittsburgh, PA. v. Stroh Cos., Inc., 265 F.3d 97, 107 (2d Cir. 2001) (noting that “the known loss
defense is distinct from a defense based on policy language excluding coverage for injuries that
were expected or intended by the insured”). Illinois National, however, simply reiterates the
arguments it made with respect to its Prior Knowledge Exclusion defense in support of its
fortuity defense. ACE makes no argument on this point. The “known loss” defense, “requires
consideration of whether, at the time the insured bought the policy . . . the loss was known.”
Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1215 (2d Cir. 1995). The
known loss doctrine does not apply “where an insured merely knows there is a risk of loss, as
knowledge of a risk is the very purpose of acquiring insurance.” Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Xerox Corp., 792 N.Y.S.2d 772, 785 (N.Y. Sup. Ct. 2004). As discussed in
detail above, at the time the policy was issued, there is no evidence that Cushman knew of
anything more than a risk of loss. Accordingly, Illinois National’s twelfth affirmative defense
and ACE’s ninth affirmative defense are dismissed.
CONCLUSION AND ORDER
For the foregoing reasons, Cushman’s motion for partial summary judgment (dkt. 221) is
granted in part and denied in part, Illinois National’s motion for partial summary judgment (dkt.
corresponding affirmative defenses include the sixth, seventh, and ninth defenses, and ACE’s
corresponding affirmative defenses include the fourth, fifth, sixth, and twelfth defenses.
41
207) is granted in part and denied in part, ACE’s motion for summary judgment (dkt. 210) is
denied, Liberty’s motion for summary judgment (dkt. 203) is denied, and RLI’s motion for
summary judgment (dkt. 220) is denied.
With respect to the declaratory judgment claims, counts I, III, IV, and V, neither
Endorsement 5 nor the Prior Knowledge Exclusion bars coverage for the Underlying Claims; the
Blixseth Action, Highland Demand, and Rhodes Action are related to the Gibson Action; Illinois
National is entitled to reimbursement of amounts paid in excess of Illinois National’s limit of
$23 million for the 2009–2010 policy year; and ACE, Liberty and RLI must pay, to the extent
the ACE, Liberty, and RLI 2009–2010 Policies are triggered, all amounts incurred in connection
with each Underlying Claim that are in excess of the 2009–2010 Illinois National Policy (as to
ACE) and the 2009–2010 ACE Policy (as to Liberty and RLI), up to their respective Policies’
limits.
With respect to the breach of contract claims, Illinois National’s motion for summary
judgment is granted as to count VI as well as count XI to the extent this count relates to the
Underlying Claims, and denied as to counts VII and VIII, as well as count XI to the extent this
count relates to the Other Claims. Cushman’s motion for summary judgment is denied as to
count VI. ACE’s motion for summary judgment is denied as to count X. Counts IX and XII were
previously dismissed. (See dkt. 109.)
Further, Illinois National and ACE’s motions for summary judgment on their respective
counterclaims for recoupment are denied and Cushman’s motion on these counterclaims is
granted. 49 Cushman and Illinois National’s motions for summary judgment on Illinois National’s
49
To the extent such counterclaims refer to reimbursement, the court refers the parties to the
portion of its order related to the declaratory judgment counts.
42
declaratory judgment counterclaims are granted in part and denied in part as is consistent with
the reasoning in this opinion. Certain affirmative defenses asserted by Illinois National and ACE
as identified in this opinion (except Illinois National’s ninth defense and ACE’s twelfth defense)
are also dismissed, to the extent they relate to the Underlying Claims. 50 Remaining counts
include count II, count VII, count VIII, count X and count XI to the extent it relates to the Other
Claims.
The case will be called for status hearing on May 22 at 11:00 a.m. to set a date for trial.
Before the status hearing, the parties are directed to discuss the possibility of settlement.
Date: April 20, 2018
_______________________________
U.S. District Judge Joan H. Lefkow
50
Illinois National has apparently agreed “to stipulate to the dismissal without prejudice (subject
to reinstatement pending the decision of the Gibson appeal) of [Illinois National’s] Eighth Affirmative
Defense raising Exclusion #1 of the Nottingham Policies, which provides that ‘This Policy does not
apply: to any claim alleging intentional wrongdoing, fraud, dishonesty, or criminal or malicious acts of
the Insured’ as well [as] that portion of [Illinois National’s] counterclaim raising Exclusion 1 only.” (Dkt.
225, Pl. Ex. 71.)
43
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