Morden et al v. XL Specialty Insurance
Filing
80
MEMORANDUM DECISION AND ORDER-denying as moot 30 Motion for Summary Judgment ; denying as moot 33 Motion ; denying as moot 46 Motion for Partial Summary Judgment; denying as moot 50 Motion for Summary Judgment ; granting 53 Motion for Summary Judgment ; granting in part and denying in part 25 Motion for Partial Summary Judgment. See Order for additional details. Signed by Judge Clark Waddoups on 4/5/16. (jmr)
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
JAMES MORDEN, et al.,
Plaintiffs,
MEMORANDUM DECISION AND
ORDER
v.
XL SPECIALTY INSURANCE,
Case No. 2:14-cv-00224
Defendant.
Judge Clark Waddoups
This case arises out of James, Jenalyn, and Wade Morden’s claims against Defendant XL
Specialty Insurance (XL) for XL’s alleged bad faith denial of insurance coverage and breach of
its fiduciary duty to its insureds, Terry Deru and Belsen Getty, LLC (collectively, Belsen Getty).
Before the court are the Mordens’ motions for partial summary judgment on XL’s fourth, ninth,
eleventh, twelfth, sixteenth, twentieth, and twenty-third affirmative defenses (Dkt. No. 25), the
Mordens’ motion for partial summary judgment on XL’s counterclaim for declaratory judgment
(id., p. 2), XL’s Rule 56(d) motion (Dkt. No. 33), XL’s cross motion for summary judgment on
its fourth affirmative defense (Dkt. No. 30), the parties’ motions and cross motions for summary
judgment on XL’s thirteenth affirmative defense (Dkt. Nos. 46, 50), and XL’s motion for
summary judgment on the Mordens’ bad faith claims (Dkt. No. 53). The court held a hearing on
all the motions, and permitted the parties to submit supplemental briefing. (Dkt. Nos. 67, 70, 72).
The court has carefully considered the parties’ submissions, arguments, and relevant
authorities. For the reasons that follow, the court finds that XL’s claim denial was in error but
that XL is entitled to judgment as a matter of law on the Mordens’ bad faith claims. Accordingly,
the court GRANTS XL’s motion for summary judgment (Dkt. No. 53), GRANTS in part and
DENIES in part the Mordens’ motion for partial summary judgment on XL’s counterclaim
(Dkt. No. 25), and DENIES as moot the remaining motions (Dkt. Nos. 30, 33, 46, 50).
BACKGROUND
The following facts are undisputed for the purposes of the parties’ motions for summary
judgment. Belsen Getty, an investment advisement company, and Mr. Deru—Belsen Getty’s
director, managing member, and control person—had an insurance policy through XL that
extended from October 9, 2010 through October 9, 2011 (the Policy Period). (Dkt. No. 29,
p. 12).1 The Policy has a limit of $1,000,000 for all claims filed in the Policy Period. (Dkt. No. 2,
p. 4).
James and Jenalyn Morden were clients of Belsen Getty beginning in approximately
1990. Over an approximately twenty-year period, the Mordens met with Mr. Deru and made
several investments with Belsen Getty through Mr. Deru. In general, the Mordens had a
conservative portfolio. But beginning in approximately 2005 and continuing through 2009,
Belsen Getty began making recommendations and investments that were unsuitable and/or did
not match the Mordens and other investors’ investment goals. For example, using Belsen Getty’s
discretionary authority, Mr. Deru purchased shares of stock in Nine Mile Software, Inc. for
Mr. and Ms. Morden’s account. (Dkt. No. 12-4, p. 5). But Mr. Deru did not disclose to the
Mordens that Nine Mile was founded by Mr. Deru’s son and Andrew Limpert, who was a
member, direct owner, and control person of Belsen Getty from 2004 through 2008. (Dkt. No.
32-3, p. 4).2 Mr. Deru also failed to disclose that Belsen Getty controlled Nine Mile’s
outstanding non-restricted stock. (Id. at p. 5). In addition, Belsen Getty recommended that
1
There was also a prior policy that extended from October 2009 through October 2010. The parties agree
this policy is not at issue.
2
Mr. Deru’s son was an investment advisor associated with Belsen Getty from 2000 through 2008.
2
investors invest in Axxess Funding Group, LLC, a company formed by Mr. Deru, his son, and
Mr. Limpert, which was engaged in the business of secured real estate lending. (Dkt. No. 12-4,
p. 6). Using Belsen Getty’s discretionary authority, Mr. Deru purchased shares of Axxess stock
for Mr. and Ms. Morden’s account. (Id., p. 6–7). But Mr. Deru did not disclose to Mr. and
Ms. Morden that he had hired and paid his son, who had only a high school education, to
perform functions related to Axxess, including managing and using investor funds. (Id., p. 6).
Mr. Deru also used investor funds in Axxess to loan himself up to $500,000 without obtaining
the consent of Axxess investors. (Id.). In 2008, Mr. Deru, using Belsen Getty’s discretionary
authority, purchased shares of stock for Mr. and Ms. Morden’s account in a corporation called
ProFire Combustion, Inc. Mr. Deru did not disclose to Mr. and Ms. Morden that Mr. Limpert
was the Chief Financial Officer of ProFire during that period of time.3 Mr. Deru also failed to
disclose that Belsen Getty controlled the non-restricted common stock of ProFire and that the
stock was not freely tradeable. (Id., p. 7).
Beginning in late 2008, Mr. Deru began encouraging Mr. and Ms. Morden, and their son,
Wade, (collectively, the Mordens) to invest in a gold mine in Mexico. (Id., p. 8). The investment
would be in the form of a real estate loan, secured by water right shares in Southern Utah. (Id.,
p. 9). Mr. Deru represented that the gold mine was owned and operated by Vermillion Holdings,
LTD, a Nevada Corporation, and that the plant had secured all necessary permits and was “ready
to go.” According to Mr. Deru, it was a low risk investment. (Id.). On the basis of these
representations, in May 2009 the Mordens transferred $500,000 to Vermillion. (Id., p. 10). A few
months later, Mr. Deru represented that the gold mine would be up and running in two-and-ahalf weeks. The Mordens then invested an additional $500,000 into the mine. (Id. at 11).
3
Prior to October 2008, Mr. Limpert was the CEO of a company called Flooring Zone. As the result of a
reverse merger, Flooring Zone changed its name to ProFire. After the reverse merger, Mr. Limpert became ProFire’s
CFO. (Dkt. No. 12-4, p. 7).
3
Ultimately, however, the Mordens learned that the mine was not as Mr. Deru represented it to be.
For example, it was not owned by Vermillion, was not operational, was subject to liabilities and
obligations that had not been disclosed, and lacked the necessary permits. At the urging of
Mr. Deru, the Mordens decided to take over operation of the mine, incurring significant
additional costs in an effort to make the mine successful. (Dkt. Nos. 2, p. 3; 12-4, pp. 10–16).
In February 2009, the SEC began investigating Belsen Getty’s potential violations of the
Advisers Act and actions related to the sale of Nine Mile stock. (Dkt. No. 32-1, pp. 39, 54, 212–
13). Although not initially the subject of the SEC’s investigation, the SEC learned of ProFire,
Axxess, and the Mexican gold mine in the course of its investigation. (Dkt. No. 32-3, pp. 2–14).
Ultimately, the SEC issued formal administrative cease and desist proceedings. (Id.). The SEC
matter was resolved when Belsen Getty and the SEC agreed to settle the case. (Dkt. No. 55-3, pp.
61–71). In the settlement agreement, the SEC found that Belsen Getty violated federal securities
laws in connection with Nine Mile, Axxess, and ProFire; found that it violated the Advisers Act;
ordered Belsen Getty to cease and desist from further violations; revoked Belsen Getty’s
registration; barred Mr. Deru from acting as a broker, dealer or investment adviser; and imposed
disgorgement and civil penalties on Mr. Deru totaling $177,596.96. (Id., pp. 61–71). The
settlement made no reference to Vermillion or the Mexican gold mine. (See id.).
On October 7, 2011, the Mordens filed a complaint in Utah state court against Belsen
Getty and Mr. Deru asserting claims for breach of fiduciary duty, unauthorized transactions,
negligence, fraud, violations of the Utah Securities Act, and negligent infliction of emotional
distress as a result of Belsen Getty and Mr. Deru’s actions related to Nine Mile, Axxess, ProFire,
Vermillion, and the Mexican gold mine (the Morden Claim).4 (Dkt. No. 52-2, p. 131–158).
4
In May 2011, the Mordens filed a third-party complaint against Mr. Deru and Belsen Getty in the case
Tabakh Group v. Vermillion Holdings, et. al. (Dkt. No. 55-3, pp. 87–105). In this third-party complaint, the
4
Belsen Getty submitted the Morden Claim to XL, which denied the claim. According to XL, it
had no obligation under the Policy to pay the Morden Claim because that claim arose from the
same interrelated wrongful acts upon which the SEC’s investigation was premised. (Dkt. No. 324, p. 62–69). Thus, XL asserted that the Morden Claim was deemed to have been made when the
SEC began its investigation in 2009, prior to the Policy Period. (Id., p. 68). The Mordens then
submitted an offer to settle with Belsen Getty for the Policy Limits. (Id., p. 94). When Belsen
Getty’s attorney forwarded the communication to XL, XL declined to settle for the same reasons
it denied coverage. (Id., p. 93–98).
Ultimately, Belsen Getty and the Mordens agreed to settle the Morden Claim. They
prepared an Arbitration Award5 providing that Mr. Deru and Belsen Getty were liable to the
Mordens in the amount of $5,434,730. (Id., p. 116–28). The parties also entered into an
assignment agreement, whereby Belsen Getty assigned to the Mordens “any and all of their
rights and claims that Belsen Getty and Deru may have against XL, of any nature or kind relating
in any way to the claims at issue in the [Morden state] lawsuit, XL’s handling of Mordens’
claims against Belsen Getty and Deru, XL’s rejection of Mordens’ policy limits settlement offer,
and the Arbitration Award.” (Id., p. 109).6 Pursuant to this assignment, the Mordens filed the
instant case alleging: 1) XL breached the implied covenant of good faith and fair dealing in its
investigation and denial of the Morden Claim, and 2) XL breached its fiduciary duty to settle the
Mordens brought claims for common law fraud, violations of the Utah Uniform Securities Act, unjust enrichment,
constructive trust, and replevin related to Mr. Deru’s actions regarding Vermillion and the Mexican gold mine. The
complaint did not make allegations related to Nine Mile, ProFire, or Axxess. (Id., pp. 87–105). This complaint was
dismissed shortly after it was filed. (Id., pp. 108–109). The Mordens do not assert that the third-party complaint in
the Tabakh action constitutes a claim under XL’s policy. To the contrary, the Mordens rely only on XL’s actions
related to the complaint filed on October 7, 2011. (See Dkt. No. 25, p. 2 (“[N]o ‘claim’ was made on [the gold mine]
investment until the Mordens filed a civil lawsuit in Utah state court on October 7, 2011.”). Accordingly, the court
treats the October 7, 2011 complaint as the relevant claim for the purposes of its analysis.
5
Although titled “Findings of Fact, Conclusions of Law, and Arbitration Award,” the case was never
arbitrated.
6
Claims that are not assignable are expressly reserved to Belsen Getty. (Dkt. No. 32-4, p. 109).
5
claim at Policy Limits because there was a substantial likelihood that there would be a judgment
against Belsen Getty in excess of Policy Limits. (Dkt. No. 2, pp. 5–8). XL filed a counterclaim
seeking declaratory judgment that no coverage existed under the Policy because the Morden
Claim relates back to the SEC investigation. (Dkt No. 12, pp. 20–22). In turn, the Mordens filed
a motion for partial summary judgment on XL’s counterclaim on the basis that the SEC prePolicy Period investigation does not constitute a claim under the Policy and that the Morden
Claim does not arise out of wrongful acts interrelated with the SEC investigation. (Dkt. No. 25, p. 2,
5–7).7 For its part, XL moved for summary judgment on the Mordens’ bad faith claims.
(Dkt. No. 53). Specifically, XL argues that even if the Morden Claim should have been covered
by the Policy, XL acted in good faith in investigating and denying it. (Id.). The court first
addresses the Mordens’ motion for partial summary judgment on XL’s counterclaim before
turning to XL’s motion for summary judgment on the Mordens’ bad faith claims.8
ANALYSIS
In considering the parties’ competing motions for summary judgment, the court treats
each motion separately, drawing all reasonable inferences against the party whose motion is
under consideration. See Macon v. United Parcel Serv., Inc., 743 F.3d 708, 712 (10th Cir. 2014)
(at the summary judgment stage, the court must “view the evidence and draw reasonable
inferences therefrom in the light most favorable to the nonmoving party”); Buell Cabinet Co. v.
Sudduth, 608 F.2d 431, 433 (10th Cir. 1979) (“Cross-motions for summary judgment are to be
7
XL also seeks declaratory judgment that there is no coverage for the Morden Claim by virtue of Policy
Exclusion J, which excludes coverage for losses relating to Belsen Getty’s rendering of investment banking services.
(Dkt. No. 12, p. 21). Neither party has sought summary judgment related to this exclusion. Thus, the court does not
consider it further.
8
The Mordens also filed multiple partial motions for summary judgment on a many of XL’s affirmative
defenses. Because the court finds that XL’s motion for summary judgment on the Mordens’ bad faith claims
disposes of the Mordens’ complaint, it need not consider the partial motions and cross motions for summary
judgment related to any of XL’s affirmative defenses.
6
treated separately; the denial of one does not require the grant of another.”). Summary judgment
is appropriate “if the movant shows that there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
A. The Mordens’ Motion for Summary Judgment on XL’s Claim for Declaratory
Judgment
As explained, XL seeks declaratory judgment that it had no obligation to pay the Morden
Claim under the plain terms of the Policy. In support, XL argues that SEC pre-policy
correspondence constitutes a “claim” under the Policy and that the Morden and SEC
investigation arose from interrelated wrongful acts. Accordingly, XL asserts that the Morden
Claim should be deemed to have been made in 2009, prior to the Policy Period.
In interpreting the Policy, the court looks to Utah law. See Berry & Murphy, P.C. v.
Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th Cir. 2009) (in diversity jurisdiction case, federal
court applies the substantive law of the forum state).9 In Utah, “Insurance policies are generally
interpreted according to rules of contract interpretation.” Utah Farm Bureau Ins. Co. v. Crook,
980 P.2d 685, 686 (Utah 1999). Thus, as it would with any other contract, the court must
construe the Policy’s provisions “by considering their meaning to a person of ordinary
intelligence and understanding, in accordance with the usual and natural meaning of the words,
and in the light of existing circumstances, including the purpose of the policy.” Lopez v. United
Auto. Ins. Co., 274 P.3d 897, 902 (Utah 2012) (internal quotation marks and ellipses omitted).
But because “an insurance policy is a classic example of an adhesion contract,” Utah courts have
long held that “insurance policies should be construed liberally in favor of the insured and their
9
In cases arising under diversity jurisdiction, the court is bound by the decisions of the forum state’s
highest court. In the absence of such binding authority, the court must attempt to predict what the state’s highest
court would do by seeking guidance from decisions rendered by lower courts in the relevant state, appellate
decisions in other states with similar legal principles, district court decisions interpreting the law of the state in
question, and “the general weight and trend of authority” in the relevant area of law. Wade v. EMCASCO Ins. Co.,
483 F.3d 657, 666 (10th Cir. 2007).
7
beneficiaries so as to promote and not defeat the purposes of insurance.” U.S. Fid. & Guar. Co.
v. Sandt, 854 P.2d 519, 521–22 (Utah 1993) (internal quotation marks omitted). “It follows that
ambiguous or uncertain language in an insurance contract that is fairly susceptible to different
interpretations should be construed in favor of coverage” and “provisions that limit or exclude
coverage should be strictly construed against the insurer.” Id. at 522–23. Accordingly, “once the
insured has established the right of coverage under the insuring clause and liability coverage is
triggered, the insurer has the burden to demonstrate that exclusions exist under which it can deny
coverage.” Am. Nat. Prop. & Cas. Co. v. Sorensen, 362 P.3d 909, 913 (Utah Ct. App. 2013). The
court strictly construes any exclusions, giving them effect “only when they use language which
clearly and unmistakably communicates to the insured the specific circumstances under which
the expected coverage will not be provided.” Id. at 916 (internal quotation marks omitted).
Here, the Policy is a claims-made policy, which by its very nature provides coverage only
for claims first made during the Policy Period. See AOK Lands, Inc. v. Shand, Morahan & Co.,
860 P.2d 924, 927 (Utah 1993). Specifically, the Policy provides that the “insurer shall pay on
behalf of the insureds loss resulting from claims first made10 against the insured during the
Policy Period . . . for wrongful acts.” (Dkt. No. 12-1, p. 20).11 In turn, “wrongful acts” are “any
actual or alleged act error, omission, misstatement, misleading statement or breach of fiduciary
duty or other duty committed by any insured in the performance of, or failure to perform,
professional services.” (Id.).
10
The parties agree that a claim is formally “made” for the purposes of the Policy when the insured
receives notice that a third party has alleged wrongful acts against it. In a separate section, the Policy provides that
claims can also be deemed to have been made during the Policy Period, if, prior to the Policy Period, the insured
becomes aware of a wrongful act and discloses that there is a potential claim to the insurer before the formal claim
has been made to the insured. In such a case, a subsequent claim (submitted to the insured) will be treated as made
on the date the notice was given to the insurer. See (Dkt. No. 12-1, p. 16).
11
Various terms that are defined by the Policy are bolded and capitalized in the Policy. For ease of reading,
the court omits these stylistic emphases.
8
The Policy also contains a relate-back exclusion, which states that “[a]ll claims arising
from interrelated wrongful acts shall be deemed to constitute a single claim and shall be deemed
to have been made at the earliest time at which the earliest such claim is made or deemed to have
been made.” (Id., p. 17). Claims that are deemed to have been made prior to the applicable Policy
Period are excluded from coverage under the Policy.12 Accordingly, the court must determine:
1) whether the SEC’s pre-Policy Period investigation notices constitute a claim and if so, 2)
whether both the SEC Claim and the Morden Claim arise from interrelated wrongful acts.
1. The SEC’s pre-Policy correspondence constitutes a claim.
The Policy defines a claim as “(1) any written notice received by an insured that any
person or entity intends to hold any insured responsible for a wrongful act; (2) any civil
proceeding in a court of law or equity, or arbitration; or (3) any criminal proceeding which is
commenced by the return of an indictment.” (Dkt. No. 12-1, p. 14 (emphasis added)). Based on
this language, it is apparent that a claim may be something less formal than the civil or criminal
proceedings contemplated by subsections (2) and (3) because of the Policy’s disjunctive
inclusion of subsection (1). Likewise, nothing in the Policy requires that the wrongful act
referenced in the notice be definitively proven. To the contrary, wrongful acts include mere
allegations of wrongdoing. Id.; see, e.g., Nat’l Stock Exch. v. Fed. Ins. Co., No. 06-civ-1603,
2007 WL 1030293, at *5 (N.D. Ill. Mar. 30, 2007) (holding that where wrongful acts are defined
to include acts “allegedly” committed, “the scope of the term necessarily includes acts that may
have been committed”).
12
As explained, claims made after the Policy Period can, in some instances, be deemed to have been made
during the Policy Period for the benefit of the insured so long as the insured provides the insurer with notice of a
potential claim. See, e.g., AOK Lands, Inc. v. Shand, Morahan & Co., 860 P.2d 924, 926 (Utah 1993) (“The typical
claims-made policy provides insurance coverage for acts or omissions occurring either before or during the term of
the policy, provided the claim is discovered and reported during the same policy term.”); Burks v. XL Specialty Ins.
Co., No. 14-14-00740-CV, 2015 WL 6949610, at *5 (Tex. App. Nov. 10, 2015) (explaining that interrelated-claims
provisions can be a double-edged sword).
9
But it is also evident that notice to hold the insured responsible for a wrongful act must
be more than “an accusation that wrongdoing occurred . . . a naked threat of a future lawsuit . . .
or a request for information or an explanation.” Windham Solid Waste Mgmt. v. Nat’l Cas. Co.,
146 F.3d 131, 134 (2d Cir. 1998); see, e.g., Office Depot, Inc. v. Nat’l Union Fire Ins. Co., 453
F. App’x 871, 876 (11th Cir. 2011) (unpublished opinion) (holding that letters from the SEC
merely requesting that Office Depot preserve documents and provide testimony were not claims,
but that a Wells Notice, which stated that a civil proceeding for injunctive relief may be
commenced, was a claim). Accordingly, courts have limited the definition of a claim for the
purposes of a relate-back defense to require allegations of wrongdoing coupled with a specific
demand for relief. See Windham, 146 F.3d at 134.
For instance, in Windham, the Second Circuit held that several letters from the Vermont
Agency of Natural Resources constituted a claim—which was defined as written or oral notice
from any party that it is the intention of such party to hold the insured responsible for any
wrongful acts—because those letters explained that the Windham Solid Waste Management
District would be responsible for the environmental cleanup caused by the District’s solid waste
disposal practices. The Second Circuit reasoned that this correspondence was sufficient to
constitute a claim because it definitively demanded specific relief in the form of environmental
cleanup costs—although in an amount yet to be determined. Id. at 134–35.
Likewise, in Fidelity National Property & Casualty Co. v. Boardwalk Condominium
Association, Inc., No. 3:07-cv-278, 2010 WL 1911159 (N.D. Fla. May 12, 2010), the United
States District Court for the Northern District of Florida considered whether various letters
constituted claims in the context of a claim definition identical to the Policy at issue here. There,
the plaintiff, Fidelity National Property & Casualty Company, provided notice to the defendant,
10
Boardwalk Condominium Association, that Fidelity intended to hold Boardwalk responsible for
improperly reporting the status of buildings damaged by flooding, resulting in Boardwalk
receiving insurance payments in excess of the amounts to which it was entitled. Id. at *5. As a
result, Fidelity submitted several letters to Boardwalk “requesting” repayment of the specific
sums it asserted were incorrectly paid. Id. Fidelity also expressly stated that if Boardwalk did not
remit these sums, Fidelity would “take further action to make the recovery.” Id. at *6. The court
explained that the assertion of incorrectly paid sums, coupled with Fidelity’s express statement
that it would take further action if Boardwalk did not remit payment, “unmistakabl[y]” evidenced
Fidelity’s intent to hold Boardwalk responsible for the error. Id. at *5. Thus, the letters
constituted a claim under the policy.
Guided by this persuasive authority, the court concludes that the SEC’s pre-Policy Period
notices of its investigation constitute a claim as that term is defined in the Policy. In February
2009, prior to the Policy Period, SEC staff sent Belsen Getty a Wells Notice informing Belsen
Getty that it “intended to recommend that the Commission bring a civil injunctive action” against
Belsen Getty, alleging that Belsen Getty violated various securities laws. (Dkt. No. 55-1, p. 39).
Also prior to the Policy Period, on August 28, 2009, SEC staff sent a letter to Belsen Getty
indicating that the SEC had conducted an examination and had “identified” various “deficiencies
and weaknesses,” including allegations that Belsen Getty and related persons manipulated the
market for Nine Mile, and “may have orchestrated a scheme of executing discretionary trades in
Belsen Getty accounts in order to create a false appearance of active trading and raise the price”
of Nine Mile stock. (Dkt. No. 55-1, p. 211–14). The letter stated further that it “appears Belsen
Getty and related persons may have failed to provide certain material disclosures to clients,” and
that Belsen Getty “appears to have breached its fiduciary duty to clients” by failing to inform
11
investors of its conflicts of interest related to Nine Mile. (Id., p. 213–14). The letter also alleged
various failures to comply with the Advisers Act. The letter concluded that SEC staff brought
these deficiencies and weaknesses to Belsen Getty’s attention “for immediate corrective action.”
(Id., p. 217). It further requested that Belsen Getty respond in writing “describing the steps [it
had] taken or intend[s] to take with respect to each of these matters.” (Id.).
In addition, on September 24, 2009, also prior to the Policy Period, the SEC issued an
order directing an investigation for the wrongful acts the SEC had identified in its prior
correspondence. In this order, the SEC stated that it had information that “tends to show” Belsen
Getty “may have been or may be employing devices, schemes, or artifices to defraud, obtaining
money or property by means of untrue statements of material fact or omitting material facts,” in
relation to Belsen Getty’s sale of Nine Mile stock. (Dkt. No. 25-4, pp. 2–4). It further authorized
SEC officers to “administer oaths and affirmations, subpoena witnesses, compel their
attendances, take evidence, and require the production of any books, papers, correspondence,
memoranda, contracts, agreements, or other [relevant] records.” (Id., p. 4). Acting pursuant to
this authority, SEC officers issued subpoenas to Mr. Limpert, Mr. Deru, and Mr. Deru’s son,
compelling them to testify before the SEC and produce various documents. The subpoenas stated
that failure to comply “may subject you to fine and/or imprisonment.” (Dkt. Nos. 32-1, pp. 227,
234; 32-2, p. 257).
When taken together, this correspondence provided notice to Belsen Getty that the SEC
intended to hold it responsible for wrongful acts, including its breaches of fiduciary duties to
investors. Rather than be mere accusations of wrongdoing, naked threats of a future lawsuit, or
simple requests for information or explanation, the SEC correspondence plainly evidences the
SEC and its staff’s intent to seek specific relief from Belsen Getty by recommending that the
12
SEC bring a civil injunctive action, demanding “immediate corrective action,” and compelling,
through subpoena, testimony and production of documents. See, e.g., Polychron v. Crum &
Forster Ins. Co., 916 F.2d 461, 463 (8th Cir. 1990) (holding that the definition of claim
encompassed a subpoena to appear before a grand-jury because, although issued to a third-party
bank, the documents demanded were related to the plaintiff’s conduct as a bank official, and the
investigation and questioning at the grand jury proceeding amounted to an allegation of
wrongdoing); Minuteman Int’l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004 WL 603482, at
*7 (N.D. Ill. Mar. 22, 2004) (collecting cases and holding that SEC orders directing
investigations and subpoenas that compelled testimony and production of documents constituted
demands for specific relief such that they were a claim). The understanding that the SEC
intended to seek specific relief from Belsen Getty is further confirmed by the undisputed fact
that, prior to the Policy Period, counsel for Belsen Getty attempted to negotiate a settlement with
the SEC “in an effort to resolve the Staff’s concerns about their conduct.” (Dkt No. 32-2, p. 91–
92). This offer to settle illustrates that even Belsen Getty was aware that the SEC intended to
hold it responsible for the alleged wrongful acts. See Polychron, 916 F.2d at 463 (finding it
relevant that the insured “prudently hired an attorney” to represent him during grand jury
proceedings, and therefore “[t]he defendants’ characterization of the grand-jury investigation as
mere requests for information and an explanation underestimates the seriousness of such a
probe”); Minuteman Int’l, 2004 WL 603482, at *7 (“[A]n SEC subpoena is not a mere request
for information, but a substantial demand for compliance by a federal agency with the ability to
enforce its demand.”). On these facts, XL correctly determined that the SEC’s pre-Policy Period
notices constitute a claim under the Policy.
13
2. Interrelated Wrongful Acts
Having determined that the SEC’s pre-Policy Period notices constitute a claim
(hereinafter the SEC Claim), the court now considers whether the Morden Claim should be
excluded from coverage because it relates back to the SEC Claim. This requires the court
determine if the both the SEC Claim and the Morden Claim arise from interrelated wrongful acts
such that they should be considered a single claim deemed to have been made on the date of the
SEC Claim. (Dkt. No. 12-1, p. 16–17).
The Policy defines interrelated wrongful acts as wrongful acts that “are based on, arising
out of, directly or indirectly resulting from, in consequence of, or in any way involving any of the
same or related or series of related facts, circumstances, situations transactions or events.”
(emphasis added). (Id., p. 14). By its plain terms, the definition of interrelated wrongful acts is
broad. But it is not ambiguous. See Daines v. Vincent, 190 P.3d 1269, 1275 (Utah 2008) (a
contractual provision is ambiguous “if it is capable of more than one reasonable interpretation
because of uncertain meanings of terms, missing terms, or other facial deficiencies” (internal
quotation marks omitted)); see, e.g., XL Specialty Ins. Co. v. Perry, No. CV 11-02078-RGK,
2012 WL 3095331 (C.D. Cal. June 27, 2012) (rejecting the argument that an identical provision
is ambiguous simply because it is broad); see also, e.g., Templeton v. Catlin Specialty Ins. Co.,
612 F. App’x 940, 957 (10th Cir. 2015) (concluding that the word “similar” as used to define
interrelated wrongful acts was not ambiguous, despite its breadth); cf. Stauth v. Nat’l Union Fire
Ins. Co. of Pittsburgh, No. 97–6437, 1999 WL 420401, at *7–8 (10th Cir. 1999) (interpreting an
interrelated wrongful acts provision narrowly where the phrase was not defined in the policy)
(unpublished table opinion). Rather than be capable of multiple meanings, the Policy plainly and
unmistakably communicates to an insured that wrongful acts are interrelated where they are
14
logically or causally connected. See Berry & Murphy, 586 F.3d at 813 (“[T]he common
understanding of the word ‘related’ covers a very broad range of connections, both causal and
logical.” (quoting Gregory v. Home Ins. Co., 876 F.2d 602, 606 (7th Cir. 1989)); Cont’l Cas. Co.
v. Wendt, 205 F.3d 1258, 1263 (11th Cir. 2000) (per curiam) (“The plain meaning of the word
‘relate’ is to show or establish a logical or causal connection between.” (internal quotation marks
omitted)); Related, BLACK’S LAW DICTIONARY (10th ed. 2014) (defining “related” as
“[c]onnected in some way; having relationship to or with something else”). Indeed, the Mordens
do not offer any alternative interpretation for which the phrase could be capable of being
reasonably understood. See Daines, 190 P.3d at 1275 (Utah 2008) (a contractual provision is
ambiguous if it is capable of more than one reasonable interpretation).
Because of its breadth, the interrelated wrongful acts provision does not require the
wrongful acts alleged in the claims to be identical to be interrelated. See Kilcher v. Cont’l Cas.
Co., 747 F.3d 983, 990 (8th Cir. 2014) (cautioning that “micro-distinguishing” between facts in
determining whether claims are sufficiently connected would “subvert[ ] the purpose of the
phrase series of related acts” (internal quotation marks omitted)); see, e.g., Wendt, 205 F.3d at
1264 (“The fact that these acts resulted in a number of different harms to different persons, who
may have different types of causes of action . . . does not render the ‘wrongful acts’ themselves
to be ‘unrelated’ for the purposes of the insurance contract [where they] comprised a single
course of conduct designed to promote investment in [the firm].”). Not every wrongful act that
shares some common facts, however, is necessarily interrelated. As explained, the wrongful acts
must be at least logically or causally connected. See Berry & Murphy, 586 F.3d at 811–812
(defining “logically connected” as “connected by an inevitable or predictable interrelation or
sequence of events,” and “causally connected” as “where one person or thing brings about the
15
other” (internal quotation marks omitted); Logical, THE RANDOM HOUSE DICTIONARY OF THE
ENGLISH LANGUAGE, p. 1130 (2d ed.) (defining “logical” as “reasonable; to be expected”);13 see,
e.g., Berry & Murphy, 586 F.3d at 803 (holding that a letter alleging malpractice alleged
wrongful acts interrelated with the client’s ultimate malpractice suit because there was a single
client, who alleged misconduct against a single attorney, related to a single tort claim, and the
conduct resulted in a single harm); Kilcher, 747 F.3d at 989 (“[A] court may consider several
factors in concluding whether dishonest acts are part of a series of related acts, including whether
the acts are connected by time, place, opportunity, pattern, and, most importantly, method or
modus operandi.”) (internal quotation marks omitted).
But even if multiple claims allege interrelated wrongful acts, the court’s inquiry is not at
an end. Rather, the Policy requires that for multiple claims to be treated as a single claim under
the relate-back provision, the claims must “aris[e] from” those interrelated wrongful acts. (Dkt.
No. 12-1, p. 17 (emphasis added). The Policy does not define the phrase arise from.
Nevertheless, the court finds the phrase is also unambiguous. Black’s Law Dictionary defines
“arise from” as “to originate; to stem (from),” or “to result (from).” Arise from, BLACK’S LAW
DICTIONARY (10th ed. 2014). This definition mirrors the common dictionary definition of the
phrase. See, e.g., Arise from, THE RANDOM HOUSE DICTIONARY, p. 113 (defining “arise from” as
“to result or proceed, spring or issue”). Thus, multiple claims alleging interrelated wrongful acts
can be treated as a single claim only where they are both the result of those alleged interrelated
wrongful acts. Accordingly, by the Policy’s plain terms, the correct analytical framework for
evaluating whether the Morden and SEC Claims should be treated as a single claim under the
Policy is for the court to begin by identifying the interrelated wrongful acts presented in both
13
In interpreting a contract, the court can determine the ordinary and usual meaning of the words through
using standard, non-legal dictionaries. S. Ridge Homeowners’ Ass’n v. Brown, 226 P.3d 758, 759 (Utah Ct. App.
2010).
16
claims. Next, the court must next assess whether both the SEC and Morden Claims are the result
of those interrelated wrongful acts.
a. The SEC and Morden Claims allege both interrelated and unrelated wrongful acts.
The court begins by recognizing that the Morden and SEC Claims likely allege
interrelated wrongful acts related to Belsen Getty’s conduct regarding Nine Mile, Axxess, and
ProFire. Indeed, the Morden Claim expressly references the omissions related to Nine Mile, one
of the subjects of the SEC pre-Policy Period notices. Likewise, both the SEC and Morden Claims
allege similar breaches of fiduciary duty with respect to Nine Mile, Axxess, and ProFire: that
Belsen Getty breached its fiduciary duties by recommending high-risk, speculative, and illiquid
investments to Belsen Getty clients, even though the investments did not match the clients’
investment objectives. With respect to these three investments, Mr. Deru completed purchases of
stock in Axxess, Nine Mile, and ProFire for clients using Belsen Getty’s discretionary authority
and did not disclose material conflicts of interest, namely that Belsen Getty principals and/or
family members had a financial interest in these companies. (See Dkt. Nos. 55-1, pp. 212–14; 324, pp. 46; 52-2, p. 146). Thus, the wrongful acts alleged regarding these three stocks are at least
arguably logically connected such that they may be considered interrelated wrongful acts.
But significant portions of the SEC and Morden Claims do not allege interrelated
wrongful acts, even under that phrase’s broad definition. In addition to alleging that Belsen Getty
breached its fiduciary duties related to Nine Mile, Axxess, and ProFire, the SEC appears to have
been equally concerned by Belsen Getty’s “scheme of executing discretionary trades in Belsen
Getty accounts in order to create a false appearance of active trading and raise the price” of Nine
Mile stock. (See Dkt. No. 55-1 pp. 212–13, 224). Nothing indicates that this independent
wrongful act of market manipulation is logically or causally connected to Belsen Getty’s conflict
17
of interest. The fact that it involves the same stock is not sufficient, particularly where the
method and modus operandi of the wrongful acts differ. See Kilcher, 747 F.3d at 989. The SEC
was also apparently troubled by Belsen Getty’s general failures to comply with the Advisers Act,
including, for instance, its failure to have a written solicitor’s agreement. (Dkt. No. 55-1, p. 215).
But as with the market manipulation allegation, there is no logical or causal connection between
the failures to comply with the Advisers Act and the failure to disclose conflicts of interest in
Nine Mile, Axxess, and ProFire.
Likewise, the undisputed facts reveal that Belsen Getty’s conduct related to Nine Mile,
Access, and ProFire is substantially dissimilar from the wrongful acts related to Vermillion and
the gold mine. For instance, Mr. Deru’s method of securing the Mordens’ investment in the gold
mine was materially different from his conduct related to Nine Mile or any other stock. Indeed,
whereas Mr. Deru used Belsen Getty’s discretionary authority to invest in Nine Mile, Axxess,
and ProFire on behalf of Mr. and Ms. Morden, he personally solicited the Mordens’ investment
in the gold mine. Moreover, the misrepresentations are different. Rather than fail to disclose a
conflict of interest, Mr. Deru affirmatively misrepresented to the Mordens that the mine was
operational, had the necessary permits, and was owned by Vermillion. He also continued to
make misrepresentations about the mine’s status after the Mordens’ initial investment and
encouraged the Mordens to become more active in the mine in order to salvage the project. This
resulted in additional damages beyond the initial investment.
Furthermore, the Mordens’ investment in the gold mine was different in kind from the
other investments. Unlike the purchase of shares of stock in Nine Mile, Axxess, or ProFire, the
investment in the gold mine was in the form of a real estate loan secured by water rights in
Southern Utah. There is no evidence that Mr. Deru solicited similar investments in real estate
18
loans from other investors, or that this method of solicitation was the result of, or motivated by,
Belsen Getty’s misconduct related to Nine Mile or any other stock. Likewise, although Mr. Deru,
Mr. Deru’s son, and/or Mr. Limpert were all involved in Nine Mile, Axxess, and ProFire, there is
nothing to suggest that any other Belsen Getty associate had any involvement with the gold mine
investment, or that any other Belsen Getty associate recommended or solicited investments in the
form of real estate loans. In sum, although both the SEC and Morden Claims arguably assert
interrelated wrongful acts with respect to Nine Mile, Axxess, and ProFire, they also make
allegations of other wrongful acts that are not logically or causally connected to these three
investments.
b. The Morden and SEC Claims do not arise from the interrelated wrongful acts.
The court must now determine if the Morden and SEC Claims arise from interrelated
wrongful acts, where, in addition to alleging wrongful acts associated with Nine Mile, Axxess,
and ProFire, both claims allege significant wrongful acts unrelated to those investments. Courts
considering this question have recognized for claims to arise from interrelated wrongful acts,
they must share a “sufficient factual nexus.” Brecek & Young Advisors, Inc. v. Lloyds of London
Syndicate 2003, 715 F.3d 1231, 1238 (10th Cir. 2013) (applying New York law). That is, they
must be the product of a common plan, a common scheme, a single course of conduct, or single
injury. See Liberty Ins. Underwriters, 2016 WL 741837, at *8 (explaining that claims may be
related even if they “allege different types of causes of action and arise from different acts”
where there is “a single course of conduct that serves as the basis for the various causes of
action” or a “single course of conduct aimed at a single particular goal”); Seneca Ins. Co. v.
Kemper Ins. Co., No. 02 CIV. 10088 (PKL), 2004 WL 1145830, at *6 (S.D.N.Y. May 21, 2004),
aff’d, 133 F. App’x 770 (2d Cir. 2005) (“Claims share a sufficient factual nexus when they are
19
based on the same agreement or when they involve the same underlying circumstance.” (internal
quotation marks omitted)); Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 855
P.2d 1263 (Cal. 4th 1993) (holding that two claims arose from interrelated wrongful acts where
they arose out of the same transaction, related to the same client, were committed by the same
attorney, and resulted in a single injury). The court cannot treat multiple claims as a single claim
if they are so factually and legally distinct that the relationship between the two is “so attenuated
or unusual that an objectively reasonable insured could not have expected that they would be
treated as a single claim under the policy.” See Axis Surplus Ins. Co. v. Johnson, No. 06-CV-500GKF-PJC, 2008 WL 4525409, at *8 (N.D. Okla. Oct. 3, 2008); Liberty Ins. Underwriters, ___ F.
Supp. 3d ___, 2016 WL 741837, at *6 (C.D. Cal. Feb. 23, 2016) (“At some point, a relationship
between two claims, though perhaps ‘logical,’ might be so attenuated or unusual that an
objectively reasonable insured could not have expected they would be treated as a single claim
under the policy.” (internal quotation marks omitted)); see, e.g., Seneca Ins. Co., 2004 WL
1145830, at *6 (“[C]laims do not share a sufficient factual nexus when a claim arising under one
policy describes wrongs that are factually and legally distinct from wrongs described in a claim
arising under a prior policy.” (internal quotation marks omitted)).
For example, in Brecek & Young Advisors, the Tenth Circuit held that three arbitration
proceedings arose from interrelated wrongful acts, even where there was some difference in the
claims and parties, because all three proceedings shared a “sufficient factual nexus.” 715 F.3d at
1238. For instance, the three proceedings involved largely the same respondents, there were
allegations of similar misconduct that occurred during the same period, and all of the claims
alleged that the insured was vicariously liable for failing to supervise its broker/agents, to the
detriment of investors. Id. at 1238. Further, and most importantly, all claims involved allegations
20
of churning or flipping of investment accounts in order to enrich the broker/agents at the expense
of account holders. Id. at 1238. Thus, the Court held that the three proceedings were sufficiently
connected by common facts, circumstances, decisions, and policies that they could be considered
to arise from interrelated wrongful acts. Id. at 1239.
In contrast, in Financial Management Advisors, LLC v. American International Specialty
Lines Insurance Co., the Ninth Circuit held that two claims did not arise out of the “same or
related wrongful acts” where different investors brought fraudulent misrepresentation claims
against the same investment advisory firm. 506 F.3d 922, 925–26 (9th Cir. 2007). The court
reasoned that despite the fact that both claims shared allegations related to a common investment
vehicle, they were brought by “unrelated investors, with unique investment objectives [who]
were advised at separate meetings on separate dates, according to their unique financial
positions.” Id. at 925. Moreover, the plaintiffs had ultimately been presented with, and invested
in, different funds, and “[m]ore importantly, some of the [w]rongful [a]cts alleged by the two
clients were different.” Id. Indeed, one plaintiff’s claims were based primarily on “various
omissions and oral misrepresentations made in connection with many different investment
vehicles,” while another’s “relie[d] heavily on affirmative misrepresentations in written
materials” and “breach of a written agreement.” Id. at 926. Thus, the court declined to find
claims interrelated “whenever two parties are advised to invest in the same fund” or “both
claimants blame the same financial advisor.” Id.
Here, XL argues that that the SEC and Morden Claims should be treated as a single claim
because both allege that Belsen Getty breached its fiduciary duties by making untrue statements
of material fact and omitting material facts with respect to all investments. The court disagrees.
Attempting to characterize the claims as a single claim simply because they may involve similar
21
legal theories paints with too broad a brush. See, e.g., St. Paul Fire & Marine Ins. Co. v. Chong,
787 F. Supp. 183, 188 (D. Kan. 1992) (finding that three malpractice claims arising from an
attorney’s multiple representation of three clients in a criminal trial were unrelated because the
attorney owed a separate duty to each client); Scott v. American Nat. Fire Ins. Co., Inc., 216 F.
Supp. 2d 689, 694 (N.D. Ohio 2002) (holding that malpractice claims against an attorney by
three separate clients were not related, even though they arose from the attorney’s representation
of all three in the formation of a company, because the attorney owed separate duties to each,
and the alleged breach of those duties gave rise to distinct harms). Instead, the court must look at
the factual allegations underlying each claim to assess if they involve a sufficient factual nexus.
Seneca Ins. Co., 2004 WL 1145830, at *7 (“The concept of ‘claim’ is distinct from that of ‘suit,’
and neither the initial amalgamation of claims in one suit nor the variety of procedural
metamorphoses which a suit often undergoes alters the distinctive nature of individual claims or
the consequent loss potentially incurred therefrom. Instead, the court evaluates an exclusion
based on the underlying facts rather than the legal theories pleaded or additional defendants
named.” (internal citations, quotation marks, brackets, and ellipses omitted); see, e.g., Axis
Surplus, 2008 WL 4525409, at *9 (rejecting the argument that two claims should be treated as
one claim for the purposes of the policy, despite the fact that both alleged of breaches of
fiduciary duty and gross negligence, where the factual basis underlying each legal claim was
different).14 Engaging in that inquiry here, the court concludes that the facts underlying each
claim do not share a sufficient factual nexus to be considered a single claim.
As explained, although both the Morden and SEC Claims contain allegations that Belsen
Getty breached its fiduciary duties, the breaches of fiduciary duties with respect to the
14
For this reason, the court is unpersuaded that it must consider both claims to arise from the same
wrongful acts simply because the Morden Claim imprecisely lumps the conduct with respect to each investment
together.
22
interrelated wrongful acts and unrelated wrongful acts are very different. For instance, there is
nothing to indicate that Mr. Deru’s actions related to the gold mine—which form a significant
portion of the Morden Claim—and the investments in Axxess, Nine Mile, and ProFire were the
product of a common plan, common scheme, or single course of conduct. Cf. Liberty Ins.
Underwriters, 2016 WL 741837, at *8 (holding that multiple claims could be treated as one
claim where “they all arise from a single course of conduct, a unified policy of making alleged
affirmative misrepresentations to investors in order to induce them to invest in commercial real
estate acquisitions” (internal quotation marks omitted) (emphasis added)). Nor is there any
evidence to suggest that the Morden or SEC Claim arose from the same injury or that they were
the direct result of each other. Cf. Perry, 2012 WL 3095331, at *8 (holding that an SEC
enforcement action for allegedly false representations regarding IndyMac’s financial status was
interrelated to a class action alleging that IndyMac ignored its own underwriting standards when
originating loans because, although the alleged wrongs were different, the SEC action was the
“direct[] result[]” of the wrongful acts alleged in the class action lawsuit; specifically, the risky
mortgages put IndyMac in a perilous financial condition, one which the defendants allegedly
tried to cover up through false SEC filings). As explained, the wrongful conduct related to
Axxess, ProFire, and Nine Mile differed significantly from the conduct related to the gold mine.
And the resulting injuries to the Mordens as a result of the different breaches of fiduciary duties
were different. There is no evidence to show the Mordens would have filed a lawsuit just on the
basis of the misconduct related to Nine Mile, Axxess, or ProFire alone.
Not only is the conduct alleged in each claim materially different, the claims also differ in
other significant ways. For example, the claimants are different. In one claim, the claimant is the
SEC, a governmental agency. In the other claim, the plaintiffs are the Mordens, a family of
23
private investors. To the extent the SEC acted on behalf of Belsen Getty’s investors, that group
included many investors besides the Mordens and did not include Wade Morden. Thus, any
factual nexus between the claims is marginal at best. Cf. Brecek & Young Advisors, 715 F.3d at
1238–39. Rather, as in Financial Management Advisors, 506 F.3d at 925–26, it appears that
Belsen Getty was generally dysfunctional during the relevant time period, and, through its
members, was involved in a wide range of misconduct that injured many investors, including the
Mordens. This resulted in two different claims that may share some factual and legal overlap
related to Nine Mile, Axxess, and ProFire. But the SEC and Morden Claims also differ
significantly in that each alleges factually different harms, to different individuals, through very
different methods and means. Thus, the court cannot conclude that it would have been
foreseeable to a reasonable insured that the SEC’s investigation into Belsen Getty’s conduct
related to Nine Mile, Axxess, and ProFire would be treated as the same claim as the wrongful
conduct related to the gold mine. The court declines to reach that conclusion simply because the
claims involve misconduct by the same investment advisor. For this reason, the SEC Claim and
Morden Claim do not arise from interrelated wrongful acts and XL erred when it denied the
Morden Claim on this basis. The Mordens are therefore entitled to partial summary judgment in
their favor on XL’s counterclaim for declaratory judgment that both claims arise from
interrelated wrongful acts.
B. The Mordens’ Contractual Claims for Breach of the Implied Covenant
of Good Faith and Fair Dealing
Having decided that XL incorrectly concluded that the Morden Claim related back to the
SEC Claim, the court turns to XL’s motion for summary judgment on the Mordens’ claim for
breach of the implied covenant of good faith and fair dealing. See Chapman Constr., LC v.
Cincinnati Ins. Co., No. 2:15-CV-00172-DB, 2015 WL 8042071, at *3 (D. Utah Dec. 4, 2015)
24
(holding that even where the court disagreed with the insurance company’s interpretation of a
policy, “the Court’s disagreement with [the insurer] does not amount to [the insurer] acting in
bad faith”).
In the context of an insurance contract, the Utah Supreme Court has explained that the
“implied obligation of good faith performance contemplates, at the very least, that the insurer
will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly
evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the
claim.” Jones v. Farmers Ins. Exch., 286 P.3d 301, 304 (Utah 2012). But “an insurer cannot be
held to have breached the covenant of good faith on the ground that it wrongfully denied
coverage if the insured’s claim, although later found to be proper, was fairly debatable at the
time it was denied.” Id. (internal quotation marks omitted).15 Considering the undisputed facts
presented here, the court finds that XL’s claim denial was fairly debatable. Accordingly, XL is
entitled to summary judgment in its favor on this claim. See Billings v. Union Bankers Ins. Co.,
918 P.2d 461, 465 (Utah 1996) (“Whether an insured’s claim is fairly debatable under a given set
of facts is . . . a question of law.”); Pheasantbrook Home Owners Ass’n v. The Travelers Indem.
Co., No. 1:14-CV-00056-DN, 2016 WL 309771, at *16 (D. Utah Jan. 25, 2016) (“Not all cases
involving the ‘fairly debatable’ defense can be resolved as a matter of law, but whether an
insured’s claim is fairly debatable under a given set of facts is a question of law.”).
15
The Mordens dispute that the fairly debatable standard applies to its claims for breach of the implied
covenant of good faith and fair dealing. According to the Mordens, XL had an obligation not to deny the claim
unless there was “clear, unequivocal, and uncontroverted evidence” showing that the claim was not covered.
(Dkt. No. 59, p. 5). This argument improperly relies on an obligation an insurer would owe to its insured if it had a
duty to defend. See Benjamin v. Amica Mut. Ins. Co., 140 P.3d 1210, 1215 (Utah 2006) (explaining that if coverage
is uncertain, an insurer must defend until any uncertainties can be resolved against coverage, because “[w]hen in
doubt, defend” (internal quotation marks omitted)). As the court explains in greater detail, see infra Section C, XL
had no obligation to defend Belsen Getty under the Policy. If the court were to adopt the Mordens’ argument that an
insurer—who has only a contractual duty to indemnify losses—cannot deny a claim unless the grounds for denial
are certain, an insurer would never be able to rely on the fairly debatable defense. Accordingly, the court rejects the
Mordens’ attempt to avoid application of the fairly debatable standard as it relates to their contractual claim for
breach of the implied covenant of good faith and fair dealing.
25
Notwithstanding the court’s disagreement with XL’s Policy interpretation, XL’s
determination that the Morden Claim was not covered under the Policy is fairly debatable as a
matter of law. See Prince v. Bear River Mut. Ins. Co., 56 P.3d 524, 535 (Utah 2002) (“A
‘debatable reason,’ for purposes of determining whether [an] insurer may be subjected to badfaith liability, means an arguable reason, a reason that is open to dispute or question.” (quoting
14 Lee R. Russ & Thomas F. Segalla, Couch on Ins. § 204:28 (3d ed. 1999)). In this case, XL’s
determination did not turn on disputed issues of fact, which may have created an issue for the
fact finder, but in the legal import of facts that are not in dispute. Cf. Jones, 286 P.3d at 307
(denying motion for summary judgment as to whether a claim denial was fairly debatable where
insurer denied coverage for dental work on the basis that the insured’s teeth had not been cracked
in an accident, but that fact was genuinely disputed). These undisputed facts establish that XL
acted in good faith in investigating the claim and reaching its coverage decision.
Indeed, the undisputed facts show that XL consulted with Troutman Sanders, a firm
retained to represent XL in this matter, who engaged in a robust analysis of the persuasive
authority in this area. This authority provides support for XL’s determination—with which this
court agrees—that the SEC pre-Policy Period correspondence constituted a Claim and that the
interrelated wrongful acts provision is unambiguously broad. Troutman Sanders also considered
the allegations of the Morden Claim and the SEC Claim and reasoned that both claims arose
from interrelated wrongful acts. (See Dkt. No. 32-4, pp. 86–91). Although the court concludes
that Troutman Sanders erred in its analysis on this point, its contrary conclusion was reasonable.
The law in this area is complex, nuanced, and fact-specific. In many instances, courts are tasked
with interpreting policy language that is different from that presented here. And significantly, the
Mordens fail to cite any controlling authority that would squarely resolve this issue in their favor.
26
See Cornhusker Cas. Co. v. Skaj, 786 F.3d 842, 858 (10th Cir. 2015) (applying Wyoming law)
(“[I]t is not necessarily an act of bad faith for an insurer to deny . . . payment of benefits where
the underlying incident objectively may be seen as being covered by a policy exclusion,
particularly where there is no controlling authority within the jurisdiction.”).
Further, there is arguable support in the record for Troutman Sanders’s assessment that
the Morden Claim and SEC Claim arose from interrelated wrongful acts. As explained, the
Morden Claim expressly references the investments in Nine Mile, the very subject of the SEC
Claim. Both the SEC Claim and Morden Claim make similar allegations of wrongful acts with
respect to Nine Mile, Axxess, and ProFire: that Belsen Getty breached its fiduciary duties by
making improper investment recommendations, by acting under a conflict of interest, and by
failing to disclose material facts to investors. This provides support for XL’s coverage decision.
See Larsen v. Allstate Ins. Co., 857 P.2d 263, 266 (Utah Ct. App. 1993) (concluding that
insurance company did not act in bad faith by failing to make payments under insurance policy,
where it “did not arrive at its coverage determination arbitrarily,” but instead sought the opinion
of its legal counsel, there were cases from other jurisdictions that arguably supported its position,
policy considerations weighed in favor of the interpretation, and the trial court agreed with the
insurer’s interpretation). Although the court is not persuaded that these similarities, when
weighed against the significant differences between the two claims, provide a sufficient basis to
conclude that both claims arise from interrelated wrongful acts, XL’s contrary conclusion is not
without basis in reason. In fact, the Mordens themselves imprecisely linked the various separate
transactions and investments together in their claim. (See Dkt. No. 52-2, p. 146). Had the
Mordens simply limited their allegations of wrongdoing to the Mexican gold mine investment, or
drafted a complaint that more clearly identified the misconduct related to each investment, XL’s
27
denial of coverage might have been more suspect.16
Furthermore, although the Mordens challenge the way XL investigated this case in
reaching its coverage determination, they do not present any material evidence XL would have
uncovered if it had investigated the case differently. Significantly, XL requested that Belsen
Getty provide it with information and reviewed the documentation that Belsen Getty’s counsel
submitted to it. (Dkt. No. 32-4, p. 62). XL also invited Belsen Getty to submit any additional
information for XL’s consideration. (Id. p. 69). The Mordens do not identify any relevant
materials that XL failed to consider, nor do they explain why XL was not entitled to make its
coverage determination on the basis of the information Belsen Getty chose to disclose to it. Cf.
Jones, 286 P.3d at 307 (denying motion for summary judgment where insured disregarded
information that the insured had provided). The Mordens also fail to explain how any additional
evidence would have changed the legal analysis.17 See Fort Lane Vill., L.L.C. v. Travelers Indem.
Co. of Am., 805 F. Supp. 2d 1236, 1242 (D. Utah 2011) (granting insurer summary judgment on
bad faith claim where its interpretation of the policy, although ultimately rejected by the court,
was reasonable, the insurer acted responsibly by investigating the claim, and there was no
evidence that the insurer undermined the insured’s ability to recover under the policy). Thus,
beyond disagreement with XL’s coverage determination, the Mordens present no evidence from
which a reasonable jury could conclude that XL’s claim denial was not fairly debatable. As a
16
The court notes that the Mordens’ third-party complaint in the Tabakh action appears to be limited to
allegations regarding the gold mine. (Dkt. No. 55-3, pp. 87–105). The Mordens have not alleged that they are
entitled to coverage for the Tabakh claim or that XL’s handling of that claim was improper. (Dkt. No. 2).
Accordingly, the court expresses no opinion as to whether the Tabakh claim and SEC Claim arise from interrelated
wrongful acts.
17
At oral argument, counsel for the Mordens conceded that the only additional fact that XL’s investigation
would have revealed if it had investigated the claim further was that Wade Morden had not invested in Nine Mile,
Axxess, or ProFire. (Dkt. No. 74, p. 56–58). But this difference does not necessarily preclude the Morden Claim and
SEC Claim from arising from interrelated wrongful acts. It would be only one factor to be considered in assessing if
the wrongful acts were interrelated, and if the claims arose from those interrelated wrongful acts. See Brecek &
Young Advisors, Inc. v. Lloyds of London Syndicate 2003, 715 F.3d 1231, 1238–39 (10th Cir. 2013) (holding claims
were interrelated despite the existence of different plaintiffs).
28
result, XL is entitled to summary judgment on the Mordens’ first cause of action for breach of
the implied covenant of good faith and fair dealing.
C. The Mordens’ Tort Claim for Bad Faith Breach of Fiduciary Duty
The court turns finally to the Mordens’ claim that XL tortiously breached its fiduciary
duty to Belsen Getty to settle the Morden Claim because there was a “substantial likelihood” that
the Morden Claim would result in a judgment against Belsen Getty in excess of policy limits. See
Campbell v. State Farm Mut. Auto. Ins. Co., 840 P.2d 130, 138 (Utah Ct. App. 1992) (holding
that where an insurer has undertaken the task of representing its insured, it is obligated to accept
an offer of settlement within policy limits when there is a substantial likelihood of a judgment
being rendered against the insured in excess of those limits). This claim fails because XL owed
no fiduciary obligations to Belsen Getty under the plain terms of the Policy.
In the seminal case of Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985),
the Utah Supreme Court held that an insurer’s decision to deny a claim does not, in every case,
give rise to a cause of action in tort. Only where an insurer acts as a fiduciary can a plaintiff
bring a tort claim for bad faith breach of fiduciary duty. Id. at 800. The Utah Supreme Court has
clarified that an insurer bears such fiduciary responsibilities only where it “controls the
disposition of claims against its insured, who relinquishes any right to negotiate on his own
behalf.” Black v. Allstate Ins. Co., 100 P.3d 1163, 1169 (Utah 2004). In such a circumstance, an
insurer bears heightened obligations because the insured is “wholly dependent upon the insurer
to see that, in dealing with claims by third parties, the insured’s best interests are protected.” Id.
at 1170. Where there is no such dependency, no corresponding fiduciary duties arise. See id.; see
also Hal Taylor Assocs. v. Unionamerica, Inc., 657 P.2d 743, 749 (Utah 1982) (“A fiduciary or
confidential relationship may be created by contract or by circumstances where equity will imply
29
a higher duty in a relationship because the trusting party has been induced to relax the care and
vigilance he would ordinarily exercise. In such a case, the evidence must demonstrate the
placement of trust and reliance such that the nature of the relationship is clear.” (emphasis
added)). Considering the Policy and facts presented here, the court has little difficulty concluding
that XL did not owe Belsen Getty any fiduciary duties.
The court begins by identifying XL’s obligations under the Policy. See Fire Ins. Exch. v.
Estate of Therkelsen, 27 P.3d 555, 559–60 (Utah 2001) (holding that the duty to indemnify and
the duty to defend both arise solely under the insurance contract). Importantly, the Policy does
not impose on XL the duty to defend. (Dkt. No. 12-1, p. 15 (“It shall be the duty of the insureds
to defend any claim under this Policy.”)). To the contrary, XL merely promised to indemnify
Belsen Getty for certain covered losses, which include defense expenses, judgments, and
settlement amounts. (Dkt. No. 32-1, p. 14). Because of XL’s obligation to pay these expenses, it
sought to retain some control over the way Belsen Getty defended or settled the case.
Accordingly, the Policy provides that for Belsen Getty to be entitled to indemnification for these
losses, Belsen Getty must obtain XL’s approval before it may incur defense expenses or agree to
a settlement that will exceed a certain amount. But in such a circumstance, Belsen Getty’s
approval shall not be unreasonably withheld. (Dkt. No. 32-1, p. 16).18 These types of
arrangements are not uncommon, see Restatement of the Law of Liability Insurance § 22 DD
(2015) (discussion draft) (explaining that “[a] defense-cost-indemnification policy is an
insurance policy in which the insurer agrees to pay the costs of defense of a covered claim and
18
The Mordens do not allege, nor do they argue, that XL breached its obligations under the Policy by
failing to pay requested defense expenses. To the contrary, their allegations of bad faith breach of fiduciary duty are
limited to XL’s failure to accept a settlement offer. Accordingly, the court does not consider if and when insurer has
the obligation to tender defense expenses. But see XL Specialty Ins. Co. v. Level Glob. Inv’rs, L.P., 874 F. Supp. 2d
263, 288 (S.D.N.Y. 2012) (collecting cases and explaining that “many cases hold, or state, that advancement [of
defense costs] is required only when a claim is covered. . . . Mandating advancement while even dubious assertions
of coverage are resolved would invite abuse.”).
30
does not undertake the duty to defend. Typically such policies also cover settlements and
judgments.”), and do not impose on the insured the type of fiduciary obligations that arise where
the insurer has undertaken the obligation to defend the insured. See Kenneth F. Oettle, D And O
Insurance: Judicially Transforming A “Duty to Pay” Policy into A “Duty to Defend” Policy, 22
Tort & Ins. L.J. 337, 342–43 (1987) (“Under prevalent forms of liability insurance policies,
which are known generally as ‘duty to defend’ policies, the insurer selects defense counsel,
orchestrates the defense, and pays for defense counsel’s fees and disbursements as they are
incurred. . . . Under a ‘duty to pay’ policy, on the other hand, . . . the insured controls the defense
and/or settlement of the underlying action, retaining the counsel of its choice and deciding how
the litigation should be conducted. Although the carrier must be consulted regarding the
insured’s choice of counsel or the terms of a proposed settlement, the carrier’s consent may not
be unreasonably withheld. For practical purposes, the insurer is relegated to the sidelines of the
litigation, having a ‘duty to pay’ but not a right—and therefore not a duty—to defend.”); see also
Therkelsen, 27 P.3d at 561 (“[T]he duty to indemnify is not necessarily coextensive with the duty
to defend. Indeed, generally, an insurer’s duty to defend is broader than its duty to indemnify.”
(internal quotation marks omitted)).19
19
The court’s independent research has revealed one case that could support the argument that a duty to
pay defense costs carries with it a duty to defend the case. See Okada v. MGIC Indem. Corp., 795 F.2d 1450, 1454
(9th Cir.) superseded on other grounds, 823 F.2d 276 (9th Cir. 1986). The court declines to follow the reasoning of
the majority in Okada for two reasons. First, unlike the Policy here, the policy in Okada was silent with respect to
the duty to defend. Thus, because the Policy at issue here expressly disclaims any obligation to defend, the court
cannot interpret the promise to indemnify Belsen Getty for defense expenses as creating a duty to defend. Second,
the Okada decision appears to be in conflict with Utah law and the weight of authority from other jurisdictions,
which hold that a duty to defend arises out of the terms of the policy. See Equine Assisted Growth & Learning Ass’n
v. Carolina Cas. Ins. Co., 266 P.3d 733, 735 (Utah 2011) (recognizing that an insurer’s “duty to defend arises solely
under the terms of the contract.” (internal quotation marks and brackets omitted)); Okada, 795 F.2d at 1458–59
(Hall, J., dissenting) (criticizing the majority’s interpretation of the policy and explaining that “[b]y defining
litigation expenses as a loss they are subject to the exclusions set forth elsewhere in the policy the same as any other
loss. The policy does not contemplate ‘unconditional payment of defense costs for potentially covered claims’ as the
majority suggests, it contemplates payment of defense costs as a loss if indemnification is required. Conspicuously
absent from the . . . policy is any clause providing that the insurer has the right and the duty to defend.”); accord In
re Ambassador Grp., Inc. Litig., 738 F. Supp. 57, 61 (E.D.N.Y. 1990) (explaining that the Okada majority’s result
31
Thus, the Policy’s plain terms belie the argument that XL was authorized to “control[] the
disposition of claims against its insured” such that Belsen Getty “relinquish[ed] any right to
negotiate on [its] own behalf.” See Black, 100 P.3d 1163 at 1170. Nor do the Mordens present
any evidence to suggest that XL exerted this type of control. It is undisputed that XL did not
appoint counsel to act on behalf of Belsen Getty, participate in or guide the defense, or otherwise
take any action on Belsen Getty’s behalf. To the contrary, Belsen Getty at all times retained its
own counsel. Further, although XL could have participated in settlement negotiations without
necessarily incurring fiduciary duties, see id. (recognizing that even if an insurance company
participates in negotiations, no fiduciary duties arise until the insured has “relinquished any right
to negotiate on his own behalf”), there is no evidence XL participated in any such negotiations.
Notably, the Mordens forwarded their offer for Policy Limits to Belsen Getty’s counsel, who
then submitted the offer to XL. (Dkt. No. 55-4, pp. 93–94). For these reasons, XL did not owe
Belsen Getty fiduciary obligations, nor did it accept heighted responsibilities to act as Belsen
Getty’s fiduciary.20 The Mordens’ claim that XL breached its fiduciary duties to settle the
Morden Claim therefore fails as matter of law and XL is entitled to summary judgment on the
Mordens’ second cause of action for bad faith breach of fiduciary duties.21
conflicts with the consensus that policies containing similar duty to pay defense cost clauses are not duty to defend
policies).
20
The Mordens argue that XL bore heightened fiduciary duties because the Mordens are third parties who
filed a suit against Belsen Getty. The court rejects this argument. Although the Utah Supreme Court has discussed
fiduciary and contractual obligations in the third-party versus first-party context, it has made clear that fiduciary
obligations do not automatically arise simply because the insured is subject to a third-party claim. See, e.g., Black v.
Allstate Ins. Co., 2004 UT 66, ¶ 20, 100 P.3d 1163, 1168 (holding that there was no fiduciary duty, even under a
third party policy, because fiduciary obligations inhere only when an insured relinquishes the ability to defend
himself). Thus, the characterization of the claim as first party or third party is not dispositive. Moreover, where the
Policy disclaims a duty to defend against third party claims and the Mordens are pursuing their complaint against
XL as an assignee’s of Belsen Getty’s rights, it is not clear the claim is a third party claim rather than a first party
claim.
21
In resolving both of the Mordens’ bad faith claims, the court has considered, over the objection of XL,
the report of the Mordens’ expert, L. Rich Humpherys. The court need not resolve the merits of XL’s objections to
32
CONCLUSION
In sum, the Morden Claim and the SEC Claim do not arise out of interrelated wrongful
acts. Thus, this Policy exclusion cannot serve as a basis to deny coverage. Nevertheless, XL did
not breach its contractual obligations to act in good faith by denying the Morden Claim because
the claim’s validity was fairly debatable. Further, XL had no obligation, nor did it undertake the
duty, to defend Belsen Getty. Therefore, it had no corresponding fiduciary duties to settle the
Morden Claim or otherwise act as Belsen Getty’s advocate. Accordingly, the court GRANTS
XL’s motion for summary judgment (Dkt. No. 53), GRANTS in part and DENIES in part the
Mordens’ motion for partial summary judgment on XL’s counterclaim (Dkt. No. 25), and
DENIES as moot the remaining motions (Dkt. Nos. 30, 33, 46, 50). This ruling resolves the
Morden complaint in its entirety. The only issue remaining is XL’s counterclaim for declaratory
judgment that it had no obligation to pay the Morden Claim because of Exclusion J, which
excludes coverage for losses relating to Belsen Getty’s rendering of investment banking services.
(Dkt. No. 12, p. 21). The court will entertain further briefing on this counterclaim, should the
parties wish to pursue it.22
SO ORDERED this 5th day of April, 2016.
Mr. Humpherys’s report because it does not change the court’s conclusion. Specifically, Mr. Humpherys’s report
does not create issues of fact as to whether XL discharged its obligations to act in good faith. Rather,
Mr. Humpherys improperly relies on the standard that would be applicable if XL had a duty to defend Belsen Getty
in attempting to place burdens on XL that XL did not owe. (See Dkt. Nos. 56, 66). For example, Mr. Humphreys
opines that XL had an obligation to settle any claim that had arguable merit. As explained, XL had no such
obligation under the plain terms of the Policy because Belsen Getty at all times retained the authority to negotiate on
its own behalf. Similarly, to the extent Mr. Humphreys opines that XL acted in bad faith because it did not obtain a
coverage opinion from outside counsel before denying the claim, the Utah Supreme Court has rejected a similar
argument. See Black v. Allstate Ins. Co., 2004 UT 66, 100 P.3d 1163, 1169 n.3 (“[T]he use of an independent
adjustor, while advisable, is not necessarily required in order for an insurer to demonstrate that it has fulfilled its
good faith duty to investigate and fairly evaluate the claims.”). Thus, Mr. Humpherys’s opinion does not provide a
basis from which a reasonable jury could conclude that XL breached the implied covenant of good faith and fair
dealing or that it breached its fiduciary obligations.
22
The court does not have any pending claim before it for payment within the Policy Limits and makes no
determination of whether such payment is required or may be precluded by any other Policy exclusions.
33
BY THE COURT:
____________________________________
Clark Waddoups
United States District Judge
34
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