913 F.3d 221
1st Cir.2019Background
- Scottsdale issued a Business and Management Indemnity Policy (Nov. 15–Dec. 15, 2013–2014) to Wellesley Advisors/WARF with a $3 million limit; WARF was an insured.
- Appellees (trustees of Plumbers & Pipefitters Local 51 Funds) sued WARF alleging WARF mismanaged a $5M investment across three properties (The Stone House, Newport, North Attleboro), asserting negligence and an ERISA breach; WARF defaulted and a $5,005,422.12 judgment entered.
- WARF assigned its rights against Scottsdale to the Funds after Scottsdale refused to defend or indemnify, invoking Professional Services, ERISA, and Conduct exclusions in the Policy.
- Scottsdale sued for declaratory relief; the Funds counterclaimed for breach of the duty to defend and indemnify. On cross-motions, the district court held Scottsdale had a duty to defend and later entered judgment for the policy limit ($3M) plus post-judgment interest.
- Scottsdale appealed, arguing (1) the Professional Services and ERISA exclusions plainly bar defense/coverage, and (2) at most liability should be limited under the Conduct Exclusion to defense costs or allocated portions of the judgment.
- The First Circuit affirmed, concluding Scottsdale failed to show the exclusions clearly applied to all allegations and thus owed the duty to defend and the policy limit.
Issues
| Issue | Scottsdale's Argument | Funds' Argument | Held |
|---|---|---|---|
| Whether Professional Services Exclusion relieves Scottsdale of duty to defend | All underlying allegations arise from real estate "professional services" (development, property management, financing) and are excluded | Complaint alleges additional, distinct misconduct (e.g., overleveraging, failure to pay taxes/mortgages) not tied to covered "services," creating ambiguity | Exclusion did not clearly cover all claims; duty to defend exists because allegations regarding some properties were ambiguous and not plainly within exclusion |
| Whether ERISA Exclusion or ERISA preemption defeats duty to defend negligence claim | ERISA-based claim and negligence arise from same facts; preempted state-law claims fall within exclusion as "similar" ERISA provisions | Policy language is ambiguous as to preempted state-law claims; ambiguities construed against insurer | Exclusion fails to clearly encompass the negligence claim; Scottsdale did not meet its burden to show exclusion applies; duty to defend stands |
| Scope of indemnity given Scottsdale's failure to defend (Conduct Exclusion) | Conduct Exclusion bars coverage for gains to which insured wasn't entitled (self-dealing); Scottsdale should be limited to defending/indemnifying only non-excluded portions | The default judgment established multiple theories of loss (negligence, not only improper gains); Scottsdale bears burden to allocate and did not prove allocation | Scottsdale cannot avoid full indemnity: Conduct Exclusion inapplicable to all established allegations and Scottsdale failed to allocate the judgment; obligated for policy limit |
| Appropriate damages when insurer wrongfully refuses to defend | Liability limited to defense costs or apportioned coverage where exclusions apply | Wrongful refusal to defend binds insurer to underlying default judgment on covered claims; liable for full covered judgment up to policy limit | Insurer liable for entire policy limit ($3M) plus post-judgment interest; district court judgment affirmed |
Key Cases Cited
- Barrett Paving Materials, Inc. v. Continental Ins. Co., 488 F.3d 59 (1st Cir.) (summary judgment standard on insurance coverage)
- Valley Forge Ins. Co. v. Field, 670 F.3d 93 (1st Cir.) (insurance policy interpretation is a question of law)
- Metro. Prop. & Cas. Ins. Co. v. Morrison, 951 N.E.2d 662 (Mass. 2011) (insurer's duty to defend broader than duty to indemnify; effects of wrongful refusal to defend)
- Scottsdale Ins. Co. v. Torres, 561 F.3d 74 (1st Cir.) (duty to defend if complaint reasonably susceptible of covered interpretation)
- Billings v. Commerce Ins. Co., 936 N.E.2d 408 (Mass. 2010) (duty to defend when complaint roughly sketches a covered claim)
- Sterilite Corp. v. Cont'l Cas. Co., 458 N.E.2d 338 (Mass. App. Ct. 1983) (complaint need only show possibility coverage exists for duty to defend)
- Bagley v. Monticello Ins. Co., 720 N.E.2d 813 (Mass. 1999) (look to source/origin of injury, not label of legal theory)
- Polaroid Corp. v. Travelers Indem. Co., 610 N.E.2d 912 (Mass. 1993) (insurer breaching duty to defend bears burden to prove claim not within coverage)