929 F.3d 11
1st Cir.2019Background
- UBS Trust and UBS Financial Services (collectively "UBS") purchased D&O/Professional liability primary and excess policies from XL, Axis, and Hartford; policies contained a negotiated "Specific Litigation Exclusion" identifying two prior matters: a 2009 SEC investigation and a 2010 Unión investor lawsuit.
- The Specific Litigation Exclusion barred coverage for any claim "in connection with" or "in any way involving" those specified proceedings or "any fact, circumstance or situation underlying or alleged therein." UBS attempted to narrow this language during negotiation but XL refused.
- After the policy period, UBS faced multiple disputes (FINRA investigations and arbitrations, SEC and civil suits including Casasnovas and Fernández) alleging CEF mismanagement, conflicts of interest, steering, and use of CEFs to offload risky municipal bonds—many allegations referencing the 2009 SEC matter and 2010 Unión suit.
- UBS notified insurers of some of the post-policy disputes; XL denied coverage invoking the Specific Litigation Exclusion. UBS sued insurers for breach of contract, and the district court granted summary judgment to insurers. UBS appealed.
- The First Circuit reviewed the contract language under Puerto Rico law, focused on the plain text of the negotiated exclusion, and considered whether prior caselaw required a "substantial overlap" test to trigger the exclusion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Specific Litigation Exclusion applies to the Disputed Matters | UBS: exclusion must be read to require "substantial overlap" or an "act-to-act" match; not all claims touching CEFs are barred | XL: plain language (including "in any way involving" and "any fact, circumstance or situation underlying or alleged therein") bars any claim involving matters alleged in the specified prior proceedings | Held: Exclusion unambiguous and broad; it bars coverage where a claim involves facts/circumstances alleged in the prior matters—no "substantial overlap" requirement applies here |
| Whether the Raytheon "substantial overlap" test controls | UBS: Raytheon requires substantial overlap between prior and subsequent claims to exclude coverage | XL: Raytheon is distinguishable because its clause was narrower and included "same or substantially similar" language | Held: Raytheon is distinguishable; UBS policy contains broader connectors ("in any way involving") and lacks the Raytheon limiting phrasing, so Raytheon’s standard does not apply |
| Whether exclusion should be construed narrowly against insurer as an ambiguous/adhesion clause | UBS: exclusionary clauses disfavored under Puerto Rico law and should be strictly construed for insured | XL: parties negotiated the clause at arm’s length; UBS had counsel and tried to change language | Held: Though exclusionary clauses are typically construed narrowly, here parties negotiated the clear language; UBS is a sophisticated insured and cannot avoid the plain meaning |
| Whether insurers had to advance/reimburse defense costs under a "remote possibility of coverage" standard | UBS: even if exclusion applies, insurer must advance defense costs if there is a remote possibility of coverage | XL: remote-possibility rule not applicable on summary judgment where court can decide coverage as a matter of law | Held: W Holding (remote-possibility) is inapposite on this record; because coverage is barred as a matter of law, no remote-possibility entitlement to defense costs exists |
Key Cases Cited
- Fed. Ins. Co. v. Raytheon Co., 426 F.3d 491 (1st Cir.) (applied a "substantial overlap" test under a narrower exclusion)
- Clark Sch. for Creative Learning, Inc. v. Philadelphia Indemnity Ins. Co., 734 F.3d 51 (1st Cir.) ("or in any way involving" clause read expansively)
- W Holding Co. v. AIG Ins. Co., 748 F.3d 377 (1st Cir.) (explains "remote possibility of coverage" standard for advancement at preliminary stage)
- Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161 (8th Cir.) (distinguishes duty to advance/reimburse defense costs; insurer had no obligation in final coverage determination)
- AJC Int'l, Inc. v. Triple-S Propiedad, 790 F.3d 1 (1st Cir.) (enforces unambiguous insurance contract language as written)