New Life Brokerage v. Cal-Surance, 334 F.3d 112, 1st Cir. (2003)

334 F.
3d 112
NEW LIFE BROKERAGE SERVICES, INC., d/b/a NLBS

Advisers and New Life Holding Company, Inc., Plaintiffs,
Appellants,
v.
CAL-SURANCE ASSOCIATES, INC., Defendant, Appellee.
No. 02-2348.
United States Court of Appeals, First Circuit.

Heard March 5, 2003.
Decided June 24, 2003.
Todd S. Holbrook, with whom Michael A. Hodgins and Bernstein, Shur,

Sawyer & Nelson, were on brief, for appellants.
John S. Whitman, with whom Richardson, Whitman, Large & Badger,
were on brief, for appellee.
Before HOWARD, Circuit Judge, CAMPBELL and CYR, Senior Circuit
Judges.
HOWARD, Circuit Judge.
This appeal arises out of a dispute between a defunct Maine securities brokerdealer known as New Life Brokerage Services, Inc., and its insurance broker,
Cal-Surance Associates, Inc. New Life contends that the district court erred in
awarding Cal-Surance summary judgment on its claims that Cal-Surance
should be held liable for failing to provide it with an insurance policy that
would have covered a series of events that put it out of business. We affirm,
though on a different basis than that relied upon by the district court.
I.
2
On or about September 2, 1997, a customer of New Life complained to the

Securities Division of Maine's Bureau of Banking that one of New Life's sales
representatives, Cary Butterfield, had unlawfully sold securities that were not
registered with the state. The complaint prompted a Securities Division
investigation that revealed that, in 1996 and 1997, Butterfield had sold some
$1.3 million worth of securities that were neither registered nor approved for
sale by New Life. This unlawful practice is known in the securities industry as
"selling away." The Securities Division thereafter sought to revoke New Life's
license as a Maine securities broker-dealer. See Me.Rev.Stat. Ann. tit. 32,
10313(1)(J) (1999 and 2002 Supp.) (conferring this power upon the Securities
Division if its administrator determines that such revocation is "in the public
interest" and that the broker-dealer "failed reasonably to supervise [its] sales
representatives").
3
From late 1997 through 1999, New Life attempted to negotiate an agreement
with the Securities Division that would permit it to retain its license. But the
Securities Division conditioned any such agreement on, inter alia, New Life
purchasing back from Butterfield's customers a substantial number of the
unlawfully sold securities. On September 21, 1998, as negotiations were
ongoing, New Life notified Zurich American, its errors and omissions insurer,
of its representative's selling away and the Securities Division's investigation.
The following month, Zurich American advised New Life that the policy did
not provide coverage for selling away. In the absence of insurance coverage,
New Life was unable to offer to purchase back a sufficient number of
unlawfully sold shares to satisfy the Securities Division. Eventually, New Life
acceded to the revocation of its broker-dealer license, effective December 31,
1999.
Cal-Surance had procured the New Life errors and omissions policies that were
in effect annually between January 1, 1996 and January 1, 2000 the period
during which the events underlying this lawsuit occurred. Following the
surrender of its license, New Life brought this diversity action against CalSurance. The complaint alleged that Cal-Surance had breached duties owed to
New Life to obtain for it errors and omissions insurance policies covering the
selling away of unregistered and/or unapproved securities. At bottom, New
Life's case theory was that, had Cal-Surance discharged these duties, New Life
would have been able to purchase back a sufficient number of the unlawfully
sold securities to avoid going out of business.
Following discovery, Cal-Surance moved for summary judgment on a number

of grounds. The district court referred the motion to a magistrate judge, who
focused on Cal-Surance's argument that New Life had failed to provide
evidence that there existed in the insurance market during the relevant time
frame policies that would have covered the costs (or some portion thereof) of
meeting the Securities Division's demands. The magistrate judge analyzed
seven insurance policies that New Life says Cal-Surance could have procured,
and concluded that there were applicable exclusions within each disavowing
coverage for claims or proceedings brought by governmental entities. See New
Life Brokerage Servs., Inc. v. Cal-Surance Assocs., 223 F.Supp.2d 264, 271-75
(D.Me.2002). Accordingly, the magistrate judge recommended that CalSurance's request for summary judgment be granted. See id. at 275. The
referring judge accepted the recommendation, see id. at 266, and this appeal
followed. While we do not quarrel with the magistrate judge's reasoning and
conclusions, we conclude that Maine law provides another and more direct
route to affirmance, as set forth below.
II.
6
Cal-Surance opens its brief not by responding to New Life's arguments against
the applicability of the exclusions relied upon by the district court, but by
presenting an alternative ground for upholding the judgment that it regards as
more straightforward. See, e.g., Houlton Citizens' Coalition v. Town of Houlton,
175 F.3d 178, 184 (1st Cir.1999) (appeals court may affirm entry of summary
judgment on "any ground revealed by the record"). Cal-Surance contends that
each of the seven policies provided only liability coverage for "damages" or, in
the case of one of the policies, "loss" (defined to include "damages, judgments,
settlements, and defense costs" but not "the cost of complying with any
settlement for or award of non-monetary relief") incurred as the result of legal
proceedings initiated against the insured. In Cal-Surance's view, funds paid by
New Life to buy back the securities would not have constituted "damages" or
"loss" liability under any reasonable interpretation of these terms. New Life
effectively concedes that the policies only covered liability of this sort. Its
responsive argument is that the buy-back costs would have constituted
"damages" or "loss" under Maine law, because they would have formed the
basis for the amount of damages to which its customers would have been
entitled had they sued New Life directly. See Me.Rev.Stat. Ann. tit. 32,
10605. Cal-Surance has the stronger argument.
We give content to the contractual terms in question by adopting "the

perspective of an average person untrained in either the law or the insurance
field" and asking "what a more than casual reading of the policy would reveal
to [this] ordinarily intelligent insured." Union Mut. Fire Ins. Co. v. Commercial
Union Ins. Co., 521 A.2d 308, 310 (Me.1987) (internal quotations omitted).
Obviously, a standard as general as this is far from self-executing, but the
Supreme Judicial Court of Maine has applied it in circumstances that strongly
suggest that New Life's buy-back costs would not constitute "damages" or
"loss" liability under Maine law.
In Patrons Oxford Mut. Ins. Co. v. Marois, 573 A.2d 16 (Me.1990), the Court
was faced with the question whether an insurance policy providing liability
coverage for amounts the insured was "legally obligated to pay as damages"
would cover expenses incurred by an insured responding to a governmental
demand that it eradicate pollution damage (on its own property and that of third
parties) caused by its leaking underground gasoline tanks. See id. at 16-17. The
Court answered this question in the negative, reasoning that there was a
material difference, discernible to the ordinarily intelligent insured, between
"sums which the insured [is] legally obligated to pay as damages" and the costs
of conduct undertaken at government direction to restore (to the extent
practicable) the status quo ante. See id. at 18. In reaching this conclusion, the
Court acknowledged that such remedial costs "may be substantial and may
effectively alleviate or prevent damage to others...." Id. But at the same time,
the Court noted the possibility of "a substantial difference between these
remedial costs and the amount of damages the [insured] would have to pay to
[affected third parties] for damages," and held that it was only "the latter
expenditure upon which the parties ... contracted and upon which the premium
[was] based." Id. at 18-19.
Like the equitable remedial costs in Marois, New Life's equitable remedial buyback costs, insisted on by the Securities Division, are distinguishable from any
actual direct damages that New Life would have been obligated to pay its
customers. Under Marois, the payment of money does not by itself constitute
loss or damage as contemplated by the policy. If anything, the circumstances
presented in this case are even more dissimilar to an action seeking to impose
damages or loss liability than the Marois scenario. After all, unlike the
government regulator in Marois, the Securities Division had no authority under
Me.Rev.Stat. Ann. 10313(1) to order New Life to buy back the securities or
otherwise to spend money to remedy the situation. See id. (conferring the power
only to deny, suspend, or revoke a broker-dealer license). In any event, the
Maine Supreme Judicial Court has concluded that the costs of remedial conduct
required by a government agency to undo the effects of an insured's unlawful
activity, even if the conduct "alleviate[s] or prevent[s]" damages to or losses by
third parties, Marois, 573 A.2d at 18, were not covered by an insurance policy
"damages" liability provision materially indistinguishable from the policy
provisions relied upon by New Life. Having invoked the district court's
diversity jurisdiction, New Life is not well positioned to argue against our
reaching the same conclusion. See, e.g., Dryden Oil Co. of New England, Inc. v.
Travelers Indem. Co., 91 F.3d 278, 289 (1st Cir.1996).
10
Affirmed.

New Life Brokerage v. Cal-Surance, 334 F.3d 112, 1st Cir. (2003)

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334 F.

NEW LIFE BROKERAGE SERVICES, INC., d/b/a NLBS

United States Court of Appeals, First Circuit.

Todd S. Holbrook, with whom Michael A. Hodgins and Bernstein, Shur,

On or about September 2, 1997, a customer of New Life complained to the

Following discovery, Cal-Surance moved for summary judgment on a number

We give content to the contractual terms in question by adopting "the

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