Ubs Fin. Servs., Inc. of Puerto Rico v. XL Specialty Ins. Co. , 929 F.3d 11 ( 2019 )

United States Court of Appeals
For the First Circuit
No. 18-1148
UBS FINANCIAL SERVICES, INC. OF PUERTO RICO AND
UBS TRUST COMPANY OF PUERTO RICO,
Plaintiffs, Appellants,
v.
XL SPECIALTY INSURANCE CO., AXIS REINSURANCE CO.,
AND HARTFORD FIRE INSURANCE CO.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]
Before
Howard, Chief Judge,
Torruella and Kayatta, Circuit Judges.
Robert T. Smith, with whom Rajesh R. Srinivasan, Michael I.
Verde, David L. Goldberg, Philip A. Nemecek, Tenley Mochizuki,
Katten Muchin Rosenman LLP, Jaime E. Toro-Monserrate, Nayda I.
Pérez-Román, and Toro, Colón, Mullet Rivera & Sifre PSC were on
brief, for appellants.
Cara Tseng Duffield, with whom Karen L. Toto, Kimberly M.
Melvin, John E. Howell, and Wiley Rein LLP were on brief, for
appellee XL Specialty Insurance Company.
Francisco E. Colón-Ramírez and Colón Ramírez LLC on brief,
for appellees XL Specialty Insurance Company, AXIS Reinsurance
Company and Hartford Fire Insurance Company.
Joshua D. Weinberg and Shipman & Goodwin LLP on brief, for
appellee Hartford Fire Insurance Company.
Michael R. Goodstein, James M. Young, and Bailey Cavalieri
LLC on brief, for appellee AXIS Reinsurance Company.
July 3, 2019
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TORRUELLA, Circuit Judge. In this case, titans of their
respective industries clash as to the interpretation of an
exclusion clause in an insurance policy representing millions of
dollars in potential coverage. In the process of deciding this
appeal, we are granted a glimpse into the ethics that apparently
prevail in some sectors of the financial industry.
Appellants UBS Trust Company ("UBS-Trust") and UBS
Financial Services Inc. of Puerto Rico ("UBS-PR") filed suit
against their primary insurance provider, XL Specialty Co. ("XL"),
as well as their secondary insurance providers, claiming that the
insurers' refusal to cover certain legal disputes constituted a
breach of their insurance contract. XL argues that those disputes
fall under a "specific litigation exclusion" clause in the
insurance policy that excepts from coverage claims related to prior
matters specified therein. UBS-Trust and UBS-PR (collectively,
"UBS"), on the other hand, assert that the specified prior matters
and the disputed matters at issue in this case are not sufficiently
related and XL is misinterpreting the scope of the exclusion.
After the parties filed cross-motions for summary
judgment, the district court held that the prior and disputed
matters were sufficiently related such that the exclusion clause
applied, and granted summary judgment in favor of the insurers.
UBS appealed. After careful review, we affirm, finding that the
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clear and unambiguous language of the specific litigation
exclusion bars coverage of the disputed litigation matters here.
I. Background
A. Factual Background
UBS-PR was an underwriter for various tax-exempt Puerto
Rican municipal bonds.1 UBS-PR, also a licensed broker-dealer,
sold shares of closed-end funds ("CEFs") to brokerage customers in
Puerto Rico.2 UBS-Trust, on the other hand, was responsible for
managing or co-managing twenty-three CEFs. From 2009 to 2012, UBS
was the subject of various proceedings concerning the CEFs, two of
which are relevant here: (1) a 2009 Securities and Exchange
1 "[A]n underwriter buys bonds from an issuer and resells them to
investors, with the difference between the purchase price paid by
the underwriter to the issuer and the resale price accounting for
the underwriter's profit or loss . . . ." Unión de Empleados de
Muelles de P.R. PRSSA Welfare Plan v. UBS Fin. Servs. Inc. of P.R.,
704 F.3d 155, 160 (1st Cir. 2013).
2 Typically, a closed-end fund is "[a] mutual fund having a fixed
number of shares that are traded on a major securities exchange or
an over-the-counter market." Unión de Empleados, 704 F.3d at 160
n.2 (citing Black's Law Dictionary 1116 (9th ed. 2009)). While
closed-end funds generally fall under the purview of the Investment
Company Act of 1940, "the funds [at issue] are exempt from the
. . . Act under section 6(a)(1), which provides an exemption for
certain funds organized in Puerto Rico, so long as [they] are sold
only to residents in Puerto Rico." Id. at 160; see also 15 U.S.C.
§ 80a-6(a)(1). Hence, "the pool of potential buyers for these
funds is smaller than the pool available to a typical large,
closed-end mutual fund." Unión de Empleados, 704 F.3d at 160.
Indeed, "[t]he CEFs are not traded on an exchange or quoted on any
quotation service, and are available only to Puerto Rico
residents."
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Commission ("SEC") investigation, and (2) a 2010 lawsuit filed by
CEF investors (collectively, the "Prior Matters").
1. 2009 SEC Investigation
In August 2009, the SEC began investigating UBS-PR for
violations of securities laws (the "2009 SEC Investigation"). The
SEC ultimately concluded that UBS-PR misrepresented the risks
associated with its CEF shares. Although UBS-PR told customers
that the share price was determined by supply and demand, the
investigation concluded that UBS-PR was effectively setting the
price of shares by controlling sales in the secondary market. In
addition, the SEC found that by not informing investors it
purchased millions of dollars of CEF shares into its inventory,
UBS-PR made CEF shares appear more liquid and in higher demand
than they actually were. The SEC further concluded that UBS-PR
offloaded shares it owned by selling them at lower prices while
"numerous UBS PR customers were also attempting to sell their
holdings[,] . . . effectively prevent[ing] certain customers from
selling their CEF shares." Ultimately, UBS-PR settled with the
SEC through the entry of an "Order Instituting Administrative and
Cease-and-Desist Proceedings," in which UBS-PR agreed to pay over
$26 million in disgorgement, prejudgment interest, and civil money
penalties.
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2. 2010 Unión Lawsuit
In 2010, CEF investors filed a lawsuit concerning UBS's
management of four CEFs, derivatively on behalf of the four funds
and directly as a putative class of fund investors (the "2010 Unión
Lawsuit"). See Verified Shareholder Derivative Action and Class
Action Complaint, Unión de Empleados de Muelles de P.R. PRSSA
Welfare Plan v. UBS Fin. Servs. of P.R., No. 10-1141-ADC (D.P.R.
Mar. 31, 2011) (ECF No. 1). The CEFs incorporated pension bonds
issued by Puerto Rico's Employee Retirement System ("ERS"), which
were underwritten by UBS-PR and purchased by UBS-Trust. The
investors alleged that: (1) in 2007, UBS-PR became financial
advisor to the ERS; (2) afterwards, it served as underwriter when
ERS sold $2.9 billion in pension bonds, which resulted in
approximately $27 million in fees for UBS-PR and its co-
underwriters; (3) ERS pension bonds were rated just one step above
junk by Moody's Investors Service and other rating agencies; (4)
UBS-Trust purchased more than half of the total bond offering; and
(5) "near-junk" ERS bonds were concentrated in the four CEFs at
issue, creating an over-concentration of low-quality ERS bonds.
Hence, plaintiffs claimed that UBS, "[o]perating on all
sides of mutual fund and bond transactions . . . manipulated the
[CEF] Funds and the bond market to the detriment of the Funds and
its unsuspecting investors." They alleged that by serving as
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"investment advisor, bond underwriter, and mutual fund manager,"
UBS's actions "created a disabling conflict of interest which
caused [it] . . . to breach [its] fiduciary and other duties to
the Funds." They further alleged that UBS caused "millions of
dollars in . . . losses which [were] exacerbated . . . [by] the
illiquidity of the market for the Funds, which [was] in large part
controlled by [UBS]." To that end, investors claimed UBS engaged
in "material misstatements and fraudulent omissions," including
the withholding of information that demand was created through
large-scale purchases of ERS bonds, thereby "artificially
inflat[ing]" the price and masking the bonds' substantial risk.
As a result, investors claimed UBS used the CEFs as a "dumping
ground for the toxic pension bonds . . . in order to maximize the
[bonds'] offering price."
3. The Insurance Policies
In 2011, UBS began searching for a new insurance provider
to cover legal disputes. UBS's broker, Marsh, approached XL for
primary coverage and Axis Reinsurance ("Axis") and Hartford Fire
Insurance ("Hartford") (collectively, "Insurers") for secondary
coverage. UBS negotiated the terms of the policies with the advice
of Marsh and coverage counsel, Covington & Burling LLP. In the
process, UBS requested numerous changes to the policy language
proposed by XL. While XL agreed to many of UBS's requested changes,
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it did not agree to alter the terms of a specific litigation
exclusion. Ultimately, XL issued a primary $10 million policy,
Axis issued a $5 million first excess policy, and Hartford issued
a $5 million second excess policy in UBS's favor. The primary and
secondary policies (together, the "Policy") shared most terms and
conditions, including a specific litigation exclusion. The
exclusion precluded coverage of:
any Claim in connection with any proceeding set forth
below, or in connection with any Claim based on,
arising out of, directly or indirectly resulting from,
in consequence of, or in any way involving any such
proceeding or any fact, circumstance or situation
underlying or alleged therein:
. . .
Unión de Empleados de Muelles de Puerto Rico PRSSA
Welfare Plan, et al. v. UBS Financial Services
Incorporated of Puerto Rico, et al., Case No. 10-1141,
U.S. District Court, District of Puerto Rico.
The [2009] investigation by the Securities and
Exchange Commission captioned "in the Matter of UBS
(Certain Puerto Rico Bonds and Funds)" SEC File No.
FL-3491.
(the "Specific Litigation Exclusion") (emphasis added). Hence,
if a new claim was related to either the 2009 SEC Investigation or
the 2010 Unión Lawsuit as described in the clause above, it was
not covered by the Policy. Crucially, during negotiations, UBS
attempted to narrow the scope of the Specific Litigation Exclusion,
but XL rejected the proposed changes. Specifically, UBS sought
to replace "any fact, circumstance or situation underlying or
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alleged therein" with "the same Wrongful Acts alleged in any such
proceeding," and to remove the phrase "in any way."
Generally, the Policy protected UBS against claims
alleging wrongful acts made during the policy period.3 A "claim"
included any "written notice received by an Insured that any person
or entity intends to hold any Insured responsible for a Wrongful
Act," any "proceeding in a court of law or equity," or "any formal,
civil, criminal, administrative, or regulatory investigation of an
Insured." Moreover, a "wrongful act" was "any actual or alleged
act, error, omission, misstatement, misleading statement or breach
of fiduciary duty . . . committed by [UBS] in the performance of,
or failure to perform, Professional Services." "Professional
services" meant "financial, economic or investment advice given or
investment management services performed for others for a fee or
commission by [UBS]."
In addition, the Policy included a "notice of claim
endorsement" that required written notice of any claim "as soon as
practicable after it is first made . . . but in no event later
than ninety (90) days after the expiration of the Policy Period."
Lastly, the Policy contained an "interrelated claims" provision
3 The policy period extended from January 15, 2013 through
January 25, 2014.
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mandating that all claims resulting from interrelated wrongful
acts constitute a single claim.
4. Legal Disputes Since 2012
Since the beginning of the policy period, UBS has
litigated, as pertinent here, two civil actions (the "Casasnovas"
and "Fernández" Litigations), two regulatory investigations (by
the SEC and the Financial Institutions Regulatory Association
("FINRA")), and hundreds of FINRA arbitrations (collectively, the
"Disputed Matters"). UBS contends that the financial crisis in
the Puerto Rico bond market catalyzed litigation against it.
a. 2013 SEC Investigation
In October 2013, the SEC issued an order directing an
investigation of the conduct of a former UBS sales manager,
Jorge G. Ramírez, Jr. (the "2013 SEC Investigation"). The order
expressly referred to the 2009 SEC Investigation and its result.
It further asserted that UBS-PR
may have been . . . making false statements of
material fact or failing to disclose material facts
to customers concerning, among other things, the risks
or suitability of investing in mutual funds or [PR
bonds] using margin, loans provided by [a] UBS
[affiliate], repurchase agreements or other means of
credit.
Ultimately, the SEC found that Ramírez "effected a
scheme" whereby customers were encouraged to use existing CEF
shares as collateral for loans, the proceeds of which were used to
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purchase additional shares in the CEFs. Consequently, by making
"material misrepresentations . . . regarding the safety of this
strategy," customers were exposed to "greater risk[s] than they
otherwise would have been exposed." The SEC concluded that UBS
did not provide reasonable supervision as required under the
Securities Exchange Act. The matter was resolved when UBS paid
$15 million in disgorgement and penalties.4
b. Casasnovas Litigation5
In February 2014, CEF investors filed a derivative suit
against UBS alleging it mismanaged the CEFs by not diversifying
and instead using them as a dumping ground for the municipal bonds
they underwrote. Moreover, they claimed that UBS engaged in gross
conflicts of interest by acting as bond underwriter, investment
adviser, and mutual fund manager. The Casasnovas plaintiffs also
alleged that UBS encouraged customers to purchase additional CEF
shares with loans collateralized by shares of the same fund,
thereby artificially increasing the demand, value, and liquidity
of the CEF shares. They further claimed that they felt "trapped"
4 The record does not show whether those involved in the various
fraudulent and nefarious activities engaged in by UBS and its
agents were the subject of criminal investigation and/or charges.
5 Casasnovas-Balado v. UBS Fin. Servs. Inc., No. 2014-0072, 2015
WL 5179147 (P.R. Cir. Feb. 5, 2014) before the Commonwealth of
Puerto Rico Court of First Instance, Superior Court of San Juan.
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by the "illiquidity of the market created by" UBS, and that UBS's
"manipulative trading, which was concealed . . . by the UBS
Defendants . . . destroyed the [CEF's] overall financial health."
c. Fernández Litigation
In May 2014, another group of CEF investors sued UBS in
the U.S. District Court for the Southern District of New York and
voluntarily withdrew the complaint less than a month later.
Fernández v. UBS AG, 222 F. Supp. 3d 358, 369 (S.D.N.Y. 2016).
The investors eventually refiled "on behalf of themselves and a
Class . . . of similarly situated persons who were and/or are
invested in one or more of twenty-three (23) closed-end mutual
funds." Amended Class Action Complaint, Fernández v. UBS AG, No.
15-2859-SHS (S.D.N.Y. May 8, 2015) (ECF No. 68). In their amended
complaint, the Fernández plaintiffs alleged that UBS steered them
into making "high-risk, volatile investments" in CEFs.
Specifically, they claimed the CEFs were not safe, despite UBS's
representations to the contrary, since the funds were highly
leveraged and invested in millions of dollars of debt securities.
Moreover, the Fernández plaintiffs complained that UBS secretly
offloaded a "substantial portion of its own inventory of shares"
by "push[ing]" them on UBS clients. As a result, UBS assumed
"conflict[ing] roles" by underwriting municipal bonds, selling
them into the CEFs, and acting as advisors to the CEFs. Because
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UBS failed to mitigate risks and employed an "improper loan
scheme," the Fernández class members alleged that they suffered
significant losses after CEF shares plummeted in value.
Significantly, in June 2015, UBS filed a motion to
dismiss, arguing that the Fernández litigation was time-barred
because the Unión lawsuit filed in 2010 made "similar allegations"
and was widely publicized, so should have put plaintiffs on notice
of their claims. In December 2016, the district court granted in
part and denied in part UBS's motion to dismiss, concluding that
"[t]he publicized lawsuits and administrative proceedings . . .
[were] sufficient for the court to find that UBS investors had
constructive notice and knowledge of their tort claims against
UBS." Fernández v. UBS AG, 222 F. Supp. 3d 358, 383 (S.D.N.Y.
2016).
d. 2014 FINRA Investigation
In February 2014, FINRA's Enforcement Department
notified UBS that it was under investigation.6 UBS ultimately
paid $18,478,402 to settle with FINRA. The settlement document,
titled "Financial Industry Regulatory Authority Letter of
Acceptance, Waiver and Consent" (the "Settlement Letter"),
discussed the 2009 SEC Investigation in the "Relevant Disciplinary
6 FINRA regulates UBS-PR only in its capacity as a broker-dealer.
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History" section. The Settlement Letter concluded that UBS
"failed to establish and maintain a supervisory system" that would
ensure "the suitability of transactions in CEFs . . . in light of
customers' risk objectives and profile." It highlighted that
since customer accounts were concentrated in CEF shares, they "bore
increased risk," which was "exacerbated by the fact that the CEFs
were internally leveraged." It further indicated that as a result
of the Puerto Rico bond market crash of 2013, customers who had
invested heavily in the CEFs were forced to sell their funds "into
an illiquid market at significant losses."
e. FINRA Arbitrations
UBS notified XL of fifty-five different FINRA
arbitrations. The arbitration claims largely asserted that the
CEFs were unsuitable investments because they were highly
leveraged in risky municipal bonds. Moreover, investors claimed
they were exposed to undue risk since UBS controlled the secondary
market for the funds and misled investors by artificially
increasing the demand for and liquidity of the shares. Notably,
many of the claimants referred to the 2009 SEC investigation and
resulting order. UBS was also served with approximately 1,150
additional arbitration proceedings, 7 which, according to UBS's
7 Eighty-four FINRA arbitrations (fourteen arbitrations in which
XL was notified and seventy additional proceedings) were given to
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First Amended Complaint, "asserted claims substantively similar or
identical to those . . . in the [fifty-five other FINRA
arbitrations reported to XL]."
5. Notice of Claims
In October 2013, UBS notified XL of expected litigation
and FINRA arbitrations involving allegations that customers were
"overconcentrated" in CEFs, and that UBS made "unsuitable
recommendations" promoting the use of CEF shares as "collateral
for credit lines" and "misrepresentations" regarding the risks
associated with investing in CEFs. XL denied coverage on
December 2, 2013, citing the Specific Litigation Exclusion. UBS
then notified XL about the FINRA arbitrations, the 2013 SEC
investigation, and the Casasnovas Litigation. XL also denied
coverage because the proceedings "involved alleged misconduct in
connection with CEFs and [municipal] bonds" and, therefore, was
excluded. Lastly, UBS notified XL about the Fernández Litigation,
and, once again, XL refused to extend coverage. UBS did not notify
the Insurers of the 2014 FINRA Investigation or the additional
FINRA arbitrations before filing this case in the district court.
the district court as a "sample set."
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B. Procedural Background
On December 18, 2015, UBS filed suit against the Insurers
for breach of contract. In its First Amended Complaint filed on
September 13, 2016, UBS alleged that the Insurers breached their
contractual duty under the Policy to reimburse UBS for defense
costs incurred in connection with the Disputed Matters. On
July 28, 2017, the parties filed cross-motions for summary
judgment. The Insurers pressed that the Disputed Matters were
excluded from coverage because they were sufficiently related to
the Prior Matters, and various Disputed Matters arose after the
policy period ended. UBS countered that the Insurers were
incorrectly interpreting the Specific Litigation Exclusion clause
too broadly, and that the Disputed Matters that arose after the
policy period were nevertheless covered because they were
"interrelated" with claims that arose during the policy period.
The district court granted summary judgment in favor of the
Insurers and dismissed UBS's claims with prejudice. UBS Fin.
Servs. Inc. of Puerto Rico v. XL Specialty Ins. Co., 289 F. Supp.
3d 335, 350 (D.P.R. 2018).
On appeal, UBS argues that: (1) the Disputed Matters are
not excludable based on a plain reading of the Policy's unambiguous
language; (2) pursuant to Fed. Ins. Co. v. Raytheon Co., 426 F.3d
491, 499 (1st Cir. 2005), the exclusion only applies when there is
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"substantial overlap" of relevant facts between the Prior and
Disputed Matters; and (3) XL was required to cover defense-related
expenses when there was a "remote possibility of coverage." In
addition, UBS asserts that it complied with the Policy's notice
requirements and that certain Disputed Matters not claimed within
the policy period8 are coverable because they are interrelated with
claims made during the policy period.
XL counters that the Specific Litigation Exclusion's
plain text unambiguously applies to any fact, circumstance, or
situation underscored in the Prior Matters, and as such, the
district court was correct in finding the clause barred coverage
for the Disputed Matters. XL highlights that UBS was aware of the
nature of the policy, as both sides heavily negotiated the terms,
including the language of the Specific Litigation Exclusion.
Moreover, XL asserts that it does not have to cover defense-related
expenses, as the district court resolved that UBS was not entitled
to coverage, so there is no "remote possibility of coverage."
Regarding the Disputed Matters that originated after the policy
period ended, XL posits that if they were interrelated to the Prior
Matters, as UBS alleges, then they would nevertheless be excluded
under the Specific Litigation Exclusion.
8 The only Disputed Matters claimed within the Policy Period were
the 2013 SEC Investigation and fourteen FINRA arbitrations.
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II. Analysis
We go directly to the language of the Specific Litigation
Exclusion to determine whether the Disputed Matters are included
in the Policy's coverage. "The interpretation of an insurance
policy is a question of law for the court." Valley Forge Ins. Co.
v. Field, 670 F.3d 93, 97 (1st Cir. 2012). "We thus must
independently determine the construction of the policy."
Raytheon, 426 F.3d at 497.
A. Construction of the Policy
Under Puerto Rico law, applicable in this diversity
case, the terms of insurance contracts "should be generally
understood within their most common and usual meaning." Pagán
Caraballo v. Silva Delgado, 22 P.R. Offic. Trans. 96, 101 (1988)
(quoting Morales Garay v. Roldán Coss, 10 P.R. Offic. Trans. 909,
916 (1981)). Furthermore, "[w]here the Insurance Code fails to
provide an interpretative approach for a given situation, we also
may turn to the [Puerto Rico] Civil Code as a supplemental source
of law." López & Medina Corp. v. Marsh USA, Inc., 667 F.3d 58,
64 (1st Cir. 2012) (citing Nieves v. Intercontinental Life Ins.
Co. of P.R., 964 F.2d 60, 63 (1st Cir. 1992)).
"More than any other bilateral contract, [insurance
contracts] are subject to the influence and modification produced
on the text by the intention and purpose of the parties."
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Rodríguez de Oller v. Transamerica Occidental Life Ins. Co., 171
D.P.R. 193 (2007), 2007 WL 1723369 at *4 (Official Translation).
Nevertheless, when "the terms of a contract are clear and leave no
doubt as to the intentions of the contracting parties, the literal
sense of its stipulations shall be observed." Lind-Hernández v.
Hosp. Episcopal San Lucas Guayama, 898 F.3d 99, 104 (1st Cir. 2018)
(citing P.R. Laws Ann. tit. 31, § 3471). In the present case we
have both the language of the contract, which all parties agree is
unambiguous, and the equally clear intention of the parties as
demonstrated by the negotiations that preceded the ultimate
agreement during which the insurers rejected the proposed
modification of the language in question, to aid us in interpreting
this controversy.
The Specific Litigation Exclusion states that no
coverage will be available "in connection with any Claim based on,
arising out of, directly or indirectly resulting from, in
consequence of, or in any way involving [the Prior Matters] or any
fact, circumstance or situation underlying or alleged therein."
In accordance with the most common and usual meaning of these
terms, we find that if a "claim . . . in any way involv[es]" a
"fact, circumstance, or situation" that was "alleged" in a Prior
Matter, that claim is clearly excluded from coverage. The terms
"as set forth in the policy" are broad and do not require that the
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overlap be substantial. See AJC Int'l, Inc. v. Triple-S Propiedad,
790 F.3d 1, 4, 10 (1st Cir. 2015) (citing P.R. Laws Ann. tit. 26,
§ 101) (rejecting textual arguments that would steer the court
away from interpreting unambiguous provisions of an insurance
contract as they are written).
Although the language is undoubtedly broad, it was the
language UBS bargained for. Indeed, as previously alluded to,
during negotiations UBS attempted to narrow the scope of the
Specific Litigation Exclusion, but XL rejected the proposed
changes. Specifically, UBS sought to replace "any fact,
circumstance or situation underlying or alleged therein" with "the
same Wrongful Acts alleged in any such proceeding," and to remove
the phrase "in any way." Aware of the breadth of the unchanged
exclusion, UBS nevertheless agreed to purchase the Policy as it
read. Therefore, we see no reason to depart from the negotiated
plain text of the provision.
UBS disagrees, insisting that pursuant to Raytheon, 426
F.3d 491, we should require "substantial" overlap between the Prior
and Disputed Matters, and that the district court's construction
of the exclusion would render the Policy illusory because any claim
connected to CEFs, which are a "core business" of UBS, would be
excluded. Moreover, UBS asserts that the clause does not call for
exclusion on a proceeding-to-proceeding or complaint-to-complaint
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basis, but rather an "act-to-act" basis. According to UBS, this
would allow a portion of a proceeding filed against UBS to be
excluded but the rest to be covered. Although ingenious, we find
these arguments unsupported by the parties' intent as set forth in
the terms of the Policy and the preceding negotiations.
UBS asserts that, pursuant to Raytheon, the Specific
Litigation Exclusion only applies if there is a "substantial"
overlap between the Prior and the Disputed Matters. We disagree,
convinced not only by the facts of this case previously summarized
but also by a comparison of the language in the present Policy
with that in Raytheon. The policy in Raytheon provided an
exclusion for
any Claim made against any Insured . . . based upon,
arising from, or in consequence of any demand, suit
or other proceeding pending, or order, decree or
judgment entered against any Insured, on or prior to
[September 15, 2000], or the same or any substantially
similar fact, circumstance or situation underlying or
alleged therein.
Raytheon, 426 F.3d at 495 (emphasis added). Based on this language,
the Court found the policy required "the allegations in the second
complaint [to] find substantial support in the first complaint,
i.e. that the allegations of the second complaint substantially
overlap those of the first." Id. at 499. While at first glance,
the Raytheon clause looks similar to the one at issue here, we
find two key differences.
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First, and most critically, the Raytheon policy required
the second claim to be "based on," "arising from," or "in
consequence of" a "fact, circumstance or situation" of the prior
litigation. Id. at 495. The Raytheon policy lacked the "in any
way involving" connector, which is present in UBS's Policy and
significantly broadens the scope of the exclusion. The Raytheon
court so acknowledged in distinguishing a Third Circuit case: "the
clause at issue [in Bensalem Twp. v. Int'l Surplus Lines Ins. Co.,
38 F.3d 1303, 1305 (3d Cir. 1994)] was broader because it excluded
subsequent claims 'in any way involving' the prior claim."
Raytheon, 426 F.3d at 499 n.7. And this Circuit has recognized
that the phrase "in any way involving" should be expansively read.
Specifically, in Clark Sch. for Creative Learning, Inc. v.
Philadelphia Indemnity Ins. Co., 734 F.3d 51, 56 (1st Cir. 2013),
we held applying Massachusetts law that "[t]he 'or in any way
involving' clause is a 'mop-up' clause intended to exclude anything
not already excluded."
Second, the clause at issue here excludes "any Claim
. . . in any way involving . . . any fact, circumstance or
situation underlying or alleged" in the Prior Matters, while the
Raytheon clause added the limiting phrase "the same or any
substantially similar" before the terms "fact, circumstance or
situation." Raytheon, 426 F.3d at 495 (emphasis added). Not only
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did this phrase further limit the Raytheon clause's scope in
comparison to the exclusion clause here, it also provided a textual
basis for the "substantial overlap" standard applied in that case.
Id. at 500 (holding that the exclusion, which barred coverage for
"subsequent claim[s] 'based upon . . . the same or any
substantially similar fact, circumstance or situation underlying
or alleged' in a prior claim," required "substantial overlap" with
the prior matter).9
Nevertheless, despite the admittedly broad scope of the
Specific Litigation Exclusion, it is limited in important ways.
The Raytheon exclusion clause mandated exclusion when a new suit
was related to any pending or prior litigation, specifically, to
"any demand, suit or other proceeding pending, or order, decree or
judgment entered against any Insured, on or prior to [September 15,
9 In "Appellants' Response to Appellees' Rule 28(j) letter
Regarding BioChemics, Inc. v. AXIS Reinsurance Company, No. 17-
2059 (1st Cir.)," UBS posits that "BioChemics is harmful to
Insurers' position, because it applied Raytheon's 'substantial
overlap' test." Yet in BioChemics, the court did not grapple with
the issue, noting that "the appellants appear to accept that the
'substantial overlap' test . . . is also the test that we should
use to determine whether the Policy's requirement that
'Interrelated Wrongful Acts' share a 'common nexus' has been met."
BioChemics, Inc. v. Axis Reinsurance Co., 924 F.3d 633, 646 (1st
Cir. 2019) (emphasis added). Not only was the BioChemics court
evaluating a different contractual provision, it merely assumed,
pursuant to the parties' arguments, that the 'substantial overlap'
test was applicable. Thus, we find that BioChemics is neither
binding nor persuasive for purposes of the matter at issue here.
-23-
2000]." Raytheon, 426 F.3d at 495. UBS's Policy, however,
mandates exclusion when the new suit is related, not to any
previous suit, but rather to five specific proceedings, including
the 2009 SEC Investigation and the 2010 Unión Lawsuit.
Thus, as the Insurers have argued, the Specific
Litigation Exclusion, although expansive, does not bar coverage
for all claims, such as "claims for breach of fiduciary duties due
to accounting errors, alleged self-dealing, failure to protect
confidential customer account information from disclosure,
whistleblower [c]laims," or claims for "deficient investment
advisory services provided to the open-end funds [as opposed to
CEFs]." UBS itself stated that CEFs were a "core business," and
therefore that a "substantial portion of UBS's business was
excluded from coverage," but it did not allege or show that CEFs
were UBS's sole business, or that the exclusion as interpreted
here would in effect vitiate all coverage. See B & T Masonry
Const. Co. v. Public Serv. Mut. Ins. Co., 382 F.3d 36, 41 (1st
Cir. 2004) ("While the[] exclusions do limit liability, they do
not completely vitiate the bargained-for coverage . . . .").
Hence, we cannot say that the Specific Litigation Exclusion renders
the policy illusory.10
10In its Reply brief, UBS posits that the Insurers' interpretation
of the exclusion would render it illusory "because, under their
interpretation, the mere presence of UBS . . . would bar coverage."
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Next, we address UBS's argument that the Specific
Litigation Exclusion does not bar coverage for entire "claims" or
proceedings, "only those portions [of the claims] with the
requisite nexus to the Prior Matters." 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.11
But the Insurers do not argue that UBS's inclusion as a party in
a proceeding would automatically render the proceeding excluded.
Indeed, they present various alternate scenarios in which UBS would
be entitled to coverage despite its presence in a proceeding. If
the mere inclusion of UBS as a litigating/arbitrating entity would
activate the exclusion, then the policy would indeed be rendered
meaningless and illusory. And we see no reason why UBS would seek
out liability insurance of that nature, or why we should construct
the clause to be even broader in scope than what the Insurers
posit. Therefore, we decline to construct the policy in such a
way, as "when the parties enter into a contract they do so to make
their covenants and agreements effective, and not seeking illusory
or empty declarations." Caguas Plumbing v. Cont'l Const. Corp.,
155 D.P.R. 744, 753 (2001) (quoting Morales Garay, 101 D.P.R. at
707).
11 The definition of "claim" was amended to include:
(1) any formal, civil, criminal, administrative, or
regulatory investigation of an Insured which is
commenced by the filing or issuance of a notice of
charges, formal investigative order or similar
document identifying in writing such Insured as a
person or entity against whom a proceeding . . . may
be commenced, including any "Wells," "Target Letter"
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UBS posits that the first prong, "any written notice received
. . . for a Wrongful Act" provides support for an "act-to-act"
approach, and that the district court erroneously construed
"claim" to mean "any civil proceeding," while ignoring the
definition's first prong. Further, UBS contends that the Policy's
allocation clause supports its argument, as it expressly provides
for partial coverage. XL, to the contrary, draws our attention
to the second prong, and argues that the Policy unambiguously
excludes coverage for "any civil proceeding . . . or arbitration,"
not "portion[s] of a loss" or "wrongful acts," as UBS wants us to
interpret it.
XL has the better argument. If the definition of a
"claim" only included the first prong, UBS's interpretation might
have better traction. UBS, however, fails to take into account
the entire definition and the disjunctive use of the word "or."
The word "or" indicates an item is separate from others in a list.
See Clark Sch. for Creative Learning, 734 F.3d at 56 (so noting).
or other notice from the Securities and Exchange
Commission or a similar state or foreign governmental
authority that describes actual or alleged violations
of securities or other laws by such Insured Person;
and
(2) service of a subpoena upon an Insured in
connection with a regulatory investigation of any
Insured.
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And while the Policy's definition for "claim" includes "any written
notice . . . that any person or entity intends to hold any Insured
responsible for a Wrongful Act," it also includes "any civil
proceeding . . . or arbitration," "any criminal proceeding," or
"any formal, civil, criminal, administrative, or regulatory
investigation." We see no reason why we should read a single
subpart defining a "claim" as a "written notice" to mean that
claims should be divided into multiple fractions for purposes of
applying the Specific Litigation Exclusion. Moreover, we do not
see why the first prong should govern instead of the more pertinent
ones regarding civil proceedings, arbitrations, or investigations.
If we were to adopt UBS's construction, the other prongs would be
rendered superfluous, and we refuse to construe the definition of
"claim" in a way that would make two-thirds of it meaningless.
See In re Advanced Cellular Sys., Inc., 483 F.3d 7, 12 (1st Cir.
2007) (noting that "courts should avoid interpretations that
render a provision of an agreement surplusage").
UBS's argument for an "act-to-act" approach based on the
Policy's allocation clause also fails. That clause states:
If both Loss covered by this Policy and loss not
covered by this Policy are incurred, either because a
Claim made against the Insured contains both covered
and uncovered matters, or because a Claim is made
against both the Insured and others not insured under
this Policy, the Insured and the Insurer will use
their best efforts to determine a fair and appropriate
allocation of Loss between that portion of Loss that
-27-
is covered under this Policy and that portion of loss
that is not covered under this Policy. . . .
Because the allocation clause permits the parsing of claims into
covered and uncovered matters, it appears to be in tension with a
claim-by-claim reading of the Specific Litigation Exclusion.
Nevertheless, it is a well-known precept of contract
interpretation in Puerto Rico law that specific provisions in a
contract trump general provisions. P.R. Tel. Co. v. SprintCom,
Inc., 662 F.3d 74, 96 (1st Cir. 2011); see also Wells Real Estate
Inv. Tr. II, Inc. v. Chardón/Hato Rey P'ship, S.E., 615 F.3d 45,
59 n.10 (1st Cir. 2010) (noting that when a general provision
conflicts with a specific provision the latter is understood as a
limitation on the former). To that end, we find that the Policy's
definition of "Claim" is more specific in the context of
determining that word's scope as used in the Specific Litigation
Exclusion, and thus controls. Moreover, while the allocation
clause explicitly creates a distinction between covered and
uncovered matters within a "Claim" for purposes of allocation, the
Specific Litigation Clause does not express an analogous
distinction between excluded and non-excluded matters within a
"Claim" for purposes of exclusion. Because the Specific Litigation
Exclusion applies by its clear terms to entire "Claims" as these
are defined by the Policy, we see no reason to depart from the
clause's plain meaning.
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Nevertheless, UBS maintains that the Specific Litigation
Exclusion should be construed to mean something other than its
plain language because Puerto Rico law requires exclusionary
clauses in insurance contracts to be disfavored and strictly
construed.
While it is true that insurance contracts are generally
viewed as adhesion contracts under Puerto Rico law, requiring
construction in favor of the insured, López & Medina Corp., 667
F.3d at 64, and that Puerto Rico's public policy disfavors
exclusionary clauses and thus promotes their strict construction,
Quiñones López v. Manzano Pozas, 1996 P.R.-Eng. 499,244, 141 D.P.R.
139, 155 (1996), those principles seek to protect a weaker party
when there is disparity at the bargaining table. See Herrera v.
First Nat'l City Bank, 3 P.R. Offic. Trans. 1004, 1009 (1975)
(noting, in the context of adhesion contracts in general, that
interpretation of an "obscure" clause should favor the
"economically weaker [party who] . . . had nothing to do with its
drafting"); see also Meléndez Piñero v. Levitt & Sons of Puerto
Rico, Inc., 1991 P.R.-Eng. 735,848, 129 D.P.R. 521, 547 (1991)
(noting that typically, "the terms of an insurance contract are
not negotiated by the parties"). Yet those concerns are not
present here, since the terms of the Specific Litigation Exclusion
are clear, and the parties negotiated the Policy at arm's length.
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UBS, a sophisticated financial player, engaged Marsh, "a large and
respected broker with expertise in the Puerto Rican market," and
together they negotiated the terms of the Policy. Moreover, UBS
received advice and suggestions from Covington & Burling LLP
concerning the Specific Litigation Exclusion. UBS therefore could
have reasonably expected that it bargained for the plain reading
construction we give the exclusion today.
Having determined the Specific Litigation Exclusion's
construction and scope, the next step is to determine its
applicability to the Disputed Matters. The district court examined
the relationship between the Prior and Disputed Matters in detail,
and ultimately concluded that the Specific Litigation Exclusion's
expansive language precludes coverage of the Disputed Matters, as
they "all involve facts, circumstances, or situations underlying
the [P]rior [M]atters." Because the district court applied the
exclusion as we have constructed it, we adopt its analysis and see
no need to rehash it here.
B. There is no "remote possibility of coverage"
UBS nevertheless relies on W Holding Co. v. AIG Ins.
Co., 748 F.3d 377, 384 (1st Cir. 2014), for the proposition that
XL is required to cover defense expenses because there was a
"remote possibility of coverage."
-30-
The district court rejected UBS's argument finding that
the Insurers "[did] not assume UBS's defense under any
circumstances" and that UBS had failed to distinguish the
applicable standards related to an insurer's "duty to defend" and
"duty to indemnify." On appeal, UBS clarifies that it is not
asserting that the Insurers had a duty to defend, which involves
appointing counsel and controlling the defense of the case, but
rather that they had a "separate (but related)" duty to reimburse
defense costs. See Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d
1161, 1170 (8th Cir. 2011) (noting distinction between duty to
reimburse defense costs and duty to defend). The Insurers do not
contest this characterization, so we need not delve into the
differences between the two concepts.
W Holding Co. explained that under Puerto Rico law, when
an insurance contract defines a covered loss to include defense
costs, "an insurance company must advance defense costs if a
complaint against an insured alleges claims that create even a
'remote possibility of coverage.'" W Holding Co., 748 F.3d at
384. Nevertheless, the procedural posture of that case was
different to the one now before us, so we find it inapposite.
There, the district court case had not moved past the motion to
dismiss stage when directors and officers of a failed bank argued
that they could not fund an effective defense without insurance
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proceeds. They sought preliminary injunctive relief, requesting
the court to order the primary insurer to advance their defense
costs on an ongoing basis under the terms of a policy provision
that required such funding. Id. at 380. The district court granted
the advancement motion under a "remote possibility of coverage"
standard. However, it expressly noted that the insurer could be
entitled to repayment. Id. at 381. We affirmed, highlighting the
procedural posture of the case and indicating that the insurer
could "still 'win' the coverage war at a succeeding trial on the
merits." Id. at 386 (quoting Narragansett Indian Tribe v. Guilbert,
934 F.2d 4, 6 (1st Cir. 1991))12.
Meanwhile, the question on this summary judgment record
is not whether UBS's complaint alleges claims that create a remote
possibility of coverage, but whether UBS is actually entitled to
coverage. And we confirm that it is not. Undeterred, UBS posits
that an Eighth Circuit case, Liberty Mutual Ins. Co. v. Pella
Corp., 650 F.3d 1161 (8th Cir. 2011), "did not arise on a
preliminary injunction, but instead involved a final determination
12 This court cited Cuadrado Rodríguez v. Fernández Rodríguez,
2007 WL 1577940, at *8 (P.R. App. Ct. Mar. 30, 2007), in which
the Puerto Rico Court of Appeals similarly warned that if the trial
court were to determine in its final sentence that the policy did
not provide coverage for the proven facts of the case, then the
party to whom the defense costs were advanced would have to return
them as per the terms of the policy agreement.
-32-
of benefits under the policy at issue" and arrived at the outcome
UBS seeks. But this rendition of Liberty Mutual is inaccurate,
as the Eighth Circuit concluded there that the insurer had no duty
to reimburse the insured's defense costs. Id. at 1176, 1178. Thus,
we are not persuaded. In sum, because the court has already
definitely decided that the Disputed Matters are not covered by
the Policy's terms, UBS cannot show there is a "remote possibility
of coverage."13
III. Conclusion
Under the facts of this case and the law of Puerto Rico
as applied to them, we must enforce the policy according to the
terms agreed to by the parties to this appeal. See López & Medina
Corp., 667 F.3d at 69. We thus find that the Specific Litigation
Exclusion bars coverage of the Disputed Matters, as they all
involve "fact[s], circumstance[s], or situation[s]" alleged or
underlying the 2009 SEC Investigation and the 2010 Unión Lawsuit.
For the foregoing reasons, we affirm. Costs granted to
appellees.
Affirmed.
13 Because we have already held that coverage for the Disputed
Matters is barred by the Specific Litigation Exclusion, we need
not reach the separate issues of whether the Disputed Matters were
adequately notified and whether they can be deemed to have been
made within the policy period.
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