New Life Brokerage Services, Inc. v. Cal-Surance Associates, Inc.

United States Court of Appeals
For the First Circuit

No. 02-2348

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.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Gene Carter, U.S. District Judge]

Before

Howard, Circuit Judge,
Campbell and Cyr, Senior Circuit Judges.

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.

June 24, 2003
 HOWARD, Circuit Judge. This appeal arises out of a

dispute between a defunct Maine securities broker-dealer 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.

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

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"failed reasonably to supervise [its] sales representatives").

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 Cal-

Surance. 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

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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 Cal-Surance'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.

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 II.

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.

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 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

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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 buy-back 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

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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).

Affirmed.

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