Twin City Fire Insurance Company v. SLRA Inc.

Background

Twin City Fire Insurance Company brought an insurance-coverage action against its insureds, SLRA Inc. and its owner, Scott M. Landress, whom the opinion collectively calls “SLRA.” Twin City sought a declaration that it was entitled to reimbursement of approximately $2.5 million in defense costs that it had paid under an excess liability policy. Twin City argued that a February 7, 2017 Securities and Exchange Commission order resolving an investigation into SLRA and Landress triggered two policy exclusions concerning illegal profits and deliberate fraudulent or criminal acts.

SLRA counterclaimed for breach of contract, bad faith, and declaratory relief. The parties filed early cross-motions for partial summary judgment on two legal questions: whether the SEC order triggered the exclusions, and, if not, whether this coverage lawsuit could itself trigger them.

The court took judicial notice of the fact that the SEC order existed, but not the truth of disputed facts stated in that order. The order said that SLRA and Landress consented to its entry without admitting or denying the findings, except for specified matters.

First issue: the SEC order

The excess policy excluded losses based on illegal profits or deliberate fraudulent or criminal acts “as determined by a final adjudication in the underlying action or in a separate action or proceeding.” The policy did not define “final adjudication.”

Applying California contract-interpretation law, the court concluded that the SEC order was not a final adjudication for purposes of the exclusions. The SEC matter was an administrative investigation, not a judicial proceeding, and the consent order did not constitute a judicial determination of the legality of the conduct described in it. The court also relied on the order’s language that SLRA and Landress did not admit or deny the SEC’s findings.

On this issue, the court denied Twin City’s motion for summary judgment and granted SLRA’s motion for summary judgment. The court held that the SEC order did not trigger the policy exclusions.

Second issue: this coverage lawsuit as a separate proceeding

The policy also referred to a final adjudication in “a separate action or proceeding.” The court held that this declaratory-judgment coverage lawsuit was indisputably a separate action or proceeding. Under the policy’s plain language, a final adjudication in this lawsuit could determine whether the alleged loss resulted from illegally obtained profits or deliberate fraudulent acts and could therefore trigger the exclusions.

The court rejected SLRA’s argument that the final adjudication had to occur before the SEC matter was resolved or had to occur only in the SEC proceeding. It concluded that those interpretations conflicted with the policy’s reference to a separate action or proceeding and would make that language meaningless.

On this issue, the court granted Twin City’s motion for partial summary judgment and denied SLRA’s motion. The court did not hold that the exclusions had already been established; it held that Twin City could attempt to establish in this coverage action that the exclusions apply. The court scheduled a further case-management conference for July 16, 2020.