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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 06-4815

____________

MDL CAPITAL MANAGEMENT, INC.; MARK D. LAY; 

STEVEN L. SANDERS; EDWARD ADATEPE,

Appellants

vs.

FEDERAL INSURANCE COMPANY,

Appellee

____________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

(D.C. Civ. No. 05-CV-01396 ) 

District Judge: Honorable Arthur J. Schwab

____________

Argued November 1, 2007

Before: RENDELL, WEIS, and NYGAARD Circuit Judges.

(Filed April 2, 2008)

____________

Joseph H. Luciana, III, Esquire (ARGUED)

Edward W. Diggs, Esquire

Clarence E. Dozier, Jr., Esquire

James S. Malloy, Esquire

KIRKPATRICK & LOCKHART

PRESTON GATES ELLIS, LLP

535 Smithfield Street

Pittsburgh, PA 15222

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Attorneys for Appellants

Daniel J. Standish, Esquire (ARGUED)

Mary E. Borja, Esquire

Kimberly M. Melvin, Esquire

WILEY REIN LLP

1776 K Street, N.W.

Washington, D.C. 20006

Dennis St. J. Mulvihill, Esquire

ROBB LEONARD MULVIHILL

2300 One Mellon Center

Pittsburgh, PA 15219

Attorneys for Appellee

_______________

OPINION 

 

PER CURIAM.

Plaintiffs MDL Capital Management, Inc., Mark D. Lay, Steven L. Sanders,

and Edward Adatepe appeal the District Court’s judgment denying coverage for liability

claims under two separate policy binders. This is a non-precedential opinion and as such

is directed to the litigants. Because the parties’ briefs set out the facts and legal issues at

length, we do not review them in detail here.

Plaintiffs contend they are entitled to coverage under the Investment

Advisor Errors & Omission Liability (“E&O”) and Executive Liability & Indemnification

(“D&O”) binders issued by defendant Federal Insurance Company. The claims against

Federal Insurance arise from the Ohio Bureau of Workers’ Compensation’s suit against

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plaintiffs and a U.S. Securities and Exchange Commission investigation. The District

Court granted summary judgment in favor of Federal Insurance, correctly determining

that plaintiffs were not entitled to D&O coverage, but erroneously gave effect to an

exclusion contained in the E&O policy. We will affirm the judgment in part, reverse in

part, and remand for further proceedings.

We exercise plenary review over a grant of summary judgment and apply

the same standard that the district courts apply. Farrell v. Planters Lifesavers Co., 206

F.3d 271, 278 (3d Cir. 2000). A judgment will be upheld if there are no issues of material

fact and a party is entitled to judgment as a matter of law. Id. For purposes of this appeal

we assume, as did the District Court, that the Federal Insurance binders were valid. 

Pennsylvania law, applicable to this case, instructs that an insurance binder

is a “written instrument, used when a policy cannot be immediately issued, to evidence

that the insurance coverage attaches at a specified time, and continues . . . until the policy

is issued or the risk is declined and notice thereof given.” Harris v. Sachse, 52 A.2d 375,

378 (Pa. Super. Ct. 1947) (quoting Webster’s Int. Dict. 2nd Ed.). Ordinarily a binder “is

to be regarded as made upon the terms and subject to the conditions contained in the

ordinary form of policies used by the [issuing] company.” Rossi v. Fireman’s Ins. Co.,

165 A. 16, 19 (Pa. 1932); see also 1A Lee R. Russ & Thomas F. Segalia, Couch on

Insurance 3d § 13:2 (1995) (“essential elements of the contract . . . may be supplied from

the standard form policy”). The provisions of Federal Insurance’s standard policy and

endorsements govern where applicable because in the binder Federal Insurance

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specifically directed plaintiffs to refer to the form policy and endorsements “for a

description of coverage.”

I. The E&O Binder

The District Court’s analysis of the E&O binder focused on an endorsement

titled “Broad Private Fund Exclusion- MDL Broad Market Fixed Income Fund, MDL

Core Fund or MDL Active Duration Fund, Ltd. (endorsement wording to be developed).” 

The Court held, as a matter of law, that this endorsement denied coverage for the

plaintiffs’ claims under the E&O binder. We do not agree.

The heading for the section of the E&O binder containing endorsements

includes a parenthetical providing, “The titles and headings are for convenience only. 

Please refer to the policy and endorsements for a description of coverage.” The Broad

Private Fund Exclusion did not refer to a form containing prototypical language. Instead,

immediately following the Exclusion’s title appears the language, “endorsement wording

to be developed.”

The District Court reasoned that when considered within the grant of

coverage afforded in the prototype E&O policy’s insuring clause, the exclusion “could

only have one meaning: that the Investment Adviser [E&O] Policy would not extend to

claims based upon MDL’s provision of professional services related to the three listed

funds. . . . [T]he title of the endorsement itself explains that the MDL Broad Market Fixed

Income Fund, the MDL Core Fund and the MDL Active Duration Fund, Ltd. would be

excluded from coverage under the Investment Adviser Policy.” 

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Pennsylvania law requires courts to read an insurance policy in its entirety

and ascertain the scope of its coverage by considering the entire instrument. See Riccio

v. Am. Republic Ins. Co., 705 A.2d 422, 426 (Pa. 1997). 

In performing its analysis in this case, the District Court overlooked the

caution in the binder providing that the titles of the endorsements “are for convenience

only.” The binder made it clear that the titles were not intended to be used in interpreting

the effect of the endorsements. The language “Broad Private Fund Exclusion” does not

define the exclusion. Although the parties agreed that an endorsement titled “Broad

Private Fund Exclusion . . .” would be included in the contemplated E&O policy, they

never agreed on what it would provide. Thus, we are left with an exclusion that is devoid

of substance. 

The reference to the Broad Private Fund Exclusion endorsement in the

E&O binder was essentially an “agreement to agree,” and, under Pennsylvania law is a

nullity. See Onyx Oils & Resins, Inc. v. Moss, 80 A.2d 815, 816 (Pa. 1951) (holding

“[a]n agreement to agree is incapable of enforcement”). This Court cannot rewrite the

parties’ agreement in order to give effect to the parties’ conflicting views of what the

Exclusion was intended to accomplish. See Moore v. Stevens Coal Co., 173 A. 661, 662

(Pa. 1934) (“It is not the province of the court to . . . make a new contract for the parties;

its duty is confined to the interpretation of the one they have made for themselves.”).

The District Court erred in granting summary judgment in Federal

Insurance’s favor based on an unarticulated text of the purported Private Fund Exclusion. 

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To that extent and without prejudice to other contentions of the parties with respect to the

E&O binder, including allegations of misstatements in the application for insurance, the

judgment in favor of Federal Insurance will be reversed and the case remanded for further

proceedings. 

II. The D&O Binder

We will affirm the District Court’s conclusion that plaintiffs Lay, Sanders,

and Adatepe are not entitled to coverage for the Ohio Bureau lawsuit or the SEC

investigation under the Executive Liability and Indemnification (“D&O”) binder. 

The D&O binder referred to Federal Insurance form #17-02-1149 for a

description of its coverage. The insuring clause of that form provides,

“[Federal Insurance] shall pay on behalf of each of the

Insured Persons all Loss for which the Insured Person . . .

becomes legally obligated to pay on account of any Claim

first made against such Insured Person, individually or

otherwise, during the Policy Period . . . for a Wrongful Act

committed, attempted, or allegedly committed or attempted by

such Insured Person before or during the Policy Period.”

(emphasis in original).

An “Insured Person” is “any past, present or future duly elected director or

duly elected or appointed officer of the Organization,” in this case MDL Capital. 

(emphasis in original). Lay, Sanders, and Adatepe all qualify as “Insured Persons”

because they all were past directors and/or officers of MDL Capital. 

A “Wrongful Act” is “any error, misstatement, misleading statement, act,

omission, neglect, or breach of duty committed, attempted, or allegedly committed or

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attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or

any matter claimed against him solely by reason of his serving in such Insured

Capacity.” (emphasis in original). “Insured Capacity” means “the Insured Person’s

position or capacity but shall not include any position or capacity in any entity other than

[MDL Capital], even if [MDL Capital] directed or requested the Insured Person to serve

in such other position or capacity.” (emphasis in original). For purposes of this appeal,

we will assume that the allegations against Lay, Sanders, and Adatepe in the Ohio Bureau

complaint and SEC Order are concerned with their “Insured Capacity” and therefore

assert “Wrongful Acts.” 

The binder states that the “Professional Services Exclusion- Complete,”

Federal Insurance form #17-02-1224, applies to the D&O coverage. This prototypical

endorsement provides,

“It is agreed that [Federal Insurance] shall not be liable for

Loss on account of any Claim based upon, arising from or in

consequence of the rendering of or failure to render

professional services, including but not limited to the

following services:

i. broker;

ii. dealer;

iii. financial adviser;

iv. investment adviser;

v. investment banker;

vi. investment manager;

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 In the District Court, the parties disputed whether the D&O and E&O

binders would cover the SEC investigation. Federal Insurance asserted that both binders

expired on their own terms before the SEC investigation began on July 15, 2005. The

District Court did not address this issue. Our analysis of the D&O binder’s

inapplicability to the SEC investigation does not prevent Federal from renewing its

argument as to the E&O binder on remand.

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. . . .”

(emphasis in original).

Since Lay, Sanders, and Adatepe are “Insured Persons” that had two

“Claims” filed against them during the “Policy Period” for, we assume, a “Wrongful

Act,” the D&O binder will cover the claims arising from the Ohio Bureau litigation and

SEC investigation1

 unless barred by the professional services exclusion. 

The endorsement bars coverage under the D&O binder if the litigation

“arises from . . . the rendering of or failure to render professional services.” Pennsylvania

law defines a similar phrase “arising out of” as “‘[b]ut for’ causation . . . a cause and

result relationship.” Forum Ins. Co. v. Allied Sec., Inc., 866 F.2d 80, 82 (3d Cir. 1989)

(quoting McCabe v. Old Republic Ins. Co., 228 A.2d 901, 903 (Pa. 1967)). Applying this

definition, the “Professional Services Exclusion- Complete” excludes D&O coverage for

Lay, Sanders, and Adatepe for claims that would not have occurred but for the providing

of, or failing to provide, investment adviser and investment manager services.

A. The Ohio Bureau Lawsuit

We have carefully reviewed the Ohio Bureau’s complaint. The 37-page

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 The counts include allegations of common law fraud, fraudulent

inducement, Ohio Securities Act violations, negligent misrepresentation, negligent

nondisclosure, breach of fiduciary duty, constructive fraud, breach of contract, common

law conspiracy, common law unjust enrichment, and aiding and abetting.

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document, containing 17 counts over 222 paragraphs,2 focuses on MDL Capital’s alleged

derelictions as investment adviser and investment manager to the Bureau. The allegations

assert two roles of MDL Capital: (i) as fixed-income investment manager to the Ohio

Bureau in connection with the creation of the “long-bond account” and the Active

Duration Fund; and, (ii) as investment adviser and manager of the Active Duration Fund. 

Both roles involve the provision of “professional services” as that term is

defined in the “Professional Services Exclusion- Complete.” The Ohio Bureau litigation,

therefore, arises from the alleged provision of, or failure to provide, “professional

services,” and the endorsement operates to withhold D&O coverage. 

Plaintiffs attempt to avoid this conclusion by quoting a portion of the

complaint that alleges, “inaction, lack of diligence and oversight, and failure to intervene

by the Individual Director Defendants . . . caused the overleveraging of the [Active

Duration] Fund’s assets.” They assert that this language implicates them as directors of

MDL Capital in a role that does not involve “professional services” and hence would be

covered under the D&O binder. 

The complaint does assert that Lay, Sanders, and Adatepe were directors of

both MDL Capital and the Active Duration Fund. Assuming the complaint states that

they failed in their capacity as directors of MDL Capital to oversee its activities with

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respect to the Active Duration Fund, the allegation stems from MDL Capital’s purported

failure as investment adviser and investment manager. Consequently, the claim arises

from the providing of, or failure to provide, professional services and D&O coverage is

not available pursuant to the “Professional Services Exclusion- Complete.”

B. The SEC Investigation

Federal Insurance’s D&O binder does not cover the SEC investigation

because the investigation also arises from the providing of or failure to provide

“professional services.” The SEC Order Directing Private Investigation and Designating

Officers to Take Testimony alleges that individuals and entities associated with MDL

Capital may have violated federal securities law. The order asserts: (i) MDL Capital and

individuals and entities associated with MDL Capital may have defrauded or deceived

individuals in connection with the offer, purchase and sale of securities; (ii) MDL Capital

and individuals and entities associated with MDL Capital may have engaged in fraudulent

transactions, practices or courses of business; (iii) MDL Capital may have made

unauthorized transactions in the course of its business and attempted to conceal losses

from these transactions; and, (iv) MDL Capital, as an investment adviser, may have failed

to keep accurate records and books relating to its business.

These allegations are based upon MDL Capital’s providing of, or failure to

provide, investment adviser or investment manager services. Therefore, the “Professional

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 Federal contends that plaintiffs have waived the SEC issue by failing to

brief it on appeal. In view of our holding on the merits, we need not address that

contention. 

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Services Exclusion- Complete” excludes D&O coverage for the SEC investigation.3 

C. The Outside Directorship Endorsement

Lay, Sanders, and Adatepe also advance an alternative contention that they

are entitled to D&O coverage as directors of the Active Duration Fund because of the

binder’s “Outside Directorship Endorsement - As required by the Insured Organization.” 

This endorsement refers to form #17-02-6537, a prototype endorsement that provides,

“It is agreed that: 

1. The term Insured Capacity . . . is amended to read in

its entirety as follows:

Insured Capacity means the Insured Person’s

position or capacity in the Organization or in

any Outside Directorship

2. [The] Definitions of this Policy is amended to include

the following terms:

(a) Outside Directorship means the position of

director, officer, trustee, governor, or equivalent

executive position with an Outside Entity if

service by an Insured Person in such position

was at the specific request of the Organization

or was part of the duties regularly assigned to

the Insured Person by the Organization.

(b) Outside Entity means any of the following

organizations:

[The term insured person will also include]

[Outside Entity]

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3. Coverage provided to any insured person in an

Outside Directorship shall:

. . . 

b. only extend to those Outside Entities and

corresponding Insured Persons listed in

paragraph 2 above;

. . . .”

(emphasis in original).

Section b of paragraph 3 of the endorsement clearly provides that outside

directorship coverage would only extend to the entities listed in paragraph 2. Section (b)

of paragraph 2 contemplates negotiation over the organizations that would qualify as

“Outside Entities.” Federal Insurance and MDL Capital never reached an agreement on

this provision. 

We conclude that, like the Broad Private Fund Exclusion in the E&O

binder, the “Outside Directorship Liability Endorsement” was merely an agreement to

agree and is not entitled to any legal significance. Accordingly, Lay, Sanders, and

Adatepe are not entitled to D&O coverage for their roles as directors of the Active

Duration Fund. 

III. The Application Warranty Exclusion

Finally, Federal Insurance argues that MDL Capital made material

misrepresentations in its application for insurance, which precludes coverage under both

binders. The District Court did not address this contention. We specifically decline to

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consider the material misrepresentations issue on this appeal and leave it for further

consideration by the District Court on remand. See Woodson v. Scott Paper Co., 109

F.3d 913, 933 n.21 (3d Cir. 1997) (quoting Selected Risks Ins. Co. v. Bruno, 718 F.2d 67,

69 (3d Cir. 1983), for the proposition, “[i]t is the general rule that a federal appellate court

does not consider an issue not passed upon below.”). 

This appeal is from rulings applicable to two separate binders. We

conclude on the present record that the District Court erred in interpreting the Broad

Private Fund Exclusion endorsement. We will reverse the entry of summary judgment on

the E&O claim and remand for further proceedings. 

We will affirm the District Court judgment in favor of defendant in the

D&O coverage claim.

Accordingly, the judgment of the District Court is affirmed in part and

reversed in part. 

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