Opinion ID: 2683922
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: The relevant facts are not disputed. Although Baum has offices across the United States, its principal place of business is in Missouri, where it is also incorporated. Twin City is an Indiana corporation wholly owned by a Connecticut corporation, the Hartford Fire Insurance Company, which in turn is wholly owned by a Delaware corporation, The Hartford Financial Services Group, Inc. Through a Kansas City, Missouri, insurance broker, Baum obtained professional services insurance from Twin City for the period June 30, 2003, to June 30, 2004. To avoid paying Missouri’s surplus lines tax, Baum wanted the policy issued to its small New York office. Twin City agreed, listing Baum’s address on the policy as “120 Broadway, Suite 3040, New York, NY 10271.” While the basic policy contained no choice of law provision, Twin City added a lengthy amendatory endorsement to comply with New York insurance law. The New York amendments (1) reference New York statutory provisions (e.g., “‘public entity’ shall mean a public entity as defined in section 107(a)(51) of the New York Insurance Law”), (2) specify that Baum should provide notice to “Hartford Financial Products” at an address in “New York, NY,” and (3) provide that notice given “to any licensed agent of the insurer in this state [(i.e., New York)] will be deemed notice to the insurer.” (Emphasis added). On August 28, 2003, Baum informed Twin City of an IRS investigation into Baum’s work as an “underwriter, structuring agent and remarking agent for approximately twenty-three municipal or government bond issues.” In a letter sent -3- to Twin City’s New York address, Baum warned that it faced actual claims by the IRS and potential claims by Baum’s municipal clients and the bondholders themselves. Twin City agreed to treat the IRS investigation as a claim under the policy. Baum ultimately settled with the IRS, agreeing to pay $7.7 million over four years without admitting misconduct. Approximately two years after settling with the IRS, Baum faced a flurry of lawsuits related to its municipal derivatives2 business. Numerous municipalities filed complaints against Baum and other brokers, alleging an anticompetitive overpricing scheme. The cases apparently were consolidated in a multi-district proceeding in the Southern District of New York. On April 6, 2010, Baum first notified Twin City that lawsuits were being filed, as predicted in Baum’s 2003 notice regarding potential liability. Twin City denied coverage on June 24, 2010, on the basis that the first complaint at issue “was filed in 2008 and is not a CLAIM made while the Policy was in force.” Although Twin City’s denial letter (sent from its New York office) referenced the first complaint’s filing date (2008), the denial did not discuss an untimely notice defense. The denial merely asserted, “Since the” fact the complaint was not filed during the policy period “appears to be dispositive, it does not seem necessary to address other provisions in the policy which might otherwise also limit coverage for this matter.” The denial also contained language purporting to reserve Twin City’s rights and defenses.
On January 27, 2011, Baum filed a complaint against Twin City in the Western District of Missouri, alleging breach of contract and seeking a declaratory judgment. 2 Municipal derivatives are sophisticated financial instruments typically used by municipalities for hedging purposes. See generally David L. Taub, Understanding Municipal Derivatives, 21 Gov’t Fin. Rev. 18 (2005). -4- On March 11, 2011—three days before filing its answer to Baum’s complaint—Twin City admitted that its earlier denial of coverage was erroneous: Twin City has reviewed carefully [Baum]’s contentions and determined to withdraw its denial based on whether the Claims are related. Twin City therefore will treat the Derivatives Litigation and the IRS investigation as a single Claim first made when [Baum] received the September 10, 2003 letter from the IRS. (Emphasis added). But, for the first time, Twin City announced “that coverage for the Derivatives Litigation is unavailable under the Policy because the Derivatives Litigation was not timely reported as the Policy requires.” On March 14, 2011, Twin City filed its answer and counterclaim in the Western District of Missouri, relying on the three-day-old untimely notice defense and seeking a declaratory judgment that Baum was not entitled to coverage. On cross motions for summary judgment, the district court decided Missouri law, not New York law, applied to the insurance policy. Applying Missouri law, the district court found Twin City could not rely on its untimely notice defense unless Twin City could “prove that it was prejudiced by the late notice.” Because the factual pieces of the prejudice question were insufficiently developed, the district court denied summary judgment to both parties. Turning to Baum’s secondary coverage issue, the district court found the derivatives litigation was subject to a $3 million self-insured retention. Although Baum’s retention under the policy ordinarily would be $1 million, a $3 million retention applies solely with respect to any CLAIM based upon, arising out of, directly or indirectly, resulting from, in consequence of, or in any manner relating to [Baum’s] activities as an underwriter or seller of municipal bonds. -5- Even viewing the issue most favorably to Baum, the district court found the derivatives litigation arose “indirectly or in consequence of the underwriter or seller activity.” Therefore, the $3 million retention applied under the plain language of the policy. After the district court’s summary judgment order, the parties jointly stipulated to entry of final judgment “in light of Twin City’s decision to not contest and thereby forego a jury trial on the issue of whether it was prejudiced by the timing of [Baum’s] notice in order to facilitate the entry of a final . . . judgment.” The district court entered final judgment: Twin City was obligated to cover Baum, but a $3 million retention applied. Twin City appeals, and Baum cross-appeals.3