The issue of "relatedness" usually arises when there is more than one suit against an insured, more than one “claim” in a single suit, or more than one claimant. The issue most often impacts how many "per claim" deductibles or retentions apply or how many “per claim” limits of liability (up to an aggregate) apply to particular claims.
In the case of Financial Management Advisors, LLC, et al. v. American International Specialty Lines Insurance Co., 506 F.3d 922 (9th Cir. 2007), the Ninth Circuit addressed the "relatedness" issue in the context of a policy exclusion. The insured provided investment advice and portfolio management services. The insured had given financial advice to two unrelated investors, the Sitrick Family and Steinman.
After suffering losses, the Sitrick Family sued the insured, alleging the insured wrongfully persuaded them not to liquidate their equity investments and misrepresented the risks of Collateral Bond Obligations ("CBOs") managed by the insured. The insured tendered the Sitrick Family’s claim to AISLIC. AISLIC provided coverage and settled that claim for the policy limit of the first of two AISLIC policies.
At about the same time, the insured was negotiating a settlement with another investor, Steinman. When his investments began to fail, Steinman, like the Sitrick Family, alleged that the insured had misrepresented to him the risks of investing in CBOs. However, Steinman further alleged that the insured placed his investment “into a tranche . . . different from and riskier than the tranche he had agreed to invest in." (A tranche is a class of bonds.)
AISLIC denied coverage for the Steinman claim on the basis of the following "related" claim exclusion:
[A]ny claim arising out of the facts alleged, or arising out of the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement of which it may succeed in time.[Emphasis added.]
The insured sued ASLIC. The U.S. District Court granted judgment in favor of AISLIC on the ground that the Sitrick Family and Steinman claims were "related" because both involved material misrepresentations made by the same financial advisor about the risks of investing in CBOs. As the limits of the first ASLIC policy had been exhausted by the Sitrick Family claim, the District Court held that AISLIC had no further obligation to defend or indemnify the insured.
On appeal, the Ninth Circuit reversed. Applying California law, the Ninth Circuit cited the seminal case of Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Insurance Co., 5 Cal.4th 854 (1993), in which the California Supreme Court held that two separate errors by a lawyer relating to a client's lien on a construction project were "related" for purposes of a liability insurance policy. The Ninth Circuit pointed out that Bay Cities involved a single lawyer making two mistakes as to a single client's single goal, whereas "the Sitricks and Steinman are separate clients with separate goals."
The Ninth Circuit noted that the Sitrick Family and Steinman were unrelated investors, had "unique investment objectives," and had separate meetings with the insured on separate dates. Also noted was that the Sitrick Family invested in a number of CBOs and equities, whereas Steinman invested in only one CBO fund. The Ninth Circuit further observed that the alleged misrepresentations differed, as the Sitrick Family included allegations specific to the equities in which they invested and, even as to the CBO fund in common, the alleged misrepresentations differed. The Court further noted that the Sitrick Family alleged only oral misrepresentations, whereas Steinman also asserted written misrepresentations. The Ninth Circuit added that "Steinman alleged not only that [the insureds] misled him, but also that they breached their agreement with him" by putting him in a riskier investment than the one he had authorized.
The Ninth Circuit distinguished Gregory v. Home Insurance Co. 876 F.2d 602 (7th Cir. 1989) and Continental Casualty Co. v. Wendt, 205 F.3d 1258 (11th Cir. 2000), cited by AISLIC, stating that the insured attorney in those cases committed a single wrong by giving the same allegedly erroneous advice to several parties to promote a single investment.
The Ninth Circuit based its decision on the "differences" in the claims by the Sitrick Family and Steinman, and gave scant attention to the similarities of the claims. When separate parties file separate lawsuits, the issues and allegations will inevitably have "differences." The AISLIC policy exclusion recognized there would be "differences" between multiple claims --the language addresses Claims "arising out of the same or related Wrongful Acts alleged [in a prior claim]." In other words, Claims that are "different" (i.e., not "the same") could still be "related" within the meaning of the policy language.
The Ninth Circuit's analysis did not focus on whether the claims by the Sitrick Family and Steinman were related under the standard articulated in Bay Cities. The Bay Cities Court held that the term "related" was broad enough to encompass "both logical and causal connections." If the opinion had examined more of the details of the substance of the claims, it might have provided a more meaningful analysis as to whether the two claims had any logical or causal connections. Instead, the Ninth Circuit merely concluded "[w]e do not believe the term 'related' was intended to bar recovery whenever two parties are advised to invest in the same fund."
As such, the opinion may create uncertainty and cause trial courts to hesitate to find that separate suits by separate claimants are “related” even where there are logical or causal connections between the suits.