Applying Nevada law, a federal district court has held that a broadly worded securities exclusion does not unambiguously bar coverage for underlying Employee Retirement Income Security Act (ERISA) lawsuits alleging that the insured company breached its fiduciary duties by failing to explain the risks associated with investing in the company via an employee retirement plan.  Int’l Game Tech. Inc. v. Fed. Ins. Co., 2014 WL 4232494 (D. Nev. Aug. 26, 2014)

The insured technology company provided a retirement plan for its employees.  Pursuant to the plan, participating employees could purchase investments from a group of pre-selected offerings, including a fund that invests directly in the company’s own stock.  In 2009, certain participants in the plan filed two putative ERISA class actions against the company and certain of its directors and officers.  The class actions alleged that the defendants breached their fiduciary duties to the plan and its participants by, among other things, failing to disclose adequately the risks of investing in the company.  The company tendered the lawsuits to its insurer under a fiduciary liability policy, and the insurer disclaimed coverage pursuant to an exclusion in the policy barring coverage for “any Claim based upon, arising from, or in consequence of: . . . Any offering, issuance, distribution, sale or purchase of securities” (the Securities Exclusion).  Following a settlement agreement with the plan participants, the company again requested coverage, and the insurer reiterated its denial.

In the coverage action that followed, the court held that the Securities Exclusion did not unambiguously preclude coverage for the ERISA lawsuits, notwithstanding the exclusion’s broad lead-in language.  The court reasoned that the Securities Exclusion could be read as barring coverage for claims arising out of the company’s role in purchasing, selling, and otherwise publically transacting in its own securities.  The court concluded, however, that the underlying ERISA lawsuits challenged the company’s performance as the manager of employee retirement accounts – a “secondary, somewhat unrelated fiduciary role” that, according to the court, was not specifically addressed by the Securities Exclusion.  Because Nevada law requires exclusionary clauses to be construed narrowly, the court denied the insurer’s motion for summary judgment on the company’s breach of contract count.  The court nonetheless concluded that it was reasonable for the insurer to deny coverage based on the Securities Exclusion, such that the insurer was entitled to judgment as a matter of law on the insured’s claim for breach of the covenant of good faith and fair dealing.