Interrelated Claims Provision Bars Coverage for Client’s Claim Tied to Broker’s Pre-Hire Conduct
The U.S. District Court for the Eastern District of New York, applying California law, held that an insured financial services company was not entitled to coverage under its professional liability policy for a client’s claim because the alleged wrongful acts were “interrelated” to acts that began before the policy’s coverage period. VCS Venture Secs., LLC v. Scottsdale Ins. Co., 2025 WL 2371021 (E.D.N.Y. Aug. 14, 2025). The court also held that there was no coverage because the alleged interrelated wrongful acts, which began before the client moved his account to the insured firm, did not solely arise from “financial services” provided by the insured to its clients.
A client of the insured financial services company filed a FINRA claim against the insured alleging that a broker engaged in speculative trading that led to significant losses to the client. The client claimed the broker began advising him in October 2019, before joining the insured firm. The broker joined the insured in September 2021, and the client moved his accounts to the firm to continue working with the broker. By May 2023, the client alleged that his accounts had been “decimated.” The insured sought coverage for the claim from its professional liability insurer, but the insurer denied coverage, asserting that the claim arose from conduct beginning in 2019, predating the policy’s September 2021 inception.
In the ensuing coverage action, the court agreed with the insurer. The policy required, as a condition of coverage, that the alleged “wrongful acts” or “interrelated wrongful acts” must occur during the “coverage period.” The policy defines “interrelated wrongful acts” as “‘wrongful acts’ which are connected by a common fact, circumstance, situation, event, [or] transaction.” The insured argued that the alleged wrongful acts were “multiple instances of separate advice regarding multiple types of investments.” The court disagreed, holding that under both the broad language of the policy and California law regarding the interpretation of similar provisions, the various wrongful acts are logically related and formed a “single course of conduct” aimed at enabling the broker’s trading of the client’s account without adequate oversight. The court found that the alleged wrongful acts were “interrelated wrongful acts” that began in October 2019, when the client first started receiving advice from the broker. Thus, the court held that the interrelated wrongful acts predated the policy period, and no coverage was available under the policy.
The court also concluded that coverage was barred because the suit did not solely arise out of the performance of covered financial services. The policy applied only to covered “financial services” provided to clients of the insured or its “representatives.” The insurer argued that the wrongful acts started years before the broker joined the insured firm, and therefore they did not solely arise out of the provision of covered financial services because the client had not yet become a client of the insured. The insured argued that the duty to defend was triggered because the broker continued to provide services once he moved to the insured company, and the insurer must “prophylactically” defend the entire action. The court disagreed, reasoning that the unambiguous policy language states that coverage turns on whether the first wrongful act arose out of financial services performed for a client of the insured. Because it did not, coverage was barred for this independent reason as well.
