Missouri Appeals Court Affirms That Insolvency Exclusion Bars Indemnity Coverage for Refusal to Pay

The Missouri Court of Appeals has affirmed summary judgment in favor of an insurer, holding that a policy’s insolvency exclusion barred indemnity coverage where facts established in the underlying arbitration established that the claim involved the refusal to pay benefits to the insured’s client by two investment trusts that the insured had recommended as investment vehicles to the client. Arch Ins. Co. v. Sunset Fin. Servs., Inc., 2015 WL 5704506 (Mo. Ct. App. Sept. 29, 2015).

The insurer issued an E&O insurance policy that contained an exclusion which provided that the policy did not apply to any claim “based upon, arising out of or in any way involving insolvency, receivership, conservatorship, liquidation, bankruptcy, inability or refusal to pay of any organization, entity or vehicle of any kind . . . in which [the insured] has placed or recommended to be placed the funds of a client or account” (Insolvency Exclusion).

The policyholder advised a client to invest in multiple Real Estate Investment Trusts (REITs) to supplement his disability income. After two of the REITs suspended distributions and limited shareholders’ ability to redeem their investments, the client initiated arbitration proceedings against the insured. The insurer defended the policyholder subject to a full reservation of rights. After the arbitrator issued an award against the policyholder in favor of the client, the insurer filed a lawsuit seeking a declaratory judgment that it owed no duty to indemnify the insured based on the application of the policy’s Insolvency Exclusion. The trial court granted summary judgment to the insurer, concluding that the Insolvency Exclusion barred coverage because the REIT’s suspension of payments to the client gave rise to the client’s claim against the insured.

On appeal, the insured argued that the Insolvency Exclusion was inapplicable because the client had not specifically alleged in the arbitration complaint that the REITs were unable or refused to pay, but had accused the insured of recommending unsuitable investments, which allegation did not trigger the exclusion.

The appellate court rejected the insured’s argument, holding that, for purposes of the duty to indemnify, the court was not limited to considering only the allegations in the client’s arbitration complaint, but could consider the arbitration proceeding in its entirety. The court further concluded that, based on the Insolvency Exclusion’s expansive, “in any way involving” lead-in language, the provision does “not require proof of a causal connection” between the refusal to pay and the underlying claim.

Applying the exclusion to the circumstances presented, the court held that Insolvency Exclusion barred coverage because the facts, as established at the arbitration, clearly indicated that the client’s claims “were based upon, arose out of, or at least ‘involved’ the REITs’ refusal to pay.” In so holding, the court noted that its decision was aligned with “most jurisdictions,” which reject the argument that the claimant specifically must allege insolvency or a refusal to pay in order to trigger the Insolvency Exclusion.


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