No Coverage Under D&O Policy For Misrepresentations Regarding Mortgage-Backed Securities Because Not “Securities Of” the Insured

The United States Court of Appeals for the Ninth Circuit, in an unpublished opinion applying California law, has held that there is no coverage under a D&O liability policy for claims alleging misrepresentations in offering documents for mortgage-backed securities because the mortgage-backed securities did not constitute “securities of an Organization.” Impac Mortgage Holdings Inc., v. Houston Casualty Co., 2016 WL 491720 (9th Cir. Feb. 8, 2016). The court also held that coverage was barred by the D&O policy’s professional services exclusion, finding that the drafting of offering and SEC documents “plainly requires professional skill.”

The insured mortgage company and its subsidiaries sold residential mortgages, securitized them and deposited them into trusts. The trusts then issued certificates, which the insured sold to investors. Subsequently, several investors asserted claims against the insured alleging that they suffered losses caused by insured’s false and misleading statements in connection with the sale of the certificates. After the D&O insurer denied coverage for the claims, the insured filed suit against its D&O and E&O insurers. On cross-motions for partial summary judgment, the district court ruled in favor of the D&O insurer on two grounds. First, the court held that the claims against the insured were not “Securities Claims,” defined as claims “arising out of, based upon or attributable to . . . the purchase or sale of or offer or solicitation of an offer to purchase or sell any securities of the Organization,” because the mortgage-backed securities were not “securities of an Organization.” Second, the district court held that the claims were excluded by the policy’s professional services exclusion, which barred coverage for claims “made against an Insured arising out of, based upon or attributable to any Insured's or Organization's performance of (or failure to perform) any professional services, or any act, error or omission relating thereto.”

On appeal, the Ninth Circuit affirmed, noting that the phrase “securities of” “is ordinarily understood to mean ‘shares in,’” focusing on the context of the phrase and the fact that an adjacent phrase in the insured versus insured exclusion used the phrase in the same context. In this regard, the court stated that the insured’s “interpretation flies in the face of the California Supreme Court’s warning not to elevate possible dictionary meanings over context in interpreting insurance policies.” The court also concluded that the record did not support the insured’s claim that it expected coverage under its D&O policy for professional errors, noting that such a policy would be “duplicative” of its E&O Policy.

The court also confirmed that coverage is further barred by the D&O policy’s professional services exclusion, rejecting the insured’s argument that the underlying claims do not arise out of its performance of professional services because the documents at issue that it prepared for the offering and for the SEC filing were required by statute. The Ninth Circuit stated that “drafting such documents, which describe complicated financial products, plainly requires professional skill, whether or not the duty to file the documents is imposed by statute.”


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