No Duty to Defend or Indemnify Due to Securities Exclusion, Consumer Protection Law Exclusion, and Investment Performance Exclusion, but Insurer Cannot Recoup Defense Costs

Applying Wisconsin law, a federal district court has held that an insurer owed no duty to defend or indemnify its insureds because exclusions for claims arising from violations of securities laws or consumer protection laws, and from the failure of investments to perform as desired, barred coverage.  Hanover Ins. Co. v. BMOC, Inc., 2019 WL 949215 (W. D. Wis. Feb. 27, 2019).

The insureds, officers and directors of a property management company, were sued for violating securities laws and a state consumer fraud act after they allegedly provided false information and omitted material information that induced bondholders to purchase bonds.  The insureds sought coverage for the lawsuit under a professional liability policy, and the insurer agreed to defend the insureds under a reservation of rights.

The insurer subsequently filed a declaratory judgment action to determine its obligations under the policy, arguing that three separate policy exclusions barred coverage.  Specifically, the insurer asserted that the policy did not cover the underlying lawsuit due to an exclusion in the policy for claims “arising out of” the “purchase, sale or offer . . . to purchase or sell securities,” as well as the “violation of any securities law” (the “Securities Law Exclusion”).  The insurer also argued coverage was unavailable due to an exclusion for claims “arising out of . . . violations of . . . consumer protection laws” (the “Consumer Protection Law Exclusion”).  Finally, the insurer contended that the underlying litigation was not covered due to an exclusion for claims “based upon, arising out of or in any way relating directly or indirectly to . . . [t]he failure of investments to perform as expected or delivered” (the “Investment Performance Exclusion”).

The court granted the insurer’s motion for judgment on the pleadings, holding that the exclusions unambiguously barred coverage for the underlying lawsuit.  In so holding, the court explained that a reasonable insured would understand that the exclusions applied to the underlying claims, which generally alleged that the insureds made material representations and omitted material facts associated with the offering of bonds and that the bondholders relied upon that information to their detriment.  As such, the claims plainly arose out of violations of securities laws or consumer protection laws.

Although the insureds argued that coverage was available for the underlying litigation because it contained allegations relating to improper property management, the court determined that those fleeting allegations were not enough to change the character of the complaint.  The court explained that the allegations of poor management did not assert a distinct legal claim for liability, but rather were part of the alleged pattern of misrepresentations and omissions that induced bond purchases.  Even assuming that these poor management allegations formed the basis of a separate claim, the court concluded they would nonetheless be barred from coverage by the Investment Performance Exclusion because the only claimed injury was the bonds’ decline in value.  The court thus held that the insurer owed no duty to defend or to indemnify the insureds.  The court concluded, however, that the insurer had no right to recoup defense costs it had already incurred because the policy did not expressly allow such reimbursement and because the insurer did not put the insureds on notice that it might seek reimbursement.


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