Options Trading Exclusion Unambiguously Bars Coverage for Investor Claims

The United States District Court for the District of Utah has held that an errors and omissions policy’s “options trading” exclusion applied to bar coverage for claims resulting from an insured investment company’s high-risk trade.  Allegis Invest. Servs., LLC v. Arthur Gallagher & Co., 2019 WL 1002364 (D. Utah Mar. 1, 2019).

In 2015, the insured investment company executed a block trade on behalf of its investor clients.  The trade resulted in permanent losses of $38.6 million, nearly the maximum potential loss for the trade.  Several investors subsequently brought claims against the company.  The company’s E&O insurer advised that the policy’s options trading exclusion barred coverage for all of the claims.  The exclusion precluded coverage for “any Claim or Defense Expenses . . . [a]rising out of the actual or alleged purchase, sale, attempted sale, solicitation or servicing of . . . [c]ommodities, any type of futures contracts, any type of option contract or derivative.”

The court held that “the exclusion is plain, unambiguous, and broadly applies to all claims arising out of options trading” and found that all claims arising from the 2015 trade fell within the exclusion.  In doing so, the court also held that, even though the complaints raised different theories of recovery, they constituted a single claim because they stemmed from the same options trade.

The investment company argued that an exception applied to the exclusion as to “fully covered” put options.  The court ultimately held that the trade at issue did not fall within the applicable regulatory definitions of “covered,” explaining that the “carve-back cannot reasonably be interpreted to permit coverage for a high-risk trade like the one that occurred in this case.”  As a result, the court granted the insurer’s motion for summary judgment in full.

Finally, the court dismissed all claims that the company brought against its insurance broker.  The company argued that the broker was negligent and breached its fiduciary duty, among other things, by failing to procure adequate coverage.  The court concluded that the company could not fault its broker for its own failure to read and understand the terms of the policies before agreeing to bind itself to the coverage proposed.


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