Securities Exclusion Bars Coverage for Claims Bearing “Incidental Relationship” to Excluded Conduct

Applying Texas law, a federal district court has held that a broadly-worded securities exclusion bars coverage of claims “incidental” to alleged misrepresentations made in connection with the sale of securities.  Gleason v. Markel Am. Ins. Co., 2018 WL 538324 (E.D. Tex. Jan. 24, 2018).  The court further held that an exception for claims involving transactions exempt from registration under the Securities Act of 1933 did not restore coverage under the policy.

The insurer issued a management liability policy with a directors and officers coverage part to a company indirectly owned by the plaintiffs based on their ownership interests in certain closely held companies.  In 2014, the plaintiffs entered an agreement to sell their interests in the insured company to a separate holding company.  The holding company filed suit against the plaintiffs, alleging they made false representations during negotiations and in the purchase agreement.  The plaintiffs sought coverage under the policy as insured directors and officers of the company, which the insurer denied.

In the resulting coverage litigation, the court granted summary judgment in favor of the insurer, holding that it had no duty to defend the plaintiffs in the underlying action.  The policy provided coverage for wrongful acts, defined in part as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by any Insured Person in their capacity as such or in an Outside Position.”  The court held that the fact that the underlying action did not conclusively establish the capacity in which the plaintiffs were sued—i.e., as insureds or as sellers—did not preclude coverage under the policy.  Rather, the court reasoned that because it was not “unreasonable” to read the allegations as “potentially alleging that the [plaintiffs] committed at least one ‘error, misstatement, misleading statement, act, omission, neglect, or breach of duty’ in their insured capacity,” coverage was triggered under the policy.

The court next reviewed the policy’s securities exclusion, which barred coverage for any claim “based upon, arising out of or in any way involving . . . the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities.”  The court relied on the broad “arising out of" language to conclude that “[a] claim need only bear an incidental relationship to the described conduct for the exclusion to apply.”  It held that even if, as the plaintiffs argued, at least one of the allegations was not “caused by” the sale of their interests in the company, “all of the allegations bear, at the very least, an incidental relationship to the sale.”

The court also held that an exception to the exclusion that restored coverage for claims “based upon, arising out of or in any way involving . . . private[]placement transaction[s] exempt from registration under the Securities Act of 1933” did not apply.  The Act exempts from registration “transactions by an issuer not involving any public offering,” and since the plaintiffs merely resold previously issued securities, they did not constitute “issuers” under the Act.