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The Second Circuit ruled that a professional services exclusion relieved D&O insurers from funding an underlying settlement in a class action suit against NASDAQ.  Beazley Ins. Co., Inc. v. Ace American Ins. Co., 2018 WL 492693 (2d Cir. Jan. 22, 2018).

The coverage dispute arose out of a class action suit against NASDAQ based on “technical failures” in executing the IPO for Facebook, which resulted in the improper processing of trade orders.  The suit asserted federal securities fraud claims and state law negligence claims.  The suit was ultimately settled for $26.5 million.  Beazley Insurance, NASDAQ’s excess E&O insurer, paid its policy limit of $15 million under an agreement in which NASDAQ assigned Beazley its rights against Ace and Illinois National, NASDAQ’s D&O insurers.  Beazley sued the D&O insurers seeking coverage for the settlement under their policies.  A New York federal district court granted the D&O insurers’ summary judgment motion, ruling that the underlying claims were within the scope of a professional services exclusion in the D&O policies.  The Second Circuit affirmed.

The exclusion provides that the insurer “shall not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client . . . arising out of, or attributable to the rendering or failure to render professional services.”  Beazley argued that the exclusion does not apply because (1) the retail investors who sued NASDAQ in the underlying class action are not customers or clients, and (2) the underlying federal securities claims are not based on the rendering or failure to render professional services.  The Second Circuit rejected both assertions. 

Although the policy does not define “customer,” the Second Circuit concluded that the term unambiguously encompasses NASDAQ’s retail investors, agreeing with the district court’s reliance on “the customs, practices, usages and terminology as generally understood in the particular trade or business” and noting that the “vast majority” of federal courts have deemed retail investors to be “customers” of a stock exchange.  In addition, the Second Circuit ruled that the underlying securities claims arose out of the rendering of professional services.  Beazley argued that NASDAQ’s alleged misstatements and omissions in violation of federal securities law were essentially advertising activities and thus do not fall within the scope of professional services.  The court disagreed, stating that “[t]he flaw in this argument is that the [class action] plaintiffs could not win at trial merely by showing that NASDAQ made false and misleading statements as to its capabilities. . . . The [underlying complaint] recognizes this, and pleads loss causation based on failures in the technical service provided by NASDAQ.”  As the court explained, such alleged failures fall squarely within the ambit of professional services.