371 F. Supp. 3d 983
D. Utah2019Background
- Allegis (AIS and AIA) executed a large August 20, 2015 bull put / net credit spread on the Russell 2000, producing a $313,600 premium and a $38.65 million realized investor loss when positions settled in-the-money. Investors initiated arbitrations and Allegis reported multiple claims to Indian Harbor (its E&O carrier).
- Indian Harbor issued E&O policies (Mar 2014–Mar 2015 and Mar 2015–Mar 2016) procured by broker Gallagher; both policies contained an Options Trading Exclusion barring claims "arising out of" options trading but carving back coverage for "fully covered put or call options." Allegis received copies and signed authorizations.
- Allegis contends its strategy used "fully covered" puts and seeks defense/indemnity; Indian Harbor contends the August 2015 trade involved uncovered (naked) puts under industry/regulatory definitions and therefore is excluded.
- Indian Harbor reserved rights, briefly authorized defense under reservation, then denied coverage on Dec. 7, 2015; Allegis later sued Indian Harbor and Gallagher and sought reformation of the policy to cover its trade.
- Procedurally: cross-motions for summary judgment between Allegis and Indian Harbor on duty to defend/indemnify; separate summary judgment motion by Gallagher and Nabavian on Allegis’ contract, negligence, fiduciary, and negligent-misrepresentation claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to defend | Allegis: Indian Harbor breached by withdrawing defense after initially providing one under ROR; multiple underlying claims created potential coverage. | Indian Harbor: underlying complaints all arise from options trading excluded by policy; insurer properly reserved rights and withdrew when exclusion applied. | Court: Indian Harbor had no continuing duty to defend; exclusion applied to all underlying claims; summary judgment for Indian Harbor. |
| Duty to indemnify ("fully covered" exception) | Allegis: its trades were "fully covered" (cash on hand/finite known risk) and fall within the carve-back; thus indemnity owed. | Indian Harbor: industry (FINRA/Cboe) definition of "covered" requires offsetting long options at same or higher strike; Allegis' bull put spread bought lower-strike puts (naked exposure) and thus is excluded. | Court: Allegis failed to prove exception; trade not "fully covered" under governing definitions; indemnity denied. |
| Claims against Gallagher (breach of contract / negligent procurement / implied covenant / fiduciary duty) | Allegis: Gallagher failed to analyze risks, warn of the options exclusion, and procure coverage tailored to Allegis' strategy. | Gallagher: contract was to procure the proposed E&O policy; Gallagher provided proposals, the actual policies, and disclaimed fiduciary duties; Allegis (sophisticated) failed to read policies and did not provide details of the strategy. | Court: No contractual or special duty shown; Gallagher satisfied obligations; summary judgment for Gallagher on all claims. |
| Reformation of policy | Allegis: mutual or unilateral mistake; parties intended coverage for options/naked puts (premium suggests such intent); asks court to reform carve‑back to include its strategy. | Indian Harbor/Gallagher: no evidence either knew of or intended to cover this high-risk strategy; parties were told to read policy; reformation requires clear and convincing proof. | Court: Denied. No clear-and-convincing evidence of mutual or inequitable unilateral mistake; reform would eviscerate the exclusion. |
Key Cases Cited
- Berry & Murphy, P.C. v. Carolina Cas. Ins. Co., 586 F.3d 803 (10th Cir.) (insurance policy construed as contract; Utah law principles applied)
- Headwaters Res., Inc. v. Ill. Union Ins. Co., 770 F.3d 885 (10th Cir.) (rules on insurer burden to prove exclusions/interpretation)
- Morden v. XL Specialty Ins., 903 F.3d 1145 (10th Cir.) (application of multiple-claims/related-transaction policy aggregation)
- Bethel v. Darwin Select Ins. Co., 735 F.3d 1035 (8th Cir.) (exclusion analysis focuses on what gave rise to claim, not who caused loss)
- Alf v. State Farm Fire & Cas. Co., 850 P.2d 1272 (Utah) (policy interpretation rules; plain meaning controls)
- S.W. Energy Corp. v. Cont'l Ins. Co., 974 P.2d 1239 (Utah) (ambiguity standard; construe in favor of coverage)
- Quaker State Minit-Lube, Inc. v. Fireman's Fund Ins. Co., 868 F. Supp. 1278 (D. Utah) (policy ambiguities resolved against drafter; insured bears burden to prove exceptions)
- Prince v. Bear River Mut. Ins. Co., 56 P.3d 524 (Utah) (insurer not liable for bad faith where denial is reasonable or fairly debatable)
- Allen v. Prudential Prop. & Cas. Ins., 839 P.2d 798 (Utah) (rejecting reasonable-expectations doctrine to alter clear policy terms)