Beazley Insurance Co. v. ACE American Insurance Co.
197 F. Supp. 3d 616
S.D.N.Y.2016Background
- The Facebook Class Action consolidated claims by retail investors over NASDAQ’s malfunction during Facebook’s 2012 IPO; NASDAQ settled for $26.5M.
- NASDAQ had an E&O insurance tower (Chartis primary, Beazley first excess) and a D&O tower (ACE primary, INIC first excess). Beazley paid its $15M limit and received an assignment from NASDAQ of rights against ACE/INIC up to that amount.
- ACE disclaimed coverage under its ACE D&O Policy, invoking a "professional services" exclusion that precludes coverage for claims by a company’s "customer or client" alleging claims "based upon, arising out of, or attributable to the rendering or failure to render professional services."
- Beazley sued ACE and INIC seeking declaratory relief, contribution, and breach of contract (as NASDAQ’s assignee). Earlier orders found legal uncertainty and held ACE had a duty to advance defense costs; parties renewed exclusion arguments after discovery.
- Court found (1) retail investors are unambiguously NASDAQ "customers or clients" under industry usage and federal securities law, and (2) the securities and negligence claims arose "but for" NASDAQ’s alleged failure to render professional services.
- Result: Court granted summary judgment to ACE on indemnity-related counts (Counts Two and Four) and to INIC in full; denied summary judgment to Beazley; but denied ACE summary judgment on Beazley’s breach-of-contract claim (Count Five) because ACE breached its duty to advance defense costs and NASDAQ (via Beazley) has unreimbursed defense fees above ACE’s $2M retention.
Issues
| Issue | Plaintiff's Argument (Beazley) | Defendant's Argument (ACE/INIC) | Held |
|---|---|---|---|
| Whether retail investors are "customers or clients" of NASDAQ for the exclusion | Retail investors are not NASDAQ’s customers; NASDAQ’s "customers" are member firms and listed issuers | Industry usage and federal securities law treat public investors as exchange customers | Held: retail investors are unambiguously "customers or clients" of NASDAQ; exclusion prong satisfied |
| Whether the settled §10(b)/§20(a) securities claims "arise out of" rendering/failure to render professional services | Securities misstatements/omissions are akin to advertising and not professional services; out-of-state cases support coverage | The claims would fail but for NASDAQ’s alleged defective design/operation of its trading systems (professional services); New York "but-for" test excludes such claims | Held: claims arise "but for" the alleged failure to render professional services; exclusion applies |
| Whether ACE had a duty to advance defense costs and whether breach damages exist | Beazley contends ACE breached by not advancing defense costs and Beazley (as assignee) has damages | ACE argues exclusion defeats indemnity and that any unreimbursed fees are within D&O retention or covered by E&O tower | Held: although exclusion defeats indemnity, ACE previously breached its duty to advance defense costs while legal uncertainty existed; Beazley may recover NASDAQ’s unreimbursed defense fees in excess of $2M (minimum identified amounts) |
| Validity of NASDAQ’s assignment to Beazley (champerty defense) | Assignment to Beazley was part of settlement/subrogation and not champertous | Defendants assert champerty (Judiciary Law §489) may bar Beazley’s assignment | Held: assignment was not champertous; Beazley’s acquisition was to enforce legitimate rights and protect insured, so assignment is valid |
Key Cases Cited
- Lank v. New York Stock Exch., 548 F.2d 61 (2d Cir. 1977) (characterizing public investors as the Exchange Act’s protected "customers" of exchanges)
- Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608 (2d Cir. 2001) (use of federal case law meanings can render undefined policy terms unambiguous; insurer’s duty to defend broader than duty to indemnify)
- Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347 (N.Y. 1996) (New York "but-for" test: exclusions apply if claims would not exist but for excluded conduct)
- Pioneer Tower Owners Ass’n v. State Farm Fire & Cas. Co., 12 N.Y.3d 302 (N.Y. 2009) (exclusionary language must be clear and unmistakable; interpret narrowly)
- Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (U.S. 2011) (elements of private securities fraud include loss causation; critical to linking misrepresentations to economic loss)
- Sea Ins. Co. v. Westchester Fire Ins. Co., 51 F.3d 22 (2d Cir. 1995) (contra proferentem principles in insurance contract interpretation)