Beazley Insurance Co. v. ACE American Insurance Co.
880 F.3d 64
2d Cir.2018Background
- NASDAQ’s May 18, 2012 Facebook IPO suffered technical failures that improperly processed retail investors’ orders; consolidated class actions against NASDAQ settled for $26.5 million.
- NASDAQ carried E&O (errors & omissions) and D&O (directors & officers) insurance towers; Beazley was a second-level E&O carrier and later sought recovery under ACE and Illinois National D&O policies after paying its $15M limit.
- ACE and Illinois National disclaimed coverage under the D&O policies based on a “professional services” exclusion that barred claims “by or on behalf of a customer or client” arising from rendering or failing to render professional services.
- NASDAQ assigned Beazley contractual rights against ACE/Illinois National up to $15M; Beazley sued for coverage. The district court granted summary judgment to ACE/Illinois National on indemnification; Beazley appealed.
- The Second Circuit affirmed: (1) federal securities law and industry usage establish that retail investors are NASDAQ’s “customers” for purposes of the exclusion; and (2) the securities claims alleged losses caused by NASDAQ’s failure to render professional services (misexecuted orders / confirmations), so the exclusion applied.
Issues
| Issue | Plaintiff's Argument (Beazley) | Defendant's Argument (ACE/Illinois Nat.) | Held |
|---|---|---|---|
| Whether retail investors are "customers" of NASDAQ under the D&O policy | "Customers" should not include retail investors; industry usage and NASDAQ communications create ambiguity | Federal securities law and industry practice treat public investors as customers of exchanges | Retail investors are unambiguously customers of NASDAQ as a matter of industry/federal-law usage; exclusion applies |
| Whether the settled securities claims "arose out of" NASDAQ's rendering or failure to render professional services | The securities claims principally alleged false advertising/marketing, not professional services; advertising is not a professional service | Plaintiffs' loss causation allegations tie losses to NASDAQ's failure to execute orders and deliver confirmations — core professional services | Claims required proof that losses flowed from failures in NASDAQ’s technical/professional performance; exclusion covers them |
Key Cases Cited
- Beazley Ins. Co., Inc. v. ACE Am. Ins. Co., 197 F. Supp. 3d 616 (S.D.N.Y. 2016) (district-court ruling on coverage and professional services exclusion)
- Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608 (2d Cir. 2001) (federal-law definitions may inform ambiguous contract terms)
- Lank v. New York Stock Exchange, 548 F.2d 61 (2d Cir. 1977) (Exchange Act’s purpose protects public investors/customers of exchanges)
- Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (private securities-fraud plaintiffs must prove loss causation)
- Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347 (N.Y. 1996) (New York “but-for” test for applying exclusions)
- Pioneer Tower Owners Ass’n v. State Farm Fire & Cas. Co., 12 N.Y.3d 302 (N.Y. 2009) (exclusionary clauses construed narrowly; insurer bears burden to prove exclusion applies)