The NASDAQ public stock exchange conducted the initial public offering for Facebook, Inc. NASDAQ encountered a variety of technical difficulties in executing the IPO that resulted in trades not being performed properly. Retail investors sued NASDAQ, and those claims were eventually settled for $26,5 .million.
NASDAQ maintained both errors and omissions (“E & 0”) and directors’ and officers’ (“D & 0”) insurance policies. Appellant Beazley Insurance Company was the second-level E & 0 carrier; appellees ACE American Insurance Company and Illinois National Insurance Company were the first and second level D & 0 carriers, respectively. ACE and Illinois National disclaimed coverage under the D & 0 policies, Beazley paid out its policy limit of $15 million in E & 0 coverage subject to an agreement with NASDAQ in which NASDAQ assigned Beazley its contractual rights against ACE and National; Beazley then sued ÁCE and National for coverage under D & 0 policies.
The United States District Court for the Southern District of New York (Rakoff, /.) ultimately granted ACE and Illinois National summary judgment. Beazley Ins. Co. Inc. v. ACE Am. Ins. Co.,
BACKGROUND
NASDAQ is a public stock exchange that provides an electronic trading platform on which its members, registered broker-dealers, execute securities transactions. See NASDAQ OMX Group, Inc. v. UBS Sec. LLC,
As relevant here, NASDAQ maintained two stacks, or towers, of insurance coverage. NASDAQ purchased a tower of E & O coverage from Chartis Specialty Insurance Company, Beazley and ACE. Chartis provided primary coverage of $15 million, above a $1 million self-insured retention, for all “[djamages resulting from any Claim ... for any Wrongful Act of the Insured” that “occur[ed] ... solely in rendering or failing to render Professional Services.” App’x at 204. The Beazley E & O policy provided excess coverage with another $15 million in coverage, and “follow[ed] form” to Chartis’ policy, that is, provided coverage on the same, terms. App’x at 192. ACE’s policy provided second level excess insurance, with a $15 million limit after the Chartis and Beazley policies were exhausted. [App’x 177] Altogether, NASDAQ purchased $50 million in E & O coverage.
NASDAQ also purchased a tower of D & O coverage from ACE and Illinois National. The ACE D & O policy was primary and provided $15 million in coverage after a $2 million self-insurance retention for
NASDAQ carried Facebook’s initial public offering ón May 18, 2012. It did not go smoothly—NASDAQ’s trading platform suffered a series of technical failures, resulting in the improper processing of orders to buy and sell stock. Retail investors in Facebook sued NASDAQ, alleging that they suffered losses as a result of NASDAQ’s technical failures. In all, more than 40 lawsuits related to the Facebook IPO were brought against NASDAQ across the country, and were eventually consolidated in the Southern District of New York.
After consolidation, plaintiffs filed a consolidated amended class action complaint (the “CAC”) against NASDAQ and two NASDAQ officers: Robert Greifeld, then-president and chief executive officer; and Anna Ewing, then-chief information officer (collectively, “NASDAQ”). The CAC, filed in April 2013, was brought on behalf of a putative class of all persons who entered orders to buy or sell Facebook’s common stock on May 18, 2012 and lost money as a result of NASDAQ’s alleged wrongdoing. The CAC asserted securities fraud claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), as well as state law negligence claims.
NASDAQ provided notice of the CAC to each insurer. Chartis accepted potential coverage under its E & O policy subject to a reservation of rights, as'did Beazley and ACE. However, both ACE and Illinois National disclaimed coverage under the D & O policies, relying on the “professional services” exclusion in the ACE policy. Neither NASDAQ nor -its broker challenged the disclaimer. NASDAQ renewed the D & O policy twice without ever raising the issue.
NASDAQ agreed to settle the CAC in April 2015 for $26.5 million, and sought coverage under its E & O tower to pay for both the settlement and ‘ NASDAQ’s defense costs. Chartis paid'out its $15 million, and ACE paid out $4.9 million under its third-level E & O policy. Because Char-tis and ACE were responsible for the cost of defending the lawsuits, the claim cost them more than the $26,5 million settlement figure. Beazley also paid out its full $15 million pursuant to= an agreement in which NASDAQ “assign[ed] to Beazley any and all contractual rights or extra-contractual rights they have or that they may acquire ... .against ACE and/or Illinois National in connection with the [CAC] up-to the amount of [$15 million].” App’x at 4101. The agreement also provided that NASDAQ would not .take “any formal position with regard to the availability of 'Coverage under the ACE D & O Policy and/or the [Illinois National policy] for the claims asserted in the” CAC, and that NASDAQ would “not voluntarily provide any testimony or declaration in connection with any proceeding between Beazley on the one hand and ACE and/or Illinois National on the other arising out of or related to the” CAC. App’x at 4128.
Beazley then attempted to get ACE to reconsider its denial of coverage, and when those efforts were unsuccessful, sued for
On balance, the Court is in agreement with Beazley that interpreting “customer [s] or client[s]” to exclude retail investors in a public company listed on NASDAQ is at least one reasonable interpretation of the ACE D & 0 Policy. As a consequence, ACE has failed to satisfy its “heavy burden of demonstrating that ... the [Professional Services] exclusion is subject to no other reasonable interpretation” than the one it has proffered to disclaim coverage, and ACE was therefore obligated to provide NASDAQ with defense costs coverage in connection with NASDAQ’s defense of the CAC.
Beazley Ins. Co., Inc. v. ACE Am. Ins. Co.,
To be clear, the Court is not interpreting “customer[s] or clientfs]” to exclude retail investors as a matter of law, as that is not the relevant question for purposes of plaintiffs motion. Defendants are free, with the benefit of discovery, to renew their arguments as to the meaning of “customers or clients” on summary judgment.
Id. at n.9.
Following discovery, in January 2016 Beazley moved for partial summary judgment seeking a declaration that ACE had a duty to indemnify in connection with the CAC settlement. ACE and Illinois National cross-moved for summary judgment on the remaining claims. The district court denied Beazley’s motion, granted ACE and Illinois National’s motion and also found ACE liable for unreimbursed attorneys’ fees and costs reasonably incurred by NASDAQ in excess of the policy’s $2 million retention. This appeal followed.
DISCUSSION
“We review orders granting summary judgment de novo.” Hizam v. Kerry,
The Insurer shall not be liable for Loss on account of any Claim ... by or on behalf of a customer or client of the Company [i.e., NASDAQ], alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.
App’x at 1628, 1653. The D & O policy defines neither “customer or client” nor “professional services.” Beazley argues that the district court erred in enforcing the exclusion because (1) the retail investors who sued and settled the CAC are not customers or clients within the meaning of the D & O policy, and (2) the claims settled in the CAC are not “alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.” The burden of proving the exclusion applies rests with the insurer. Pioneer Tower Owners Ass’n v. State Farm Fire & Cas. Co.,
“The law governing the interpretation of exclusionary clauses in insurance policies is highly favorable to insureds.”
[W]henever an insurer wishes to exclude certain coverage from its policy obligations, it must do so in clear and unmistakable language. Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction.
I. Customers and clients
“[A]n insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of .the contract.” Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co.,
In the absence of guidance from the policy language, courts ask whether a body of law or an established custom or usage provides a definition. “For it is quite possible that even where a contract does not define a particular—and potentially ambiguous—term, a body of state law or an established custom fills in the gaps left by the drafters.”
[U]nder these conditions—where neither the contract nor state law defines a disputed term—a court may, nevertheless, find the term, as used in a state-law contract, to be unambiguous. For contracting parties operate against the backdrop not only of state law, but of federal law as well. And when federal law concepts, such as those relevant to trademark—paradigmatically a federal field—are employed, the parties may be read as having incorporated established meanings and definitions forged in the relevant federal cases.
The district court properly relied on custom and usage of the terms “customers” in determining that the retail investors were “customers” of NASDAQ within the meaning of the ACE D & O policy. Similar to trademark law, securities law is “paradigmatically a federal field.”
We have little trouble finding that the vast majority of federal courts to consider the issue find retail investors to be “customers” of a stock, exchange. In Lank v. New York Stock Exchange, our Court held that “[t]he primary purpose of the Exchange Act was to protect customers of the stock exchanges that is, public investors.”
Beázley argues that the district. court erred in turning to federal law to provide a definition for “customer,” primarily because (1) industry usage should be considered before federal case law; (2) the professional services exclusion was standard language, thus its terms cannot be defined in the context of a specific industry; and (3) other evidence in the record indicates that NASDAQ considered broker-dealers, not retail investors, to be NASDAQ’s customers. We find these arguments unavailing.
First, in this context, there is little distinction between looking to “industry .usage” and federal case law to define a term. Federal case law is , simply another way of determining whether the parties shared a common language that would lead them to a mutual, unambiguous understanding, of the meaning of an undefined term. Second, the fact that the professional services exclusion is a standard clause does not alter the analysis here. The parties are not required to tailor language for every policy in order for terms to have industry-specific meanings. Who counts as a customer of a particular.insured within the meaning of the generic exclusion will often depend on the nature- of the industry in which the insured does business. What is relevant here is that-the insurer sold the policy to its insured, a stock exchange, against the backdrop of well-established federal securities law that unambiguously considers retail investors to be customers of the exchange.
Third, a 2012 rule change NASDAQ submitted to the Securities and Exchange Commission cannot bear the weight Beaz-ley assigns it. There, NASDAQ sought to provide accommodation payments to members who could demonstrate losses stemming from the ill-fated Facebook IPO that the members, in turn, could use to pay-claims from retail investors. The rule change would make $62 million available to pay claims from retail investors, rather than the $600,000 then available to each member. In submitting the rule change, NASDAQ stated that “[NASDAQ’s] búsiness and legal relationships are with its members, not its members’ customers. [NASDAQ] has no contractual or oth.er relationships with its members’ customers, and generally does not possess information about interactions between a member and its customer that may underlie members’ trading activity.” App’x at 2678.
Beazley argues this language, at a minimum, raises a question of material fact as to whether NASDAQ considered retail investors its customers. However, as the district court correctly concluded, the fact that retail investors are customers of
We agree with the district court that when considered against the background of the “the customs, practices, usages and terminology as generally understood in the particular trade or business,” the term “customers” of NASDAQ unambiguously includes retail investors. Morgan Stanley Grp. Inc. v. New England Ins. Co.,
II. Professional services
To successfully invoke the exclusion, ACE also must demonstrate that the claims arose out of the “rendering of or failure to render professional services.” Under New York law, a court makes such a determination by examining whether the asserted claim could succeed but for the excluded conduct. See Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd.,
In determining whether a professional service is at issue, Courts “[look] to the nature of the conduct under scrutiny rather than the title or position of thosé involved, as well as to the underlying complaint. ...” David Lerner Assocs., Inc. v. Phila. Indem. Ins. Co.,
Here, as below, the parties do not “dispute that the design and operation of NASDAQ’s systems require the special acumen and training of professionals,' such that 'these activities constitute professional services.” Beczley II,
Beazley, however,. argues that the dis-' trict court erred in finding that the CAC’s federal, securities claims were “alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.” Beazley argues that the CAC allegations accusing NASDAQ of misstatements and omissions in violation of
Beazley relies on Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am.,
The flaw in this argument is that the CAC plaintiffs could not win at trial merely by showing that NASDAQ made false and misleading statements as to its capabilities. “To prevail on the merits in a private securities fraud action, investors must demonstrate that the defendant’s deceptive conduct caused their claimed economic loss.” Erica P. John Fund, Inc. v. Halliburton Co.,
[D]amages [to the class members] were foreseeable and directly caused by the materialization of the concealed risks of Defendants NASDAQ, Greifeld and Ewing; namely, NASDAQ’s technology and trading platform technical limitations and resulting failures, including the breakdown of its IPO Cross system, and Defendants’ failure to properly test NASDAQ’s systems prior to the IPO. The materialization of these risks occurred during the Class Period when NASDAQ’s systems failed to: (i) properly execute Class Members’ buy and sell pre-market Cross orders and aftermarket orders in Facebook’s IPO; and (ii) failed to timely deliver confirmations of Class Members^] pre-market Cross orders, causing Class Members substantial damages.
CONCLUSION
We have considered the remainder of Beazley’s arguments and find them to be without merit. For the reasons given above, the judgment of the district court is affirmed. As the Illinois National policy follows the ACE D & 0 policy, we need not reach the alternate grounds for affir-mance proffered by Illinois National.