Despite Withdrawal, Plaintiff’s Allegations Constitute A “Claim”

Summary of Quanta Lines Ins Co. v. Investors Capital Corp. (S.D.N.Y. Dec. 17, 2009):

ICC is a securities broker/dealer. Prior to December 31, 2004, ICC was insured under a professional liability policy issued by Firemen’s Fund Insurance Company. From December 31, 2004 to December 31, 2005, ICC was insured under a Broker/Dealer and Registered Representative Professional Liability policy issued by Quanta. (The policy was renewed for the period of December 31, 2005 to December 31, 2006).

On October 21, 2004, ICC received a letter from an attorney representing an investor, Patricia Alston, claiming that Alston had invested over $100,000 and as a result of the actions of ICC’s representative, Joseph Jones, had sold her unregistered securities (BAB Productions). After a brief investigation, it was determined that Jones had, in fact, invested in a different securities fund. After a conversation with claimant’s counsel, it was agreed that the letter could be disregarded and that no claim was being pursued against ICC by Alston. This letter and the investigation were subsequently reported to Quanta a year and a half later on May 8, 2006.

Beginning on August 12, 2005, ICC was served with a series of arbitration demands relating to the selling of the BAB security by Jones. In response, ICC sought coverage under the Quanta policy. Quanta denied coverage concluding that the Alston letter and the underlying arbitrations were part of a single claim that arose out of an interrelated wrongful act that occurred prior to the inception date of the policy.

The initial question addressed by the court was whether the Alston letter constituted a claim as defined by the policy. Accordingly, the court held that the term “claim” was not ambiguous and the Alston letter alleged a specific wrongful act as contemplated by the policy. The court noted that the allegation clearly included a claim of negligent supervision and respondeat superior liability against ICC which qualified as a negligent act or omission committed by an insured.

Finally, the court held that there was a sufficient factual nexus between the Alston letter and the underlying arbitrations, i.e. Jones’ sale of unregistered BAB securities and ICC’s failure to supervise such sales. The court stated that even though ICC’s investigation determined that Ms. Alston did not actually invest in BAB, the veracity of the allegations, or lack thereof, did not erase the fact that the allegations were made and were consistent with the factual allegations in the underlying arbitrations. Accordingly, ICC was not entitled to coverage.

Impact: This case is interesting because the Alston letter was deemed a claim despite the fact that it contained factual inaccuracies and was later withdrawn. This court applied a very mechanical interpretation of the policy and arguably stretched the limits of the definition of the term claim to find an interrelated act. It will be interesting to see whether this case gets appealed to the Second Circuit and what resulting decision the court will reach.

For a copy of this decision, click here: http://tinyurl.com/GS-PLM-Jan-15