Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which UBS Puerto Rico sought to overcome its insurance carriers’ refusal to defend and provide coverage for two civil actions, settlements with the SEC and FINRA and hundreds of FINRA arbitrations. Applying Puerto Rico insurance law, the Court sided with the carriers stating that policies should be understood within their most common and usual meaning and, though exclusions should be strictly construed, the law does not compel constructions favorable to the insured when a clear and unambiguous exclusion favors the insurer.
Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.
UBS Financial Services Inc., of Puerto Rico vs. XL Specialty Ins. Co., No. 15-3099 (D. P.R., 2/1/18)
Under Puerto Rico insurance law, policies should be understood within their most common and usual meaning and, though exclusions should be strictly construed, the law does not compel constructions favorable to the insured when a clear and unambiguous exclusion favors the insurer.
UBS-PR brought this breach of contract action after its insurance carriers denied coverage of two civil actions, settlements with the SEC and FINRA and hundreds of FINRA arbitrations. Finding for the carriers on the parties’ cross-motions for summary judgment, the Court dismisses UBS-PR’s claims with prejudice. The Court’s decision hinges on its interpretation and application of a broad exclusionary clause the carriers specifically drafted that barred coverage of matters arising “in connection with” or “in any way involving . . . any fact, circumstance or situation underlying or alleged” in two matters that pre-dated the January 2012 policy issuance dates. In those prior matters, UBS-PR had settled an SEC investigation and been sued in a derivative shareholder action. Both matters alleged that UBS-PR used its conflicting status as investment advisor, bond underwriter and mutual fund manager to manipulate and control the market for its Puerto Rico closed-end mutual funds and Puerto Rico bonds it underwrote. The shareholders alleged that UBS-PR created a fraudulent bond market by dumping the junk bonds into the funds, and the SEC alleged that UBS-PR propped up the funds by purchasing millions of dollars of fund shares for its inventory and then selling those shares while undercutting its customers’ sell orders. UBS-PR accepted the carriers’ exclusionary clause, and the policies were issued.
After the policies were issued, UBS-PR faced new investor and regulatory actions. A second derivative action and a putative class action were filed, both of which mimicked the allegations in the prior SEC and derivative action. The SEC initiated a new investigation, focusing on UBS-PR’s efforts to have its customers purchase fund shares or bonds using margin and other means of credit. FINRA investigated UBS-PR’s supervisory system and procedures. Finally, over one thousand individual arbitration proceedings were filed. UBS sought coverage of all claims, even though only the SEC investigation and some arbitrations were filed during the two-year policy period. The carriers denied coverage, and this case followed.
The Court begins its analysis by pointing out that, under Puerto Rico insurance law, “contracts should be understood within their most common and usual meaning,” and “exclusionary clauses are not favored [and] should be strictly construed.” However, the Court adds, the law does not compel constructions favorable to the insured when a clear and unambiguous clause favors the insurer. The Court then analyzes each disputed matter, finding that they involve many facts, circumstances and situations underlying the prior matters, and concludes that the litigation exclusions bar coverage.
Here, UBS-PR made no ambiguity claim. Instead, it argued that even one covered claim in a complaint obligates the carriers to pay for the defense. The Court rejects this argument. First, it is inconsistent with the policies’ definitions, which define “claims” not in the granular fashion proposed by UBS-PR, but in broad fashion as civil proceedings, arbitrations, or formal civil or criminal, administrative or regulatory proceedings. Second, the Court notes the inconsistencies in UBS-PR’s efforts to separate matters into thousands of claims for one purpose, while seeking to aggregate them to gain coverage over matters filed outside the policy period under a policy clause that provides that claims arising from interrelated acts are deemed to have been made at the same time as the earliest such claim.
The defendant carriers were XL Specialty Insurance Company, which issued a $10 million primary policy, Axis Reinsurance Company, which issued a $5 million first excess policy, and Hartford Fire Insurance Company, which issued a $5 million second excess policy.