Chris Lazarini Provides Insight on Interpretation and Application of Broad Exclusionary Clause in an Insurance Contract

August 27, 2019
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini provided insight on a case questioning how a broad exclusionary clause in an insurance contract is interpreted and applied. The court ruled that an insurance contract containing broad exclusions is not illusory where it does not completely vitiate all coverage.

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. 18-1148 (1st Cir., 7/3/19)

*Under Puerto Rico insurance law, policy terms should be given their common and usual meanings.

**An insurance contract containing broad exclusions is not illusory where it does not completely vitiate all coverage.

Calling it a “clash of industry titans,” the Court considers UBS-PR’s appeal from the district court’s summary judgment award for the Defendant insurance carriers on UBS-PR’s breach of contract action. The underlying facts and the district court’s analysis are described in SOLA Reference No. 2018-09-06.

At issue is the interpretation and application of a broad exclusionary clause in Defendants’ insurance contracts. The exclusion barred coverage of matters arising “in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving [two Prior Matters] or any fact, circumstance or situation underlying or alleged therein.” The Prior Matters were an SEC investigation and derivative shareholder action both of which alleged 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 matters for which the carriers rejected coverage (the “Disputed Matters”) included a second derivative action, a putative class action, new SEC and FINRA investigations, and individual arbitration proceedings.

The Court is not swayed by UBS-PR’s arguments for coverage. Noting that UBS-PR is a “sophisticated financial player” that engaged a large and respected broker with expertise in the Puerto Rican market and an outside law firm to assist it in negotiating the policies, the Court finds no reason to deviate from the most common and usual meanings of the broad exclusion clause. The Court rejects UBS-PR’s argument that the policies are illusory unless the exclusion is limited to situations involving a “substantial” overlap between the Prior Matters and Disputed Matters. The Court finds the phrase “in any way involving” should be read expansively as a “mop-up” clause excluding anything not already excluded. However, the Court continues, the policies are not illusory because they do not exclude claims for breach of fiduciary duties due to accounting errors, alleged self-dealing, failure to maintain customer information confidentially, whistleblower claims, or claims for deficient advisory services provided to the open-end funds.  The Court similarly rejects UBS-PR’s argument that the exclusion should be applied only to overlapping claims instead of entire proceedings. The Court finds “claim” is defined broadly, and sees no reason to divide claims into fractional units to determine exclusions. Finally, the Court rejects UBS-PR’s request for defense expenses because there is a “remote possibility of coverage.” Because it has found the Disputed Matters are not covered, the Court states, UBS cannot show a remote possibility of coverage.