A securities firm sought coverage under a professional liability policy for claims by customers that suffered losses on real estate investment vehicles. The Panel for the Second Appellate District in California found that the policyholder was not entitled to coverage because the “application exclusion” in the firm’s policy bars coverage for the claims asserted, as the policyholder did not disclose the facts of the claims against it to the insurer in its application.
The claimants brought suit, asserting that the policyholder failed to properly vet certain investments and that the claimants suffered losses as a result. The policyholder had recommended certain investments to its customers, then the investment company behind those investments went bankrupt and the bankruptcy processing issued a report finding that the investment company had engaged in a Ponzi scheme. The policyholder was sued by multiple customers as a result.
When the policyholder applied for professional liability insurance, it disclosed a claim against it, but answered “no” on the application question asking if it was aware of any facts or circumstances that could give rise to other claims. The policyholder knew when it applied for the policy that the investment company had declared bankruptcy and had allegedly been operating a Ponzi scheme and that the disclosed claim was related to that Ponzi scheme. The court found that the policyholder was aware of the facts and circumstances that might result in more claims being made and did not disclose them. As such, the court found that the insurer had no duty to defend the policyholder.
Crown Capital Securities, LP v. Endurance American Specialty Ins. Co., Court of Appeal of the State of California, Second Appellate District, April 10, 2015.