Insurer, Represented by Traub Lieberman Straus & Shrewsberry LLP, Wins a Series of Dispositive Motions in a Coverage Action Involving Securities Broker Dealer Professional Liability Insurance
March 10, 2010

This coverage action involved Investors Capital Corporation (“ICC”), which is a securities broker/dealer. One of its former registered representatives was involved in the sale of fraudulent securities. Several arbitrations against ICC before FINRA arose from the registered representative’s acts in this regard. ICC sought coverage for the arbitrations from its insurer, Quanta Specialty Lines Insurance Co. (“Quanta”), under a claims made/reported professional liability policy. Quanta disclaimed coverage for the underlying arbitrations, and instituted a coverage action. As will be discussed below, the grounds for the disclaimer included that the interrelated “Claim” at issue was first made before the policy period, and the Insured otherwise knew of circumstances that could result in claims before the policy’s inception date. Quanta, represented by Traub, Lieberman, Straus & Shrewsberry, LLP (“TLS&S”), commenced the action in the United States District Court for the Southern District of New York.

With ICC’s answer, it asserted a counterclaim seeking to rescind the Quanta policy on the basis that Quanta have violated New York’s excess line insurance regulations, and failed to obtain proper New York licenses. These alleged violations were based, in part, on New York Department of Insurance “Circular 6,” which prohibits, inter alia, aggregate limits of liability being applied to individual insureds under a group professional liability policy. Quanta, through TLS&S, moved to strike ICC’s counterclaims. ICC cross-moved with a demand that Quanta provide a pre-answer security, and that ICC be allowed to amend its answer to add an affirmative defense based upon New York Business Corporation Law Section 1312, which prohibits an unlicensed company from commencing litigation in New York courts.

Quanta’s motion to dismiss was successful as to many central aspects of ICC’s counterclaims. Agreeing with TLS&S, the court found that Quanta’s alleged violations of excess line insurance regulations, and Quanta’s failure to obtain a license in New York, did not give ICC a private right of action, nor does it affect the substance of the insurance contract. Quanta Specialty Lines Ins. Co. v. Investors Capital Corp.,2008 U.S. Dist. LEXIS 35319 * 16 (S.D.N.Y., Apr. 30, 2009). The court also denied ICC’s request for a pre-answer security under New York Insurance Law Section 1213, which states that unauthorized foreign insurance are required to post a security before filing responsive pleadings. This demand was rejected because ICC is a non-resident and could not avail itself to the New York Insurance Law. Id. at 25. In addition, the court denied ICC’s motion to assert an affirmative defense based upon New York Busisness Corporation Law Section 1312 which dictates that a foreign corporation without authority may not maintain any action in the state. The court found that the amendment would be futile. This ruling was based on the fact that Quanta is an interstate company, and Section 1312 was meant to protect New York citizens from foreign corporations that conduct mainly intrastate business. Id. at 32-33.

Following preliminary motion practice, discovery was taken in the action as to other coverage issues. Quanta’s disclaimer was based on a complaint letter forwarded to ICC (“complaint letter”) regarding its registered representative’s sale of a fraudulent security, which was delivered to ICC prior to the Quanta policy’s inception date. The complaint letter was later withdrawn by the claimant due to various factual errors which eviscerated the demand. In addition, prior to the Quanta policy’s inception date, the North Carolina Securities Division opened an investigation as to the same ICC registered representative regarding the sale of the same fraudulent securities which resulted in a summary order to cease and desist the sale of the securities (“Investigation and Summary Order”).

TLS&S moved for summary judgment declaring that Quanta was not obligated to provide ICC with coverage for the underlying arbitrations on the grounds that: (1) the complaint letter and the underlying arbitrations were a single “Claim” deemed made when the earliest claim first was made, which was before the policy inception date; (2) as of the policy inception date, ICC had knowledge or a reasonable basis upon which to anticipate that a “Wrongful Act” or “Interrelated Wrongful Acts” could result in a claim based on complaint letter, and Investigation and Summary Order; and (3) the claim was excluded by the policy because ICC had notice that the allegations in the underlying arbitrations were the subject of the complaint letter, and Investigation and Summary Order.

ICC cross-moved for summary judgment seeking coverage for the underlying arbitrations arguing that: (1) the complaint Letter is not a “Claim” within the meaning of the policy because it was withdrawn and contained factual errors; (2) the complaint letter, and Investigation and Summary Order did not lead ICC to have knowledge or a reasonable basis to anticipate a claim as of the inception dates of the policy; and (3) the underlying arbitrations did not arise from the Complaint Letter, or Summary Order, making the “pending and prior claim” exclusion inapplicable.

The court agreed with TLS&S on all of the arguments, finding that the complaint letter was a “Claim” within the meaning of the policy, even though it was withdrawn. Although the complaint letter had factual errors, it still accurately described the ICC registered representatives fraudulent sale of the securities which was directly related to the wrongful acts of the claims in the underlying arbitrations for which ICC sought coverage. Quanta Lines Insurance Company v. Investors Capital, 2009 U.S. Dist LEXIS 117689 * 28 (S.D.N.Y., Dec. 17, 2009) Therefore, the claim was deemed prior to the inception date of the policy. The court also agreed that, as of the policy inception date, ICC had knowledge or a reasonable basis upon which to anticipate a claim, which gave it notice of the claim prior to the inception date. Id. at 43. Further the court determined that the allegations of the underlying arbitrations were the same subject as the Investigation and Summary Order, thereby falling under the policy’s exclusion. Id. at 59. Finding for all of Quanta’s arguments, the court granted Quanta’s motion for summary judgment and denied ICC’s motion for summary judgment.

Quanta v. ICC April 28, 2008 Decision (Adobe PDF)

Quanta v. ICC Dec. 17, 2009 Decision (Adobe PDF)