Ninth Circuit Holds Professional Services Exclusion Bars Coverage for Ponzi Scheme Lawsuit

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that a professional services exclusion bars coverage for a lawsuit alleging a Ponzi scheme by an insured parent company and its subsidiaries, even though only the subsidiaries directly performed the investment services at issue.  Jamison v. Certain Underwriters at Lloyd’s Under Policy No. B0146LDUSA0701030, 2015 WL 1546254 (9th Cir. Apr. 8, 2015). 

The insured parent company and its subsidiaries were sued by a group of investors for fraudulently selling unlawfully unregistered securities and for running and concealing a Ponzi scheme.  The investors alleged that the subsidiaries had provided improper investment advice and that the parent company had operated the subsidiaries in a way that allowed the Ponzi scheme.  The parties in the underlying litigation reached a settlement for $3 million and the assignment of the company’s rights under its D&O policy.  The investors then brought suit against the D&O insurer.  The district court granted the insurer’s motion to dismiss on the basis of the policy’s professional services exclusion, which bars claims “for any act, error or omission in connection with the performance of any professional services by or on behalf of the Company for the benefit of any other entity or person.”

On appeal, the court rejected the investors’ argument that the professional services exclusion applied only to claims for acts “directly,” as opposed to “indirectly,” connected to professional services, or only to claims premised on primary, as opposed to secondary, liability.  The court held that the exclusion was not reasonably susceptible to that interpretation because the plain language of the exclusion did not qualify the term “in connection with” in any way.  The court further observed that the investors’ interpretation would require the exclusion to apply differently to the parent company than to the subsidiaries, even though the policy did not distinguish between the two for purposes of coverage.  Finally, the court held that this interpretation did not render the policy illusory because the policy did cover claims not in connection with the performance of professional services, such as shareholder derivative actions or regulatory investigations of securities violations.