Coverage for Common Law Causes of Action Not Barred Under ERISA/Securities Law Exclusion

Applying Michigan law, a federal district court has held that common law causes of action for fraud and negligent misrepresentation are not “based on or arising out of actual or alleged violations” of ERISA or securities laws merely because they arise out of the same factual scenario.  Great Am. Fidelity Ins. Co. v. Stout Risius Ross, Inc., 2020 WL 601784 (E.D. Mich. Feb. 7, 2020).

Two lawsuits were filed against the insured valuation company alleging that the insured provided inaccurate investment valuations on behalf of an ERISA-governed plan.  The first complaint included five causes of action for violations of ERISA, violation of Wisconsin and federal securities statutes, general fraud, and negligent misrepresentation.  The second complaint, which was filed in bankruptcy court, asserted causes of action for “aiding and abetting breaches of fiduciary duties of care and loyalty[,]” avoidable preference, and avoidable transfer.

The insurer issued a professional liability policy to the insured, which provided coverage for “valuation services.” The policy, however, excluded coverage for “any Claim . . . based on or arising out of actual or alleged violation of . . . (1) The Employment Retirement Income Security Act of 1974; (2) The Securities Act of 1933; (3) The Securities Act of 1934; (4) Any state Blue Sky or Securities law; . . . or any rules, regulations, or amendments issued in relation to such acts, or any similar state or federal statutes or regulations[.]”  The insurer brought suit seeking a declaratory judgment that the insurer owed no duty to defend or indemnify under the policy based on this exclusion.

The court held that the ERISA/securities exclusion did not preclude a duty to defend because the common law causes of action did not fall within the exclusionary language. The court rejected the insurer’s argument that coverage for all of the causes of action in the underlying lawsuits were barred because both lawsuits were “based on and arise out of [the insured’s] engagement” by an ERISA-governed plan.  Rather, the court held that “a violation of ERISA must have caused [the insured] to commit negligence and/or fraud” to be excluded and “being based on the same underlying factual scenario is not sufficient.”  The court likewise held that the common law causes of action for fraud and negligent misrepresentation did not arise from any alleged securities violation, explaining that “[i]t instead seems more likely that the alleged securities violations arose from the fraud and negligent misrepresentation.”