A Michigan federal court held recently in Great American Fidelity Ins. Co. v. Stout Risius Ross, Inc., et al., 2020 WL 601784, at *1 (E.D. Mich. Feb. 7, 2020), that an insurer must defend an investment advisor against lawsuits alleging that it fraudulently overvalued the stock of a company destined for bankruptcy. The court determined that the insurer failed to show that an exclusion barring coverage for claims arising out of ERISA and other securities laws violations was broad enough to bar coverage for accompanying common law claims of fraud and negligent misrepresentation.
In Stout, trustees of the Appvion Retirement Savings and Employee Stock Ownership Plan (“Appvion”) hired the insured, Stout Risius Ross, Inc. and Stout Risius Ross, LLC (together, “Stout”), as Appvion’s financial advisor. Stout provided Appvion with an independent stock valuation of Appvion’s parent company. Subsequent to the valuation, Appvion went bankrupt, resulting in financial losses to the retirement plans of its employees, which were exposed to the overvalued stock of the parent.
Appvion sued Stout in federal court in Wisconsin, where Stout allegedly appraised and overstated the stock value. The complaint includes claims for violations of ERISA, fraud, misrepresentation, and securities fraud. Trustees of the Appvion Liquidating Trust (“Trust”) also sued Stout in a bankruptcy action in Delaware. The Trust alleged that the flawed valuation by Stout contributed to its financial losses. The complaint includes counts for aiding and abetting breaches of the fiduciary duties, avoidable preference, and avoidable transfer.
Stout tendered the lawsuits to its professional liability insurer, Great American Fidelity Insurance Company (“Great American”). The Great American policy afforded coverage for, among other things, valuation services. Great American agreed to defend Stout against the lawsuits under a reservation of rights, but subsequently filed a coverage action seeking a declaration that it had no duty to defend Stout.
Great American relied primarily on an exclusion that eliminated coverage for any claim arising out of actual or alleged violations of ERISA or securities laws. Great American argued that the phrase “arising out of” is so broad that it captured not only the statutory claims, but also the bankruptcy claims and those for common law fraud and misrepresentation. Stout, in contrast, argued that at least one of the underlying claims fell outside the ambit of the exclusion. The court rejected a broad interpretation of the phrase “arising out of.” In fact, the court noted that it seemed more likely that the alleged statutory violations arose out of the common law claims—not the other way around. In the court’s view, the plain language of the exclusion excluded coverage only for claims arising out of violations of ERISA or securities laws—not for other claims merely stemming from the same set of facts. See id. at *6. The court also concluded that the lawsuit by the Trust suffered from the same flaw, noting that any connection between the bankruptcy claims and the alleged ERISA violations “is too remote to establish that the [bankruptcy] claims are based on or arising out of an ERISA violation.” Id. at *7. Accordingly, the court ruled that Great American had a duty to defend Stout against both lawsuits.
Stout exemplifies the narrow construction that should be afforded to coverage exclusions and illustrates how courts will not allow insurers to infer a broader scope than is actually set forth in the plain language of the policy. The decision also provides a good illustration of the limits that can fairly be applied to an exclusion that purports to bar coverage for statutory violations. As the court explained, such exclusions must be limited to the claims of alleged statutory violation only and not accompanying common law claims, even where the latter arise out of the same facts or circumstances. While Stout involved ERISA- and securities-based claims against the insured, the same analysis and limitations should apply to claims arising under other statutory schemes, such as wage and hour, unfair labor, and anticompetitive business practices statutes.