In a January 4, 2010 order (here), Southern District of Texas Judge Nancy Atlas held that an insurance broker’s Professional Liability Insurance insurer must defend the broker and one of its employees in connection with claims arising out of the Stanford Group fraud.



The Bowen Miclette & Britt insurance brokerage and one of its employees (Winter) have been named as defendants in several civil actions filed following the revelations of the Stanford Group fraud. The plaintiffs in the cases had deposited money in or invested in Certificates of Deposit issued by the Stanford International Bank (SIB).


The plaintiffs in the underlying lawsuits alleged that the brokerage provided the Stanford Group with "safety and soundness letters" that Stanford used in marketing. Among other things, the letters allegedly asserted that SIB was "insured by various Lloyd’s insurance policies" and that SIB had "qualified" for the Lloyd’s policies.


The defendants sought to have their insurer under the brokerage’s Professional Liability Insurance policy defend them in the underlying actions. The insurer denied coverage, and in July 2009, the insurer initiated an action against the brokerage and Winter in the Southern District of Texas, seeking a judicial declaration that there was no coverage under the policy for the claims. The defendants counterclaimed, alleging breach of contract and seeking a judicial declaration of coverage. The parties filed cross motions for summary judgment.


The January 4 Order

In her January 4 order, Judge Atlas denied the insurer’s summary judgment motion and granted the defendants’ motions, ruling that the allegations in the complaint gave rise to a duty for the insurer to defend. Judge Atlas’s ruling was without prejudice as to the duty to indemnify, the issues with respect to which she held were not yet justiciable because the underlying actions remain pending.


Judge Atlas first concluded that the allegations in the underlying cases about the defendants’ provisions of the "safety and soundness letters" were claims for "Professional Services" within the meaning of the policy.


The insurer argued that coverage under the policy nevertheless was precluded by the policy’s securities exclusion, which excluded coverage for any claim "based upon or arising out of any violation or alleged violation" of federal or securities laws. The insurer argued that the underlying complaints alleged securities violations and therefore the exclusion precluded coverage.


Judge Atlas agreed that the underlying complaints alleged violations of the securities laws, but noted that the complaints also "alternatively asserted negligence-based claims" that were not within the securities exclusion, and therefore the insurer owed the defendants a duty to defend all claims in the underlying lawsuit.


Winter had also sought to have the insurer defend him. Winter was an employee of the brokerage who allegedly had provided and signed the "safety and soundness" letters. The plaintiffs in the underlying case alleged that Winter had not disclosed that he was also a director of SIB.


Judge Atlas found that "in none of the three underlying lawsuits are there allegations against Winter in his capacity as a member of SIB’s Board or in any capacity other than an employee of BMB." She found that the allegations against him are based on professional services Winter provided in his capacity as a BMB employee and that the insurer owed him a duty to defend.



High-profile cases, particularly those charged with headline grabbing fraud allegations, can sometimes be difficult from an insurance perspective. Insurers may well feel that the kinds of things alleged are not the kinds of things for which they undertook to provide insurance. On the other hand, at the outset of a case, the allegations are as yet unproven. And the defendants dragged into a high profile cases need to be able to defend themselves.


There may or may not ultimately be indemnity coverage under the policy for the claims against BMB and Winter. But in the meantime, the defendants – who are insureds under the policy – face very serious allegations for which they would likely have trouble defending themselves if there were no insurance available. Unfortunately, in addition to having to defend themselves against very serious allegations in the underlying cases, they also had to deal with a lawsuit brought against them by the insurer from whom they were hoping to obtain a defense.


As Judge Atlas found, the complaint contained allegations that potentially come within the policy’s coverage, and so the insurer was obliged to provide a defense. If the defendants (and their insurer) are fortunate, their defense will succeed and the need to address the indemnity issues will never arise.