Ninth Circuit bitmapPublic company D&O insurance provides coverage for “Securities Claims.” But whose securities must be involved in a claim in order for coverage to be triggered? Must the claim involve the securities of the corporate policyholder itself? Or can coverage be triggered by a claim involving mortgage-backed securities the corporate policyholder issued as part of its financial operations?


According to an unpublished February 8, 2016 Ninth Circuit opinion (here), in order for Securities Claim coverage to be triggered under Impac Mortgage’s D&O insurance policy, the claim at issue must have involved the company’s own securities. Claims involving securities backed by residential mortgages that Impac sold to finance its mortgage-lending operations did not trigger the policy’s coverage, because the mortgage-backed securities are not “securities of” Impact Mortgage.



Until mid-2007, Impac sold residential mortgages. To finance its mortgage operations, Impac, acting through affiliated entities, transferred its mortgages to a trust, which in turn, acting through an underwriter, sold the mortgage-backed securities to investors.


In a series of lawsuits, the Federal Home Loan Bank of Boston, the Federal Reserve Bank of New York, Citigroup, and others accused Impac of misrepresentations, deceptive trade practices, and other alleged misconduct in connection with billions of dollars in mortgage-backed securities sales.


Impac sought coverage under its D&O insurance policy for the fees and costs it incurred in defending the various underlying claims. The policy provides coverage for “Securities Claims.” The policy defines the term “Securities Claim” to mean:


a Claim . . . made against any Insured: (1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities . . . which is: (a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale of or offer or solicitation of an offer to purchase or sell any securities of an Organization; or (b) brought by a security holder of an Organization with respect to such security holder’s interest in securities of such Organization; or (2) brought derivatively on the behalf of an Organization by a security holder of such Organization.


The D&O insurer denied that it had coverage for Impac’s defense costs, contending that the underlying lawsuits were not “Securities Claims” within the meaning of the policy. Impac sued the D&O insurer in California state court, and the insurer removed the action to the Central District of California. As discussed here, in a February 26, 2013 order, Judge Josephine Staton granted the D&O insurer’s motion for summary judgment. Impac appealed.


The February 8, 2016 Opinion

In a short, unpublished per curiam opinion dated February 8, 2016, the Ninth Circuit affirmed the district court.


Impac had argued, with respect to the phrase “securities of” in the definition of the term Securities Claim, that the phrase included any securities to which it had a connection. However, the appellate court said, “the phrase ‘securities of,’ like ‘stock of,’ is ordinarily understood as meaning ‘shares in.’”


While Impac had cited instances, for example in SEC regulations, where the phrase “securities of” had been used in a way consistent with its argument, the appellate court said these instances “merely demonstrate that ‘securities of’ can mean ‘securities issued by’ if the surrounding language so indicates; but here, the policy contains no such indication.”


The Court also said that the interpretation that Impac urged “flies in the face of the California Supreme Court’s warning not to elevate possible dictionary meanings over context in interpreting language in insurance policies.”


Finally, the court concluded that coverage for the underlying claims was also preclude by the policy’s E&O exclusion, which precludes coverage for claims “arising out of, based upon, or attributable to any Insured’s or Organization’s performance of (or failure to perform) any professional services.”



The appellate court’s determination that the phrase “securities of” in Impac’s D&O insurance policy refers to Impac’s own shares is, in and of itself, unremarkable. What is perhaps of greater interest is the question of whether or not a D&O insurance policy should be providing coverage for claims that alleged violations of the federal securities laws, even if the claims did not involve a corporate policyholder’s own securities.


There are various alternatives and extensions of the phrase “Securities Claim” to be found in public company D&O insurance policies. One way to define the term is as the term was defined here; that is, by reference to the corporate policyholder’s own securities. An alternative way to define the term is with reference to the securities laws; that is, involving a claim that the securities laws have been violated. The definition at issue in this case in fact expressly utilizes language referring to the violations of the securities laws, but then qualifies the language in a series of subordinate clauses requiring the involvement of “securities of” the company.


It is in my mind a fair question whether the definition of the term “Securities Claim” as used in D&O insurance policies properly ought to include not only claims involved “securities of” the corporate policyholder, but also any claim involving an alleged violation of the securities laws, whether or not the “securities of” the corporate policyholder are involved. D&O insurers concerned that this definition would be overly broad could, as the policy at issue here did, preclude coverage for claims of a kind for which it does not want to provide coverage.


There are claims that can arise when a company is hauled into a lawsuit alleging violations of the securities laws when the specific securities at issue may not be those of the insured company.


A couple of examples come to mind: say, for example, when the insured company has spun out one of its divisions as a stand alone, publicly traded entity, and the separate entities file claims not only against the new company but out of the predecessor firm as well. (For an example of this kind of claim, refer here). Another example is an aiding and abetting type lawsuit; say, for example, an insured company is alleged to have violated the securities laws by aiding another company misrepresent its financial condition (sure, private claimants can’t assert these kinds of claims under the federal securities laws, but the SEC can, and private claimants could assert their claims in reliance on state law liability theories). A D&O insurance policy limiting “Securities Claims” solely to claims relating to securities “of” the company arguably might preclude coverage for these claims. For that reason, I have preferred definitions of the term “Securities Claim” that extends coverage to any claim alleging a violation of the federal securities laws or state or local equivalents.


From the factual allegations in the Impac case, I can see that from the carrier’s perspective at least one flaw with a definition of the term “Securities Claim” that would extend coverage to any alleged violation of the securities laws. If Impac’s D&O policy had included this “any violation of the securities laws” formulation, the policy might well have picked up coverage for the claims against Impac arising from its mortgage securitization activities, which is a result I am certain that the D&O insurer did not intend here.


Recognition of this potential shortcoming to the “any violation of the securities laws” formulation suggests a need to devise a new formulation, one that would not hazard the kind of unintended result I noted in the preceding paragraph. Perhaps the “any violation of the securities laws” formulation could include a provision expressly precluding coverage for the company’s issuance of securities other than its own securities.


This is a topic that would benefit from further discussion. I welcome readers’ thoughts on this topic, under the heading – “toward a more perfect definition of the term ‘Securities Claim’.”