Everyone involved in any way in D&O insurance transactions has seen an insurance buyer choose to buy a policy that while less expensive provides narrower coverage. Sometimes the price difference might be slight, sometimes the difference could be significant. But the fact is, the most expensive policy is the one that doesn’t provide coverage when it should, and in the event of a claim, narrower coverage can translate into a claims denial.  Anyone who wants to see what this might look like in action will want to consider the recent ruling out of the Middle District of Florida, in which the court held that the securities exclusion in a private company D&O insurance policy precluded coverage for an underlying claim against the policyholder and certain of its directors and officer. The January 2, 2019 decision in the case can be found here. A January 25, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the decision can be found here.



Colorado Boxed Beef (CBB) and certain of its directors and officers were named as defendants in a state court lawsuit (the “underlying lawsuit”). The plaintiffs in the underlying lawsuit alleged that they had sold to the defendants in the underlying lawsuit shares of CBB stock that the plaintiffs owned. The plaintiffs alleged that in connection with the transaction the defendants had made misrepresentations in order to drive down the price paid in the transaction. The plaintiffs alleged seven causes of action: fraud in the inducement; negligent misrepresentation; violation of Florida Statute, section 517.301; breach of fiduciary duty; unjust enrichment; conspiracy to defraud; and rescission.


CBB submitted the lawsuit to its D&O insurance carrier as a claim under its policy. The insurer denied coverage for the claim in reliance on Exclusion K of the policy, precluding coverage for securities claims. CBB and the individuals named as defendants in the underlying lawsuit filed an action against the D&O insurer in the Middle District of Florida seeking a judicial declaration that there was coverage under the policy for the underlying claim. The insurer filed a motion to dismiss.


Exclusion K precludes coverage under the policy for claims “[b]ased upon, arising out of, or in any way involving … the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or see, any debt or equity securities[.]”


The January 2, 2019 Decision

In an order filed on January 2, 2019, Judge William F. Jung, applying Florida law, granted the insurer’s motion to dismiss, holding that Exclusion K precluded coverage, and that the insurer had no duty to defend or indemnify the defendants in the underlying lawsuit.


In considering the exclusion’s preclusive effect, Judge Jung first considered what he called the exclusion’s “broad” preamble, noting that given the exclusion’s wording, if the claims for which the company was seeking coverage “in any way” involve security sales, “the exception applies.” And the underlying complaint, Judge Jung said, “does indeed involve and arise from security sales.” The “entire complaint seeks to revoke, rescind or get damages for the sale of stock in Colorado Boxed Beef.” Judge Jung then went through each of the seven counts in the underlying complaint, determining as to each that it related to the stock transaction.


CBB sought to argue that some of the alleged activity both preceded and continued after the execution of the Stock Purchase Agreement (SPA) and that one of the plaintiffs in the underlying lawsuit (Sullivan) was not a party to the SPA. While that may be true, Judge Jung said, the alleged activity and the Sullivan’s involvement are “only relevant to the underlying action insofar as it relates to the SPA.” The “heart of the issue” in the underlying lawsuit is “the alleged misrepresentation and omissions “of CBB and the other individuals “relating to the securities sales, not the underlying conduct.”


CBB also sought to argue there were allegations in the underlying complaint for self-dealing and usurpation of corporate opportunity that “could stand alone” as Claims for Wrongful Acts under the policy. However, Judge Jung said, “when read with the underlying complaint, these acts do not stand alone …. These are the very acts by which the securities fraud is alleged to have been accomplished.” That the allegations might be sued upon in a separate action “does not change what they are: part of the scheme to undervalue the company and cheat the sale price (i.e. ‘relating in any way … and arising out of’ stock sales).”



Given the wording of Exclusion K in the applicable insurance policy, it is hardly surprising that Judge Jung concluded that coverage for the underlying claim  is precluded. What is surprising to me is the wording of Exclusion K.


Let me just emphasize at the outset of my discussion of the policy at issue I am not trying to suggest in any way that there is anything wrong with the way the policy was placed or with the fact that the policyholder’s coverage was placed on this policy. I have no way of knowing what other options were available for this company at the time its insurance was placed, what trade-offs might have been weighed in the policy placement, or what considerations might have led to the placement of policyholder’s insurance coverage on this policy. I am expressing no opinions here having anything to do with the placement of this policy.


That said, the fact is, the wording of Exclusion K in this policy is unusual. To be sure, almost every private company D&O insurance policy has a securities exclusion – but the exclusions in most other policies are worded differently and apply differently than this exclusion in this policy.


In order to illustrate my point here, I did a little exercise. I reviewed three private company D&O insurance policies, one from a mainstream admitted insurer, one from a specialty insurer that concentrates on providing insurance for smaller companies, and one from a surplus lines insurer. (I knew before I did this exercise what the outcome would be, but I went through the process just to substantiate my point.)


All three of the policies in my sample do indeed have securities exclusions. The three exclusions are worded quite a bit differently from each other. But the exclusions do have one important thing in common – in each case, the exclusions do not apply to preclude coverage for all transactions in securities; rather, the exclusions apply to preclude coverage only for public transactions in securities.


For example, the mainstream admitted carrier’s exclusion precludes coverage for “any public offering of securities of the Organization” or “the purchase or sale of any publicly traded securities.”


The surplus lines insurer’s exclusion applies only to “any public offering of, or purchase or sale of, equity or debt securities issued by any Company.”


The specialty insurer’s policy’s exclusion applies only “any initial public offering of securities undertaken and consummated by the Company” or “the actual or alleged violation of [the securities laws] subsequent to the consummation of an initial public offering.”


Both the mainstream admitted insurer’s exclusion and the surplus lines insurer’s exclusion expressly stated that the exclusion does not apply to any transaction in securities “that are not required to be registered.”


The exclusion at issue in this coverage dispute is obviously quite a bit different than the exclusions in the three policies in my sample. Indeed the exclusion that precluded coverage here is quite a bit different than what you are typically going to find  in most private company D&O insurance policies. The exclusion in the policy at issue precluded coverage for claims arising from all securities transaction, whereas most private company D&O insurance policies preclude coverage only for public securities transactions. This wording difference clearly made a difference in the outcome of this coverage dispute.


Wording the securities exclusion so as to preclude coverage for all securities claims represents a very significant diminution in coverage. The fact is that transactions in securities are a frequent source of D&O claims. For many companies, the possibility of claims arising out of securities transactions is a significant reason for purchasing D&O insurance. Indeed, it could be argued that a dispute arising out of a securities transaction is the very kind of claim for which the coverage exists.


If nothing else, the outcome of this coverage dispute shows that policy wording matters. All too often, insurance buyers make their decision of which insurance to buy based on price alone. However, when a serious claim arises, no one remembers the small cost savings that might have been achieved when the insurance was placed; the only thing that matters is whether or not the claim is covered.


There is another important thing that the outcome of this coverage dispute shows, and that is that not all policies are the same. In fact, the policy wording in and coverage available under the various private company D&O insurance policies in the marketplace vary widely. Insurance buyers cannot be expected to recognize and weigh the relative importance of the differences between and among the various policies. That is the reason why well-advised companies — even small private companies — make sure to have a knowledgeable and experienced adviser specializing in the placement of D&O insurance involved in their D&O insurance transactions. (Again, I am not finding fault with anyone about the fact that this policyholder’s insurance was placed on this policy, I am not expressing any opinion about the insurance placement here.)


I know others will want to try to point out that other terms, conditions, or exclusions might also have operated here to preclude coverage. It is of course possible that if coverage had not been precluded here by the securities exclusion that some other policy terms, condition, or exclusion might have affected the availability of coverage, I don’t know. All I know is that coverage was precluded here by the securities exclusion, and that a different wording of the exclusion might possibly have produced a different outcome.


One final note. While I believe that when it comes to insurance, coverage matters more than price, that doesn’t mean that only right approach is going to be paying more. Just paying more provides no assurance that the coverage purchased will be the broadest available. The best policy to purchase is the one that has the best combination of price and terms. That is yet another reason why the best approach for companies purchasing D&O insurance is to enlist the assistance of a knowledgeable and experienced adviser specializing in D&O insurance.


Top Ten Stories in D&O in 2018: The Webinar: For those who were unable to attend RT ProExec  webinar in which I discussed the Top Ten D&O Stories live a few days ago, there is now a video recording of the webinar available on YouTube. I have linked to the YouTube video below. (At the beginning of the video you may need to turn the volume up .) If you watch the video and you have any thoughts or comments about the video, I would be grateful if you would drop me a note and let me know what you think.



Emerging Professional Liability Claims Seminar: On Tuesday, February 5, 2019, the American Bar Association Tort and Trial Practice Section, the Professional Liability Defense Federation, are sponsoring a seminar at Fordham Law School in New York on the topic “Disasters: The Emerging D&O, E&O, and Corporate Risks.” This event, which will begin at 12:30 pm, features a distinguished list of panelists and speakers from law firms, insurance carriers, and companies, to discuss approaches for companies to take to prevent, respond to, and resolve disasters. Further information about this seminar can be found here.