In a number of recent posts (most recently here), I have emphasized the importance of the wording of the securities exclusion in private company D&O insurance policies. A recent case out of Florida underscores the importance of the securities exclusion wording and illustrates how an unusual wording can lead to the preclusion of coverage for claims that might otherwise be covered. The decision also highlights the extent of the preclusionary effect from exclusions written on a very broad basis. Middle District of Florida Judge William Jung’s January 2, 2019 decision can be found here. A March 5, 2019 Law 360 article from the Jenner & Block firm about the decision can be found here.



The underlying claim arises out of a transaction in which several individuals (the “buyers”), officers and directors of Colorado Boxed Beef Co. Inc. (“CBB”), purchased shares of CBB from certain sellers. The transaction was set out in a Stock Purchase Agreement (“SPA”). After the transaction was completed, the sellers initiated a lawsuit in Florida state court in which the sellers alleged that the buyers had induced the sellers to sell the shares based on material misrepresentations of fact that allegedly drove down the price paid in the sales transaction.


The sellers state court complaint alleged seven causes of action including: (1) fraud in the inducement; (2) negligent misrepresentation; (3) violation to Florida Statute section 517.301; (4) breach of fiduciary duty; (5) unjust enrichment; (6) conspiracy to defraud; and (7) rescission.


The individual defendants in the underlying action submitted the lawsuit to CBB’s D&O insurer as a claim under the policy. The insurer denied coverage for the claim in reliance on Exclusion K in the policy (described below). The company and the individuals initiated a coverage lawsuit against the insurer. The insurer moved to dismiss. The court granted the company’s motion to dismiss but gave the company leave to amend its complaint. The company filed an amended complaint and the insurer filed a renewed motion to dismiss.


The Relevant Policy Language

Exclusion K of the policy precludes coverage for claims “based 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 sell, and debt or equity securities[.]”


The January 2, 2019 Order

On January 2, 2019, Judge Jung, applying Florida law, granted the insurer’s renewed motion to dismiss, with prejudice, holding that Exclusion K precluded coverage for the entire underlying claim.


Judge Jung began his analysis by noting that the exclusion’s “based upon, arising out of” preamble sweeps very broadly, noting that if the claims for which the company seeks coverage “in any way” involve security sales, the exclusion applies —  and, he added, “the underlying complaint does indeed involve and arise from security sales.” The entire complaint, he noted, “seeks to revoke, rescind, or get damages for the sale of stock in Colorado Boxes Beef.” Each separate claim in the underlying complaint “directly connects [the alleged misconduct] to the SPA.”


Judge Jung noted that in its amended complaint, the company had made a “valiant effort” to “recast the underlying complaint’s nature away from the rescission/security sales damages.” The company, he noted, had added allegations in the insurance coverage action that highlight the self-dealing and usurpation of corporate opportunity claims in the underlying complaint, arguing that these allegations could stand alone as claims within the meaning of the policy.


However, Judge Jung said, “when read with the underlying complaint, these acts do not stand alone.” They are “part and parcel of the fraudulent inducement” and the purchase of the sellers’ shares. Notwithstanding the company’s contention that the underlying allegations pre- and post-date the transaction, these acts, Judge Jung said, are ways that the buyers allegedly cheated the sellers  into taking low value – “these are the very acts by which the securities fraud is alleged to have been accomplished.” The fact that the self-dealing allegations might have been 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.” These allegations, he said, are “relating in any way to … and arising out of” stock sales, and therefor excluded from coverage under Exclusion K.



Given the exclusionary language at issue, and given the underlying allegations, the outcome of this insurance coverage dispute is arguably unsurprising. One possible interpretation of the outcome is that it is the inevitable result of the policy’s unusual exclusionary wording. As the Jenner & Block firm noted in its article about this decision to which I linked above, “the formulation of the exclusion in most other policies is quite different than Exclusion K.”


For example, in one leading D&O insurer’s base form for its private company D&O insurance policy, the equivalent exclusion is headed “Publicly Traded Securities,” and the exclusion specifies that it applies only to trading or transactions in publicly traded securities; the exclusion specifies in pertinent part that it preclude coverage for claims “based upon, arising from or in consequence of: (1) any public offering of securities issued by any Organization or Outside Entity, or (b) the purchase or sale of any publicly traded securities for which the Organization is subject to the Securities Exchange Act of 1934.”  The preclusionary effect of this more standard exclusion is limited solely to the public offering of or trading in publicly traded securities.


As I have emphasized in the past, the wording of the securities exclusion in the private company D&O insurance policy is very important. As this case highlights, differences in the wording of the securities exclusion can have a significant impact on the availability of coverage in the event of a claim. I do not mean to suggest that anyone erred in connection with the placement of this policy; I have no way of knowing what terms and conditions might have been available to CBB at the time this policy was placed, or what tradeoffs may have been involved in the acceptance of the terms and conditions in this policy. However, it does seem clear that an exclusion with the more standard focus solely on transactions involving only publicly traded securities likely would not have precluded coverage for this transaction.


There is another aspect of the exclusion that arguably also was important in the outcome of this coverage dispute, and that is the broad basis on which it was written. The exclusion’s broad preclusion of claim “based upon, arising out of or in any way involving” transactions in securities was important to Judge Jung’s conclusion that the exclusion precluded coverage even for the underlying allegations that he conceded could have stood alone. As the authors of the law firm memo noted, this case is “a cautionary tale to policyholders regarding the reach of an exclusion with such broad language.”


While the broad preamble language clearly was a factor in Judge Jung’s conclusion that the coverage for the entirely claim was precluded, in the current marketplace there may be relatively little that policyholders can do to ameliorate the broad sweep of this type of exclusion. As the language of the more traditional exclusion that I recited above shows, the standard securities exclusion often includes the broad preamble. Many insurers may be reluctant to alter this wording, out of a conservative effort to try to minimize potential exposure for claims arising from transactions in publicly traded securities.


As regular readers know, one of my hobby-horse issues is insurers’ use of overly broad exclusionary language that results in exclusions sweeping far more broadly than they should. I think there is a good case that could be made that in many if not most situations the insurer’s use of a broad preclusionary preamble is unnecessary to achieve the intended exclusionary effect and that the result of the use of the broad preamble is the preclusion of claims that appropriately should be covered. However, the reality is that there are certain exclusions that the insurers are going to be even less willing to use narrower language, and the securities exclusion arguably is one of those exclusions – which might make sense if (and only if) the exclusion is limited to transactions in publicly traded securities. It makes less sense for the exclusion here, because the upshot of the exclusion at issue here is that the exclusion precludes coverage for claim involving securities transactions in any way, the result of which is the preclusion of coverage that not only should be covered but arguably represent the very type of claim for which this type of insurance is purchased.


The law firm’s memo’s authors recommend that “policyholders carefully review the exclusions to their D&O policies, taking particular note of the broad preamble language to exclusions … as well as any unusual formulations of otherwise standard policy exclusions.” Where such terms exist, “insureds may be able to work with their insurance brokers or outside counsel to obtain more favorable terms.”  All of which is another way highlighting a point I often make on this site, which is the importance of involving knowledgeable and experienced insurance advisers in the policy placement process.


One final note. The company has filed a notice of appeal of Judge Jung’s decision and so this case will now head to the appellate court. There may yet to be more to be heard on these issues in this case.