The California Court of Appeal for the Second Appellate District affirmed the trial court’s granting of summary judgment to the insurer, holding there is no coverage for undisclosed claims that arose out of the same events as a disclosed claim. The facts underlying the undisclosed claims should have been revealed to the insurer in applying for professional liability insurance.
The insured, Crown Capital Securities, is a securities firm whose broker-dealers recommended real estate investments through an entity, DBSI, that subsequently filed for bankruptcy. On October 19, 2009, a court appointed bankruptcy examiner issued a final report with respect to DBSI’s operations, concluding that DBSI engaged in a Ponzi scheme to defraud and misappropriate funds from investors.
A week later, on October 26, 2009, one of Crown Capital’s investors, George Bou-Sliman, sent a letter to Crown accusing the firm of “flawed investigation [into DBSI] resulting in our loss of investment capital.” It is unclear whether Bou-Sliman took any further action against Crown Capital.
Approximately six months later, on April 20, 2010, Crown Capital applied for professional liability insurance with Endurance American Specialty Insurance Company. Crown Capital disclosed Bou-Sliman’s claim. However, Crown Capital denied being aware of “any fact, circumstance, incident, situation, or accident … that may result in a claim being made against” it. Based on Crown Capital’s representations, Endurance issued a professional liability insurance policy for the April 1, 2010-April 1, 2011 policy period. The application contained the following exclusion:
NOTE: It is agreed that any claim or lawsuit against the Applicant … arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed … is hereby expressly excluded from coverage under the proposed insurance policy. (“Application Exclusion”)
On April 21, 2010 (just three weeks into the policy), Curt Bochner, who also invested in a DBSI property based on Crown Capital’s recommendations, initiated arbitration proceedings against Crown Capital for losses he sustained. Two more Crown Capital clients, Susan Biles and Linda Grana, also initiated arbitration proceedings for losses sustained as a result of investing in DBSI during the Endurance policy period. Crown Capital reported all three claims to Endurance.
Endurance denied insurance coverage for Bochner, Biles, and Grana’s claims and refused to defend. Crown Capital filed suit against Endurance, asserting causes of action for reformation, breach of contract and bad faith. Endurance answered and cross-claimed for declaratory relief regarding the Bochner, Biles, and Grana claims.
Endurance subsequently moved for summary judgment on its cross-claims on the ground that the Bochner, Biles, and Grana claims were excluded from coverage pursuant to the Application Exclusion. The trial court granted Endurance’s motion, reasoning that the Bochner, Biles and Grana claims all arose out of a “fact, circumstance, act, error or omission” as the Bou-Sliman claim, which “disclosed an array of investments under the DBSI umbrella, the failure of which were tied to the DBSI activities.” The trial court entered judgment “on all matters related to the Bochner, Biles, and Grana claims” in favor of Endurance and against Crown Capital.
The Court of Appeal affirmed the trial court’s ruling. The appellate court rejected Crown Capital’s argument that the Bochner, Biles and Grana claims did not arise out of the Bou-Sliman claim because none of three claims involved the same investor, the same investment property, or the same broker-dealer.
Instead, the Court of Appeal focused on the DBSI’s operations, specifically, the Ponzi scheme allegedly perpetrated by DBSI and the contention that Crown Capital failed to exercise due diligence in assessing the viability of DBSI investments, all of which Crown Capital was aware of at the time it applied to Endurance for insurance. “Thus, Crown Capital was aware of facts and circumstances that might result in a claim or clams being made against it, which awareness it was required to disclose[.]” It was irrelevant that the Bochner, Biles, and Grana claims did not involve the same investor, the same investment property, or the same broker-dealer.
The Court of Appeal further held that the Application Exclusion’s use of the term “arising from any fact, circumstance, act, error or omission” was not ambiguous. Crown Capital argued that the trial court interpreted the “arising from” language too broadly in applying it to future claims “merely because they might have some relation to DBSI.” Instead, Crown Capital argued the court should have applied the Application Exclusion narrowly to exclude from coverage only those claims that involved Bou-Sliman or his specific DBSI investment.
The Court of Appeal disagreed, holding that coverage for the Bochner, Biles and Grana claims was not excluded because the claims had some relation to DBSI. Instead, these three claims were properly excluded because they related to and arose from DBSI’s alleged operation of a Ponzi scheme and Crown Capital’s alleged failure to exercise due diligence in recommending DBSI investments to its investors. These are the facts and circumstances that Crown Capital was aware of that might result in a claim or claims made against the insured.
The Court of Appeal further held that, besides the negligence cause of action against Crown Capital, all of the other causes of action asserted by Bochner, Biles and Grana were also excluded because they all arose out of losses sustained as a result of their investments in DBSI per the recommendation of Crown Capital broker-dealers. Accordingly, “the entire Bochner, Biles, and Grana [c]laims, regardless of the theory of liability, were excluded from coverage under the Application Exclusion.”
For the opinion click here.
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.