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Beazley Insurance Company, Inc. v. Ace American Insurance Co.

United States Court of Appeals, Second Circuit

January 22, 2018

BEAZLEY INSURANCE COMPANY, INC., Plaintiff-Appellant,
v.
ACE AMERICAN INSURANCE COMPANY, ILLINOIS NATIONAL INSURANCE COMPANY, Defendants-Appellees.

          Argued: August 23, 2017

         The NASDAQ public stock exchange conducted the initial public offering for Facebook, Inc. NASDAQ encountered a variety of technical difficulties in executing the IPO that resulted in trades not being performed properly. Retail investors sued NASDAQ, and those claims were eventually settled for $26.5 million.

         NASDAQ maintained both errors and omissions ("E&O") and directors' and officers' ("D&O) insurance policies. Appellant Beazley Insurance Company was the second-level E&O carrier; appellees ACE American Insurance Company and Illinois National Insurance Company were the first and second level D&O carriers, respectively. ACE and Illinois National disclaimed coverage under the D&O policies. Beazley paid out its policy limit of $15 million in E&O coverage subject to an agreement with NASDAQ in which NASDAQ assigned Beazley its contractual rights against ACE and National. Beazley then sued ACE and National for coverage under D&O policies.

         The United States District Court for the Southern District of New York (Rakoff, J.) ultimately granted ACE and Illinois National summary judgment. Beazley Ins. Co. v. ACE Am. Ins. Co., 197 F.Supp.3d 616 (S.D.N.Y. 2016). The district court found that (1) retail investors in Facebook were unambiguously "customers" of NASDAQ; (2) the underlying securities claims against NASDAQ arose out of NASDAQ's provision of professional services; and (3) thus, the claims were excluded from coverage pursuant to the D&O policy's professional services exclusion.

          KEVIN KIEFFER, Troutman Sanders LLP (Ryan C. Tuley, on the brief), Irvine, CA for Plaintiff-Appellant Beazley Insurance Co., Inc.

          JONATHAN D. HACKER, O'Melveny & Myers LLP (Bradley N. Garcia, on the brief), Washington, DC, for Defendant-Appellant Ace American Insurance Company.

          ALEXANDER S. LORENZO, Alston & Bird LLP, New York, NY, for Defendant-Appellant Illinois National Insurance Company.

          Before: POOLER and LYNCH, Circuit Judges, and COGAN, District Judge. [1]

          POOLER, CIRCUIT JUDGE

         The NASDAQ public stock exchange conducted the initial public offering for Facebook, Inc. NASDAQ encountered a variety of technical difficulties in executing the IPO that resulted in trades not being performed properly. Retail investors sued NASDAQ, and those claims were eventually settled for $26.5 million.

         NASDAQ maintained both errors and omissions ("E&O") and directors' and officers' ("D&O") insurance policies. Appellant Beazley Insurance Company was the second-level E&O carrier; appellees ACE American Insurance Company and Illinois National Insurance Company were the first and second level D&O carriers, respectively. ACE and Illinois National disclaimed coverage under the D&O policies. Beazley paid out its policy limit of $15 million in E&O coverage subject to an agreement with NASDAQ in which NASDAQ assigned Beazley its contractual rights against ACE and National. Beazley then sued ACE and National for coverage under D&O policies.

         The United States District Court for the Southern District of New York (Rakoff, J.) ultimately granted ACE and Illinois National summary judgment. Beazley Ins. Co. Inc. v. ACE Am. Ins. Co., 197 F.Supp.3d 616 (S.D.N.Y. 2016). The district court found that (1) retail investors in Facebook were unambiguously "customers" of NASDAQ; (2) the underlying securities claims against NASDAQ arose out of NASDAQ's provision of professional services; and (3) thus, the claims were excluded from coverage pursuant to the D&O policy's professional services exclusion. We agree with the district court that federal securities law makes clear that retail investors in company stock are "customers" of NASDAQ within the meaning of the insurance policies at issue. We also agree that the claims in the underlying complaint arose out of the provision of "professional services, " as plaintiffs could not prevail without demonstrating that their losses flowed from NASDAQ's failure to properly process their trades. We thus affirm the district court's grant of summary judgment on the issue of indemnification.

         BACKGROUND

         NASDAQ is a public stock exchange that provides an electronic trading platform on which its members, registered broker-dealers, execute securities transactions. See NASDAQ OMX Group, Inc. v. UBS Sec. LLC, 770 F.3d 1010, 1013- 14 (2d Cir. 2014). Members trade on NASDAQ both on their own behalf, and on behalf of retail investors. See id.

         As relevant here, NASDAQ maintained two stacks, or towers, of insurance coverage. NASDAQ purchased a tower of E&O coverage from Chartis Specialty Insurance Company, Beazley and ACE. Chartis provided primary coverage of $15 million, above a $1 million self-insured retention, for all "[d]amages resulting from any Claim . . . for any Wrongful Act of the Insured" that "occur[ed] . . . solely in rendering or failing to render Professional Services." App'x at 204. The Beazley E&O policy provided excess coverage with another $15 million in coverage, and "follow[ed] form" to Chartis' policy, that is, provided coverage on the same terms. App'x at 192. ACE's policy provided second level excess insurance, with a $15 million limit after the Chartis and Beazley policies were exhausted. [App'x 177] Altogether, NASDAQ purchased $50 million in E&O coverage.

         NASDAQ also purchased a tower of D&O coverage from ACE and Illinois National. The ACE D&O policy was primary and provided $15 million in coverage after a $2 million self-insurance retention for liability incurred by certain officers and directors for any "[w]rongful [a]cts." App'x at 1624. The ACE D&O also provided coverage to NASDAQ for any losses NASDAQ became obligated to pay "by reason of a Securities Claim . . . for any Wrongful Acts." App'x at 1624. The ACE D&O policy also contained a "professional services exclusion" that provided that ACE "shall not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services." App'x at 1628, 1653. Illinois National issued an excess policy for an additional $15 million in coverage that follows form with the ACE D&O policy.

         NASDAQ carried Facebook's initial public offering on May 18, 2012. It did not go smoothly-NASDAQ's trading platform suffered a series of technical failures, resulting in the improper processing of orders to buy and sell stock. Retail investors in Facebook sued NASDAQ, alleging that they suffered losses as a result of NASDAQ's technical failures. In all, more than 40 lawsuits related to the Facebook IPO ...


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