Federal Judge Rules That Professional Liability Insurer Must Defend Insurance Broker Against Ponzi Scheme Lawsuits

Federal Judge Rules That Professional Liability Insurer Must Defend Insurance Broker Against Ponzi Scheme Lawsuits

The U.S. District Court for the Southern District of Texas recently ruled that a professional liability insurer must defend its insured, an insurance brokerage and consulting firm, against claims by victims of the alleged Stanford Financial ("Stanford") Ponzi scheme.  Endurance American Specialty Ins. Co. v. Brown, Miclette & Britt, Inc., et al., Civ. no. H-09-2307 (S.D. Tex. Jan. 4, 2010).

The insured provided Stanford's bank, Stanford International Bank, with letters attesting to the Stanford's insurance coverage, which the victims allege were false.  The victims sued the firm and an individual broker for securities fraud and negligence.  The victims based their securities fraud claim on the theory that by issuing the letters, the firm "crossed the line from being mere insurance brokers for Stanford Financial Group, and essentially acted as Stanford Financial's sales agent."

In the coverage suit, the insurer argued that the victims' lawsuit was excluded under the policy's exclusion for securities violations.  The court held that the insurer had a duty to defend because of the negligence claim.  The court distinguished contrary cases in which the excluded and covered claims were inseparable.  The court found that in this case, the underlying factfinder could find that the firm's conduct did not "cross the line from being mere insurance brokers" but did constitute negligence.  The court also held that the individual broker was an "insured" under the policy, because his alleged concealment of his role as director of Stanford was committed as an employee of the insured firm.

© Copyright 2010 by Edwards Angell Palmer and Dodge LLP. All rights reserved. Reprinted with permission. This blog originally appeared on the InsureReinsure Blog. The InsureReinsure Blog is one of the Insurance Law Center's Top 50 Insurance Blogs for 2009. See the Top 50 Insurance Blogs list.

Please click on the above link to download a copy of Endurance American Specialty Ins. Co. v. Brown, Miclette & Britt, Inc., et al.

 

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