In this case, the trustee of a bankrupt securities underwriter and broker brought an adversary proceeding against a securities broker’s insurer for its alleged breach of contract in denying coverage for claims arising out the underwriting and sale of bonds. The D&O policy contained an endorsement that excluded coverage for “any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged violation of: (1) the Securities Act of 1933, the Securities Exchange Act of 1934…any other federal law rule or regulation with respect to the regulation of securities…” The court held that under Minnesota law, the exclusion was not limited to claims alleging actual violations of federal and state securities laws but also excluded coverage for “any claim based on, arising out of, directly or indirectly resulting from… any actual or alleged violation of” those laws.
In upholding the broad applicability of the exclusion, the Eighth Circuit reversed the previous rulings of the bankruptcy court and district court, which were based on the broker’s testimony that the standard securities exclusion was intended to exclude coverage for liability arising only out of the insured’s sale of its own stock. The Eighth Circuit stated that because the insurance policy’s endorsement language was unambiguous in its scope and intent, the lower court’s reliance on extrinsic evidence of the parties’ intent was improper. Additionally, the appellate court noted that its decision does not render the policy illusory because the policy still could provide coverage for various non-securities actions.