The federal district court in Massachusetts has declared that a professional liability insurer owes no duty to defend its insured, an accounting firm, against a suit alleging that the accounting firm negligently advised its client to invest in a Ponzi scheme.  A copy of the decision in Salomon v. Philadelphia Insurance Companies, No. 13-10378-DPW (D.Mass. Jan. 23, 2014), is available here.  The decision is significant not only because the court gave effect to a plainly-worded policy exclusion, but also because the court correctly determined that all of the claims alleged in the underlying action arose out of the same “logically or causally connected” acts, errors, or omissions, and therefore constituted but a single excluded “claim.”

The coverage case stemmed from an underlying action brought in the Massachusetts Superior Court.  Harry Davidson was a client of Robert Salomon and the latter’s accounting firm, Friedman, Suvalle & Salomon, P.C.  Davidson alleged that, over a period of three years, Salomon provided standard accounting services as well as occasional investment advice.  On Salomon’s recommendation, Davidson invested a total of $750,000 in promissory notes made by one Richard Elkinson, whom Salomon advised owned a company that provided uniforms to municipalities and for major athletic events.  In fact, Elkinson had no business, and was operating a Ponzi scheme; he was indicted on multiple counts of mail fraud in January 2010.  Davidson lost his entire investment.  Davidson subsequently sued Salomon and the accounting firm, as well as others involved in the investment scheme.  Eight of the counts in his complaint were germane to the coverage dispute: negligent misrepresentation, breach of fiduciary duty, and six specific violations of the Massachusetts Uniform Securities Act.

Salomon and the accounting firm tendered Davidson’s suit to Philadelphia, their professional liability carrier, which declined coverage on the basis of policy exclusions for claims “arising out of” professional services for any client to whom an insured “promoted, solicited or sold securities, real estate or other investment”; a similar exclusion for claims “arising out of the sale or solicitation of securities” or any other investment; and a Securities Practice Exclusion, which barred coverage for any claim “arising out of an actual or alleged violation of…any State Blue Sky Laws” or any rules, regulations or amendments issued in relation to such acts, or for any claim “based upon common law principles of liability if made in connection with an actual or alleged violation of any law” listed previously.

After reviewing controlling Massachusetts law on policy construction, the court concluded that, when read as a whole, the policy was “not susceptible to…an interpretation” in favor of coverage.  Accordingly, the policy’s endorsement extending coverage for financial planning could not overcome the cited exclusions, which barred coverage for claims involving the solicitation and sale of investments in contravention of the Massachusetts Blue Sky laws and attendant common-law duties.

The court held that the entire complaint fell “squarely within the scope of the Securities Practice Exclusion” because the common law claims were made in connection with an alleged violation of the Massachusetts Blue Sky laws, and the statutory claims were plainly excluded.  Because the policy’s conditions stated that all claims “arising out of the same act, error or omission, or acts, errors or omissions which are logically connected in any way shall be deemed as a single claim,” the policyholder’s demand for failed.  The insurer, therefore, had no duty to defend or indemnify against Davidson’s suit.