Associated Community Bancorp, Inc. v. The Travelers Companies, Inc., 2010 U.S. Dist. LEXIS 34799 (D. Conn. Apr. 8, 2010)

Insureds brought this action alleging breach of contract for failure to provide insurance coverage for underlying lawsuits by investors for damages resulting from Bernard Madoff’s Ponzi scheme. Assoc. Community Bancorp., Inc., 2010 U.S. Dist. LEXIS 34799, at **1-3. The insurer denied coverage on the basis of several exclusions in the policy. Id. at *8. The court considered whether two exclusions applied – i.e., the insolvency exclusion of the Professional Services Liability Coverage form, and the professional services exclusion in the Management Liability Insuring Agreement. Id. at **9, 28.

First, under the Professional Services Liability Coverage form, the policy provided coverage for a claim first made during the policy period for a “professional services act” taking place before of or during the policy period. Id. at *9. A professional services act included any error, misstatement, act, omission, neglect, or breach of duty committed by any insured person in the rendering or failure to render professional services. Id. The insolvency exclusion, however, stated that the policy did not cover loss on the account of any claim made against any insured based upon or arising out of the insolvency, receivership, bankruptcy, liquidation, or inability to pay of any investment company or any broker or dealer in securities or commodities. Id. at *10. After considering Connecticut’s broad interpretation of the term “arising out of,” the court found the insolvency exclusion excluded coverage of the investor’s claims against the insureds. Id. at *12. Specifically, the court found that “[h]ad Madoff not become insolvent and lost the investors’ money, the investors would have had no damages and thus no reason to file suit against [the insured].” Id. As such, there was a causal connection between the insolvency and the claims. Id.

Next, the court considered the Management Liability Insuring Agreement, which provided liability coverage for the directors and officers, and liability and indemnification for the company, for claims for “management practices acts.” Id. at *28. Management practices acts were defined to include any error, misstatement, act, omission, neglect or breach of duty by any insured person in his of her capacity as such. Id. This coverage grant included a broad form professional services act exclusion, which stated that the policy would not cover any claim made against any insured based upon, arising out of, or attributable to the rendering of or failure to render any service to a customer of the Company. Id. at *29. The court considered all relevant portions of the policy together and held that the professional services exclusion did not eviscerate the insureds’ coverage under the policy. Id. at *30. Indeed, it was “reasonable” that professional services could be excluded from the management liability coverage because such services were covered by their own professional services liability agreement. Id. at **30-31. As such, the court granted the insurer’s motion to strike and declined to grant the insureds a right to replead their claims, as any such amendment would not affect coverage. Id. at **34-36.