In the wake of the very public demise of the John Thomas Financial investment brokerage -- under circumstances reminiscent of Scorsese’s Wolf of Wall Street -- one jilted investor filed suit directly against JTF’s former insurer, New York Marine and General Insurance Company, under one of the most important provisions of New York’s Insurance Law. That investor, Todd Tuls, argued that he was entitled to recover approximately $650,000 directly from New York Marine under Insurance Law § 3420, which permits tortfeasors’ victims to recover damages from their insurers for certain types of claims. It is believed that Mr. Tuls is just one of many investors who lost substantial sums as a result of JTF’s schemes.

New York Marine had previously sued JTF and others on the basis that the insured had made misrepresentations and withheld material information in applying for insurance and sought a declaration that he policy was void or, in the alternative, did not provide any coverage for the mounting claims against JTF and its principals. New York Marine obtained a default judgment in that case after the defendants failed to respond to discovery or otherwise appear in the action after their answer was filed. After the default judgment was entered, a number of JTF customers threatened direct actions against New York Marine to recover amounts that they claimed were owed by JTF, including FINRA arbitration awards to which JTF had stipulated. Mr. Tuls was one such claimant.

After Mr. Tuls filed his action against New York Marine, New York Marine moved to dismiss on the basis that the default judgment precluded any actions under the void policy. Mr. Tuls persuaded the New York court that the default judgment could not preclude his action and that evidence would show that the default judgment could not be maintained and the court denied New York Marine’s motion to dismiss.

After conducting discovery, New York Marine moved for summary judgment on Mr. Tuls’ sole claim under § 3420 on three different grounds. First, New York Marine argued that Tuls did not have standing under § 3420 because the portion of that statute that permits direct actions against insurers is expressly limited to policies that insure the underlying tortfeasor from “injury to person . . . or against liability for injury to, or destruction of, property” (Mr. Tuls argued that investment losses were a form of property damage). New York Marine also argued that the policy at issue -- which had actually been issued to another entity called ATB Holdings, LLC and only named JTF as an additional insured under narrow conditions -- was a broker-dealer professional liability policy that expressly excluded coverage for personal injuries and property damage. New York Marine further argued that, because the policy did not cover Tuls’ claims against JTF, Tuls could not maintain a direct action against New York Marine. Tuls’ discovery responses and deposition testimony confirmed that he had no evidence to support his allegation that his claims against JTF were actually covered under the policy. Finally, New York Marine argued that the policy was a legal nullity by virtue of a default judgment and that Mr. Tuls had no evidence to support his claim that the default judgment should be overturned or was incorrect in any way.

On November 16, 2016 -- over the course of a 15-page order which is the first state court ruling on the issue -- the court entered summary judgment in New York Marine’s favor and agreed with each of New York Marine’s arguments. For instance, the court held that Mr. Tuls did not have standing under Insurance Law § 3420 because, as a matter of law, his alleged injury (investment losses) fell outside of the scope of the statute. The court also held that, even if Mr. Tuls’ claim fell within the scope of § 3420, summary judgment was appropriate because Mr. Tuls’ claims against JTF were not covered under the policy that New York Marine issued to ATB. Finally, even if the claims fell within the scope of § 3420 and even if they were covered under the express terms of the ATB policy, the court ruled that it would “still grant [New York Marine’s] motion for summary judgment because it has been declared that the underlying policy is void ab initio.” The court refused to find that “[Tuls], standing in the shoes of JTF, has rights that JTF does not.”

The implications of the court’s ruling go beyond a prohibition against investors bringing direct actions against the insurers of defunct investment brokerage houses. The court also confirmed the scope of § 3420 with respect to investment losses and professional liability policies, holding that such damages and policies are factually and conceptually distinct from the type of injuries and policies contemplated by the statute. Finally, the court confirmed that a default judgment declaring an insurance policy to be void ab initio prevents third parties from claiming under the policy, whether under § 3420 or any other legal theory.