The Ninth Circuit recently affirmed a 2009 order granting summary judgment in favor of Illinois Union Insurance Co., ruling that the insurer owed no coverage on claims by allegedly defrauded clients of the now defunct Brookstreet Securities Corp. Brookstreet experienced a financial collapse in 2007 and was sued by several investors that same year on claims related to, among other things, the sale of collateralized mortgage obligations ("CMOs"). Illinois Union, which provided a $3 million professional liability policy to Brookstreet, filed an interpleader seeking a declaration that the investors were not entitled to any rights, benefits or recovery under the policy. The policy provided that Illinois Union would not be liable for any loss on account of any claim based upon, arising out of, or attributable to the sale of derivatives. The investors argued "derivative" was not defined by the policy and did not include CMOs. The lower court disagreed, citing extensive case law to rule that CMOs are derivatives and are thus subject to the policy exclusion. The Ninth Circuit affirmed, holding that that the plain language of the policy excluded coverage for the sale of derivatives.
The Court also rejected one investor's claims that part of her damages arose out of conduct separate and apart from the sale of derivatives. The investor alleged that Brookstreet breached its fiduciary duty, committed fraud, made misrepresentations, omitted material facts, acted negligently, and violated state and federal securities law before buying the CMOs. The investor argued that the policy covered this conduct under a theory of concurrent causation or efficient proximate cause. The Court rejected this argument, holding that the exclusion applied irrespective of the legal theory of recovery asserted.