The question regularly arises in securities fraud litigation: Are defense costs covered under the applicable insurance policies? This week, in Endurance American Specialty Insurance Company v. Brown, et al., the U.S. District Court for the Southern District of Texas offered some guidance when it held, applying Texas law, that the insurer was required to provide a defense to three defendants in litigation filed by victims of the alleged Stanford Financial Group Ponzi scheme.

At issue was a professional liability insurance policy, which covered claims for "wrongful acts," defined as "any actual or alleged act, error or omission committed or attempted solely in the performance of or failure to perform 'Professional Services' by an insured." The defendants were alleged to have provided "professional services to Stanford Financial as insurance agents, brokers, risk managers, and/or insurance consultants." The policy also contained an exclusion for any claim "based upon or arising out of any violation or alleged violation" of federal or state securities laws. The insurer relied on this exclusion in denying the requests for defense costs. 

Notwithstanding the exclusion, the court found that the insurer was required to provide a defense because the complaints against each defendant included a common law negligence claim. Because this claim potentially would be covered, the court found that the insurer was required to provide a defense to all claims in the underlying litigation.  It should be noted that an insurer's duty to defend is based on the applicable state law; while some jurisdictions, like Texas, impose a duty to defend all claims where only one claim falls within a policy's coverages, other jurisdictions require insurers to provide a defense only for covered claims. 

For more information concerning this opinion, internal investigations, or insurance coverages applicable in internal investigations and securities fraud litigation, please contact John C. Grugan, 215.864.8226 or gruganj@ballardspahr.com; Justin P. Klein, 215.864.8606 or kleinj@ballardspahr.com; Douglas Y. Christian, 215.864.8404 or christiand@ballardspahr.com; or M. Norman Goldberger, 215.864.8850 or goldbergerm@ballardspahr.com.


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