U.S. District Judge Robert C. Jones, of the U.S. District Court for the District of Nevada, ultimately concluded that the Fiduciary Liability Section’s Securities Exclusion in the fiduciary liability policy Federal Insurance Co. provided to International Game Technology (IGT) was not sufficiently clear that it related to remaining claims in a lawsuit against IGT by its retirement plan participants. The federal court in Nevada previously applied the now-defunct “Moench” presumption in dismissing claims that IGT continued to offer employer stock as an investment option in the plan when it was no longer prudent to do so, but let stand other claims regarding IGT’s monitoring of plan committee member actions and communications provided to participants.
When the participant lawsuit was initially filed, IGT notified Federal Insurance which responded that the lawsuit fell under the Securities Exclusion in the policy. After the court dismissed the company stock claim, IGT decided to settle the remaining claims. It again contacted Federal Insurance asserting that Federal had breached its duty to defend and was therefore estopped from raising coverage defenses, and demanded that Federal withdraw its denial of coverage, reimburse IGT for its losses, and fund the prospective settlement. Federal stood by its denial of coverage.
According to the court opinion, the Securities Exclusion provides that no coverage will be available under Fiduciary Liability Section for loss on account of any claim based upon, arising from, or in consequence of:
(a) Any offering, issuance, distribution, sale or purchase of securities;
(b) Any organization’s past, present, or future financial or operational performance, condition, or prospects; or
(c) Any actual or alleged violation of the Securities Act of 1933, Securities Exchange Act of 1934, Investment Act of 1940, any state “blue sky” securities law, or any other federal, state or local securities law or any amendments thereto or any rules or regulations promulgated thereunder, or any similar provisions of any federal, state, or local statutory law or common law anywhere in the world (including but not limited to any provision of statutory law or common law used to impose liability in connection with the offer to sell or purchase, or the sale or purchase of securities).
Federal Insurance argued that the Employee Retirement Income Security Act (ERISA) lawsuit falls squarely and entirely within the Securities Exclusion, so IGT cannot plausibly allege breach of contract. However, the court found that assumption to be less than clear. For example, the decision states it is not immediately clear the participant claims that the defendants “failed to adequately review the performance of the other fiduciaries of the Plan” fall outside the scope of the Securities Exclusion, and that ambiguity demonstrates IGT has stated a plausible claim for breach of duty to indemnify.
Federal Insurance also argued that in the context of an exclusionary clause, the 9th U.S. Circuit Court of Appeals, the circuit in which the district court belongs, would interpret the phrase “arising out of” to mean “originating from, having its origin in, growing out of, or flowing from or in short, incident to, or having connection with.” It contended the ERISA plaintiffs’ failure-to-monitor claim is subject to the Securities Exclusion, because it is based on: (1) the monitoring defendants’ alleged failure to “ensure that the monitored fiduciaries appreciated IGT’s true financial condition and [existing] threats to company earnings[,] which made IGT stock an imprudent investment and an unjustified risk”; and (2) the monitoring defendants’ alleged failure to disclose accurate information about IGT’s known financial condition and practices. According to Federal, these allegations demonstrate that the claims arise out of “the offering, issuance, distribution, sale or purchase of IGT stock and/or IGT’s past, present or future financial or operational performance, condition or prospects,” as stated by the Securities Exclusion.
Jones disagreed, saying the Securities Exclusion cannot be construed so broadly. The language of an insurance policy must be viewed “from the perspective of one not trained in law or in insurance, with the terms of the contract viewed in their plain, ordinary and popular sense,” he wrote in his opinion, citing another court decision. “Viewing the Securities Exclusion [in this way], the Court is simply unable to conclude that it unambiguously applies to the present facts such that an ‘interpretation excluding coverage is the only reasonable interpretation,’” he wrote.
Jones concluded that when viewed as a whole, the Securities Exclusion can be reasonably read to exclude coverage for claims arising out of IGT’s role in purchasing, selling, and otherwise publically transacting in its own securities as a pure matter of corporate finance, but the participants who filed the ERISA lawsuit challenged IGT’s performance in a different role—as manager of employee retirement accounts. “The Exclusion includes no language concerning this secondary, somewhat unrelated fiduciary role. … [N]othing in the policy suggests, let alone plainly evidences, that the parties intended the Exclusion to apply against the management of IGT securities in the ERISA context.”