HNRK Coverage Corner

On January 22, 2018, the Second Circuit issued a decision in Beazley Ins. Co. v. ACE Am. Ins. Co., Case No. 16‐2812‐cv, holding that an undefined term in a policy exclusion was not ambiguous because it had a “clear meaning in federal law.” is an insurance coverage action relating to investor lawsuits against NASDAQ in connection with Facebook’s IPO. At issue was a “professional services” exclusion in NASDAQ’s policy, which provided that the insurer “shall not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.” The D&O carrier argued that this exclusion applied because the investors who traded in Facebook shares were “customers” of NASDAQ (and their claims arose from NASDAQ’s “rendering professional services”). The policy did not define the term “customer,” and the plaintiff – an E&O carrier to which NASDAQ had assigned its rights under the D&O Policy – argued that the term was ambiguous and should be construed against the insurance company, especially because it appeared in a policy exclusion. However, the Second Circuit affirmed the district court's holding that the term “customer,” as applied to retailer investors who traded on NASDAQ, was not ambiguous, explaining: 

The district court properly relied on custom and usage of the term “customers” in determining that the retail investors were “customers” of NASDAQ within the meaning of the ACE D&O policy. . . . [S]ecurities law is paradigmatically a federal field. In assessing whether there is a prevailing federal definition, we consider not whether there is complete unanimity among the courts that have addressed the question, but rather whether there is an overwhelming current of judicial opinion, that is, a meaning used by the vast majority of federal courts.

We have little trouble finding that the vast majority of federal courts to consider the issue find retail investors to be “customers” of a stock exchange. In Lank v. New York Stock Exchange, our Court held that “[t]he primary purpose of the Exchange Act was to protect customers of the stock exchanges that is, public investors.” 548 F.2d 61, 64 (2d Cir. 1977). “One method of effectuating this was to impose on the exchanges a statutory duty to protect investors by regulating (the exchanges’) members.” Id (citation and internal quotation marks omitted). District courts also regularly characterize retail investors as “customers” of stock exchanges. . . . It appears most federal courts take the meaning of “customer” in this context as a given. . . .

[T]he fact that the professional services exclusion is a standard clause does not alter the analysis here. The parties are not required to tailor language for every policy in order for terms to have industry-specific meanings. Who counts as a customer of a particular insured within the meaning of the generic exclusion will often depend on the nature of the industry in which the insured does business. What is relevant here is that the insurer sold the policy to its insured, a stock exchange, against the backdrop of well-established federal securities law that unambiguously considers retail investors to be customers of the exchange.

(Some citations omitted).

This decision illustrates that the absence of an express definition for a term used in an insurance policy does not automatically render the term ambiguous. In an appropriate case, courts will look to outside the policy to custom and usage in the insured’s industry to define policy terms.