In Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, ___F.3d ___, 2013 WL 1943338 (10th Cir. (Kan.) May 13, 2013), the United States Court of Appeals for the Tenth Circuit broadly applied the definition of “Interrelated Wrongful Acts” commonly found in errors and omissions and directors and officers liability policies and held that, under New York law, numerous unsuitability claims constituted a single claim first made prior to inception of the policy.
In May 2007, Paul and Marie Wahl brought an arbitration proceeding against Brecek & Young Advisors, Inc. (BYA), alleging that the Wahls received financial advice from B&G Financial Network, Inc. (B&G). BYA acted as the broker-dealer through which B&G sold the Wahls several of its investment products. The complaint alleged that the Wahls were sold unsuitable investments and that BYA engaged in the frequent “flipping” and “churning” of the investments. The Wahls amended their complaint to add additional claimants who similarly alleged unsuitability and flipping/churning.
Lloyds of London Syndicate 2003 (Lloyds), which issued a professional liability policy to BYA, agreed to defend BYA, but asserted that each of the claimants in the Wahls action presented a separate Claim, subject to a separate $50,000 retention, pursuant to the following policy provision: “All Claims based upon or arising out of … Interrelated Wrongful Acts shall be considered a single Claim…” The phrase “Interrelated Wrongful Act” was defined as Wrongful Acts that are, inter alia, “connected by reason of any common fact, … or one or more series of facts…”
BYA sued Lloyds and the district court granted summary judgment for BYA. The court held that the Wahls’ arbitration constituted a single claim, but permitted supplemental briefing on an alternative position raised by Lloyds as to whether the Wahls’ action and earlier claims brought by investors Knotts and Colaner in 2005 and 2006 constituted a single claim first made prior to inception of the Lloyds policy. BYA argued that the claims were not sufficiently related and that Lloyds’ argument was precluded by the doctrines of waiver or estoppel. The court rejected the waiver/estoppel argument, but held that the Wahls matter was not related to the earlier Knotts and Colaner claims.
On appeal, the parties agreed that the principle issue on aggregation of the claims was whether there existed a “sufficient factual nexus” between the claims. Emphasizing that “Wrongful Acts” are interrelated if they are “connected by reason of any common fact,” the Tenth Circuit concluded that there were “several common facts” connecting all of the claims, including: they named the same respondents, they alleged misconduct occurring in the same general time period, they alleged that the respondents had been sold unsuitable investments, they involved allegations of flipping or churning, and they were predicated by BYA’s liability on theories of vicarious liability and failure to supervise. As such, the Tenth circuit concluded that the Wahls, Knotts and Colaner matters constituted a single “Claim” under the policy. In addition, although the court rejected BYA’s waiver argument on the basis that coverage under an insuring clause or the application of exclusions from coverage cannot be waived, it held that the district court abused its discretion in ruling that that BYA could not establish estoppel, and thus the case was remanded so that the district court could consider the extent to which BYA detrimentally relied on Lloyds’ representations of coverage.