FEDERAL DISTRICT COURT RULES FOR INSURER THAT REFUSED DEFENSE AND INDEMNITY FOR SUIT OVER ALLEGED “STOCK KICKBACK SCHEME”

October 15, 2012

Judge Hittner of the Southern District of Texas granted summary judgment earlier this month in favor of an insurer whose insured had tendered defense in a Massachusetts case over a deal gone bad.  D’Amato v. Endurance American Specialty Insurance Co., Civ. No. H-12-84 (S.D. Tex. Oct. 5, 2012), involved a claim for benefits under a professional liability policy.  The insured was a defendant in a suit over a securities transaction, in which the plaintiff, a software company, claimed that the defendants had participated in an “illegal stock kickback scheme” — a stock transfer without legitimate consideration, intended to induce the plaintiff into a deal that eventually devalued the plaintiff’s intellectual property.  The insured tendered the defense, but Endurance denied the claim, and the insured entered into a settlement of the underlying case.

Judge Hittner applied the eight-corners rule to evaluate the insurer’s duty to defend, considering only the petition in the underlying lawsuit and the Endurance insurance policy.  The duty to defend turned on whether the allegedly fraudulent securities transfer constituted “professional services.”  Endurance argued that there were no facts alleged in the underlying petition that the insured provided the plaintiffs with professional services.  Judge Hittner agreed.  While the petition alleged that the insured participated in the securities transaction, it was not alleged that she engaged in what the policy defined as “professional” services.  Judge Hittner refused to consider, for duty-to-defend purposes, the insured’s arguments based on extrinsic evidence.  He also determined that even if the insured had provided “professional services,” her actions were not for “clients” as the term is used in the policy.

Judge Hittner also ruled for the insurer on the duty to indemnify.  While the duty to indemnify and the duty to defend are not co-extensive, the insured did not present any evidence in response to summary judgment other than the underlying complaint and the policy.  Thus, there was no extrinsic evidence that would support a finding of a duty to indemnify where there was no duty to defend.  Finally, Judge Hittner dismissed the insured’s extra-contractual claims, finding that (1) there is no cause of action for negligent claims handling, defeating the insured’s assertions of negligence, gross negligence, and negligence per se; and (2) the failure of the insured’s contract claims defeated her statutory and common-law bad faith claim.