(Article from Insurance Law Alert, July/August 2019)
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The First Circuit ruled that primary and excess insurers had no duty to provide coverage for suits brought against UBS Trust Company, finding that a specific litigation exclusion applied to all claims. UBS Fin. Servs., Inc. v. XL Specialty Ins. Co., 929 F.3d 11 (1st Cir. 2019).
From 2009 to 2012, UBS was the subject of various proceedings related to its sale of shares in closed-end funds to brokerage customers in Puerto Rico. Two such proceedings were a 2009 Securities and Exchange Commission (“SEC”) investigation and a 2010 lawsuit brought by fund investors. In 2011, UBS secured primary and excess insurance coverage. The policies contained a specific litigation exclusion that precluded coverage for “any Claim in connection with [the 2009 SEC investigation and the 2010 fund investor lawsuit], or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein.”
UBS was the target of additional litigation and investigations during and after 2012 (the “Disputed Matters”). The insurers denied coverage for those claims on the basis of the specific litigation exclusion. A Puerto Rico federal district court, applying Puerto Rico law, granted summary judgment to the insurers, finding that the Disputed Matters were excluded from coverage because they were related to the prior litigation referenced in the exclusion. The First Circuit affirmed.
The First Circuit rejected UBS’s assertion that the exclusion applies only when there is a “substantial overlap” of relevant facts between the prior litigation and Disputed Matters, explaining that the broadly-worded exclusion included no such requirement. In so ruling, the court noted that UBS had sought to narrow the exclusionary language during contract negotiations but ultimately agreed to the stated verbiage. The court also rejected UBS’s contention that the exclusion rendered coverage illusory because any claim connected to the closed-end funds, which are a “core business” of UBS, would be excluded. The court reasoned that the exclusion, “although expansive,” does not bar coverage for all claims. Finally, the court rejected UBS’s argument that the specific litigation exclusion bars coverage for only those portions of claims with the requisite nexus to the Disputed Matter.