Great Am. Fid. Ins. Co. v. Stout Risius Ross, Inc.

In this suit, the defendant (Stout) was initially sued over its valuation of the stock of a paper company in connection with the ESOP for that company. Stout demanded coverage for that suit from its malpractice insurer, Great American Fidelity Insurance Co. (Great American). Great American had filed an earlier motion for a summary declaratory judgment that it had no duty to defend or indemnify Stout in this matter. Still, the court found “that Great American had not shown that all of the underlying claims were excluded from coverage and so it had a duty to defend Stout in action. The Court ruled that the indemnification claim was not yet ripe.” Since that ruling, there have been significant developments, the most significant being that the claim by the ESOP was refiled.

“The current motion for partial summary judgment relates only to one of the underlying suits against Stout (referred to as the Appvion ESOP action).” In that action, the ESOP sued Stout for its role in providing an independent valuation of the stock of Appvion’s parent company, Paperweight Development Corp. After the valuation, Appvion went bankrupt, causing financial losses to the Appvion ESOP. In their suit, the trustees of the ESOP alleged in part that Stout had negligently or fraudulently overstated the value of Paperweight, which contributed to the bankruptcy of Appvion and caused financial losses to the ESOP. Stout requested coverage for the Appvion matter under its $5 million malpractice policy purchased from Great American. That policy not only covers valuation services but also has several exclusions. The exclusion at issue in this matter is Exclusion F, which reads as follows: “This Policy does not apply to any Claim … based on or arising out of actual or alleged violation of … (1) The Employee Retirement Income Security Act of 1974; (2) The Securities Act of 1933; (3) The Securities Act of 1934; (4) Any state Blue Sky or Securities law; … or any rules, regulations or amendments issued in concerning acts, or any similar state or federal statutes or regulations, including any Claim based upon common law principles of liability.”

Great American ultimately brought this suit against Stout to declare that it had no responsibility to defend or indemnify Stout in the Appvion ESOP matter. Great American argued it had no duty to defend because of the Exclusion F noted above. It was also stated that the only claim in the amended claim against Stout by the ESOP was for “federal securities fraud.” Before the court in this matter was whether to declare that Great American no longer had a duty to defend or indemnify Stout in the Appvion ESOP action.

The court will grant summary judgment if the movant shows no genuine dispute about the facts and the movant was entitled as a matter of law. The burden of proof rests with the movant, Great American. If the moving party met that initial burden, then the nonmoving party must present specific facts showing a genuine issue for trial. Great American argued its obligation to defend ended on Sept. 25, 2020, because, as of that date, the only issue remaining for Stout was excluded from coverage under the policy by Exclusion F. The court agreed with that argument. “Stout argues in its response in this case that despite the title, this count pleads at most a negligence claim and not a securities-fraud claim.” However, Exclusion F applied to any claim based on an alleged violation of federal securities law. “Stout might ultimately be correct that there is no actual violation of any securities laws at issue, but there is an alleged violation of securities laws, even if those allegations fail to adequately plead an element of securities fraud (i.e., scienter).”

Great American was under no duty to defend the ESOP case beyond the Sept. 25, 2020, date.