In Saoud v. Everest Indemnity Insurance Co., the Sixth Circuit Court of Appeals held that an “unregistered security exclusion” barred coverage for various underlying lawsuits under a professional liability policy.
The policyholder, William Saoud, was in the business of selling insurance-related products, such as annuities, life insurance, and long-term health care products. In 2017 and 2018, Saoud sold some of his clients an investment product called the 1 Global Memorandum of Indebtedness issued by 1 Global Capital LLC. After the investment product turned out to be unsuccessful, multiple clients sued Saoud and his wife (who worked with Saoud) alleging that they misrepresented that the 1 Global Memorandum of Indebtedness was a secure investment and sold an unregistered security in violation of Michigan’s securities laws.
The Saouds sued their professional liability insurer, Everest Indemnity Insurance Co., to obtain defense and indemnity coverage for the underlying lawsuits. The U.S. District Court for the Eastern District of Michigan entered summary judgment in favor of Everest, holding that coverage was barred by the policy’s “unregistered security exclusion,” which excluded coverage for any claim “[b]ased upon, attributable to, or arising out of the use of or investment in any security that is not registered with the Securities and Exchange Commission.” The Sixth Circuit summarized the district court’s rationale for its ruling as follows:
Below, the parties disputed whether the 1 Global Memorandum of Indebtedness was a “security” within the meaning of the exclusion. The district court explained that a “note” is presumed a “security” under the Securities Acts and concluded that the 1 Global Memorandum of Indebtedness was a “note.” The court also confirmed, after ordering supplemental briefing, that the 1 Global Memorandum of Indebtedness was a “security” because it was not a note that matured in nine months or less and, even if it was, the 1 Global Memorandum of Indebtedness was not “commercial paper.”
Applying Michigan law, the Sixth Circuit affirmed the district court’s ruling. On appeal, the Saouds argued that the unregistered security exclusion “applies only if the complaints alleged that the Saouds sold ‘securities’ that were required to be registered with the SEC.” They further argued that, since the underlying lawsuits “alleged only that the 1 Global Memorandum of Indebtedness was a security under Michigan law, not federal,” the exclusion does not bar coverage. The Sixth Circuit held that this argument did not provide a basis to reverse the district court’s decision because the Saouds forfeited the argument by not properly raising it in the district court. The Sixth Circuit did not address the merits of this argument.
The Saouds also argued on appeal that Everest failed to timely disclaim coverage and, therefore, waiver or estoppel should preclude Everest from relying on the unregistered security exclusion. The Sixth Circuit rejected this argument, explaining:
In limited circumstances, Michigan courts prohibit insurers from raising defenses to coverage that they could have raised earlier. But this doctrine usually cannot broaden the coverage of a policy to protect the insured against risks that were not included in the policy or that were expressly excluded from the policy. Michigan courts do recognize an exception when the inequity of forcing the insurer to pay on a risk for which it never collected premiums is outweighed by the inequity suffered by the insured because of the insurance company’s actions. Such cases generally involve an insurance company that has either misrepresented the terms of the policy to the insured or defended the insured without reserving the right to deny coverage.
Everest never represented the Saouds in the underlying litigation and therefore never controlled the Saouds’ litigation strategy to their detriment. Nor have the Saouds provided any evidence of actual prejudice from Everest’s delay in informing the Saouds that it would neither defend nor indemnify them. Instead, they argue that prejudice should be presumed. But Michigan caselaw affords such a presumption only when an insurer undertakes to defend its insured without reservation of rights, continues to defend although it possesses sufficient information concerning a possible policy exclusion, and subsequently gives notice of its intent to deny coverage. This is not one of those cases. So no presumptive prejudice applies, and Everest did not waive the right to raise the exclusion.
