NASDAQ settled the claims for $26.5 million.

NASDAQ maintained both errors and omissions ("E&O") and directors' and officers' ("D&O") insurance policies.

ACE American Insurance Company and Illinois National Insurance Company, the first and second level D&O carriers, respectively, relying on a "professional services" exclusion, disclaimed coverage under the D&O policies.

Beazley Insurance Company, the second-level E&O carrier, paid out its policy limit of $15 million in E&O coverage subject to an agreement with NASDAQ in which NASDAQ assigned Beazley its contractual rights against ACE and National.

Beazley then sued ACE and Illinois National for coverage under the D&O policies.

The district court granted ACE and Illinois National summary judgment. It ruled that:

(1) Retail investors in Facebook were unambiguously "customers" of NASDAQ;

(2) The underlying securities claims against NASDAQ arose out of NASDAQ's provision of professional services; and

(3) The claims, therefore, were excluded from coverage pursuant to the D&O policy's professional services exclusion.

Beazley appealed to the Second Circuit. It argued that the district court had erred in enforcing the exclusion because:

(1) The retail investors who sued and settled with NASDAQ were not customers or clients within the meaning of the exclusion; and

(2) The claims settled were not "alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services."

The Professional Services Exclusion

The professional services exclusion provided:

The Insurer shall not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client of the Company [i.e., NASDAQ], alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services. 

The Second Circuit, applying New York law, affirmed.

In its decision, the circuit court explained that the "vast majority of federal courts to consider the issue" have found retail investors to be "customers" of a stock exchange. It then agreed with district court that when considered against the background of the "the customs, practices, usages and terminology as generally understood in the particular trade or business," the term "customers" of NASDAQ unambiguously included retail investors within the meaning of the Ace and Illinois National insurance policies.

The circuit court then observed that the parties did not "dispute that the design and operation of NASDAQ's systems" required the "special acumen and training of professionals," such that these activities constituted professional services and the exclusion applied. It pointed out that the complaint against NASDAQ attributed the plaintiffs' losses to NASDAQ's failure to "properly execute" the purchase and sale orders and deliver timely confirmations – which went "to the heart of NASDAQ's provision of professional services."

Accordingly, the Second Circuit concluded, the district court had correctly determined that the professional services exclusion applied.

The case is Beazley Ins. Co. v. Ace American Ins. Co., No. 16-2812-cv (2d Cir. Jan. 22, 2018). Attorneys involved include: KEVIN KIEFFER, Troutman Sanders LLP (Ryan C. Tuley, on the brief), Irvine, CA for Plaintiff-Appellant Beazley Insurance Co., Inc. JONATHAN D. HACKER, O'Melveny & Myers LLP (Bradley N. Garcia, on the brief), Washington, DC, for Defendant-Appellant Ace American Insurance Company. ALEXANDER S. LORENZO, Alston & Bird LLP, New York, NY, for Defendant-Appellant Illinois National Insurance Company.