A federal district court in Texas has ruled that an exclusion in an insurance policy relating to the sale of securities precluded coverage of a lawsuit brought against insured shareholders stemming from the sale of their interests in a private company.

The Case

Tom and Julie Gleason owned interests in a few closely held companies. Through these companies, the Gleasons indirectly owned Oregon Ice Cream, LLC (the “Company”) and, as officers of the Company, they entered into an agreement to sell their interest to OIC Holdings, LLC.

OIC subsequently alleged that the Gleasons had made false representations during the negotiations and in the equity interest purchase agreement, and it sued the Gleasons in a Texas state court.

The Gleasons submitted their claim to Markel American Insurance Company, which had issued a “For Profit Management Liability Policy” to the Company. Markel denied coverage, relying on, among things, Exclusion K in its policy, relating to the sale of securities.

The Gleasons sued Markel.

During the pendency of their suit against Markel, OIC's suit concluded, with the Gleasons prevailing on all claims.

In the Gleasons' suit against Markel, the insurer moved for summary judgment, relying on, among other things, Exclusion K.

For their part, the Gleasons argued that not all of OIC's allegations arose out of the sale of the Gleasons' interests in the Company. Accordingly, they maintained that Markel had to defend the suit, even if there was only one claim that was not precluded under Exclusion K. 

The Markel Policy

The “For Profit Management Liability Policy” Markel issued to the Company stated:

Section IV – EXCLUSIONS

The Insurer shall not be liable under this Coverage Part to pay any Loss on account of, and shall not be obligated to defend, any Claim made against any Insured:

. . .

K. based upon, arising out of or in any way involving (i) the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities, or (ii) the actual or alleged violation of any federal, state, local or common or foreign law relating to debt or equity securities; provided this exclusion shall not apply to any Claim:

1. based upon, arising out of or in any way involving the purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities in a private[ ] placement transaction exempt from registration under the Securities Act of 1933, as amended. 

The District Court's Decision

The district court granted Markel's motion for summary judgment.

In its decision, the district court explained that Exclusion K provided that Markel was not liable for any claim “based upon, arising out of or in any way involving (i) the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities.” According to the district court, the words “arising out of” were words “of much broader significance than” the words “caused by,” and ordinarily were understood to mean “originating from,” “having its origin in,” “growing out of,” “flowing from,” “incident to,” or having connection with.”

The district court then said that even if the Gleasons were correct that some of the OIC's allegations had not been caused by the sale of the Gleasons' interest in the Company, “all of the allegations” bore, at the very least, “an incidental relationship to the sale of their interest in OIC.”

Therefore, the district court ruled, the OIC suit fit into Exclusion K.

The district court concluded that the exemption to Exclusion K relating to private placements under the Securities Act of 1933, as amended, did not apply because the Gleasons were not “issuers” such that the transaction could be considered a private placement under the Markel policy. Rather, the district court found, the transaction involved the resale of securities that previously had been issued, not the issuance of securities by the Company.

The case is Gleason v. Markel American Ins. Co., No. 4:17-CV-00163 (E.D. Tex. Jan. 24, 2018). Attorneys involved include: For Julie Gleason, Tom Gleason, Plaintiffs: Bryan Haynes, LEAD ATTORNEY, Scheef & Stone, L.L.P., Dallas, TX; Jason Mitchell Little, Scheef & Stone LLP – Frisco, Frisco, TX. For Markel American Insurance Company, Defendant: Stephen Olan Venable, Walker Wilcox Matousek LLP, Houston, TX; Marc J Wojciechowski, Wojciechowski & Associates, Spring, TX.