A federal appeals court has upheld a lower court ruling holding that a Chubb Ltd. unit is not obligated to indemnify Nasdaq under the professional services exclusion in its directors and officers liability policy in connection with Facebook’s botched 2012 initial public offering.

The unanimous ruling by a three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York in Beazley Insurance Co. Inc. v. ACE American Insurance Co., Illinois National Insurance Co. agrees with a 2016 ruling by the U.S. District Court in New York that Nasdaq retail investors were “customers” and therefore excluded under the D&O policy’s professional services exclusion.

In 2015, in a first for a U.S. stock exchange, Nasdaq agreed to pay $26.5 million to settle a class action lawsuit in its bungling of Facebook's $16 billion IPO.

According to court papers, during the relevant time period, Nasdaq maintained both errors and omissions and D&O liability policies.

American International Group Inc. unit Chartis Specialty Insurance Co., which is not a party to the litigation, was Nasdaq's primary E&O liability insurer at the relevant time, with a $15 million limit of liability, while Beazley was Nasdaq's first-layer excess E&O insurer, with a $15 million limit of liability.

Ace was Nasdaq's primary D&O liability insurer, with a $15 million liability limit, while AIG unit Illinois National Insurance Co. was the first layer excess insurer, with a $15 million limit of liability.

After receiving notice of litigation, Chartis issued a reservation of rights letter and agreed to advance defense costs to Nasdaq under its E&O policy, as did Beazley under its E&O policy, according to the ruling.

Ace, however, denied coverage under the professional services exclusion in its policy. That exclusion states that the insurer will not be liable for any loss “by or on behalf of a customer or client of the company, alleging...the rendering or failure to render professional services.”

After Nasdaq settled the case, Beazley agreed to contribute its full $15 million limit of liability toward the settlement, according to the ruling.

Subsequently, there was litigation between Ace and Beazley on the issue of Ace's professional services exclusion and whether Ace must contribute to Beazley's defense costs under its D&O policy.

Judge Jed Rakoff held in his 2016 ruling that the retail investors were customers, that the underlying securities claims against Nasdaq arose out of its professional services and, thus, their claims were excluded under the D&O coverage’s exclusion for professional services.

There is no dispute, said the appeals court ruling, that the negligence claims arose out of Nasdaq’s failure to properly render professional services, “such that the exclusion applies.”

“The district court correctly determined that the professional services exclusion applies,” said the ruling in upholding the lower court’s decision.