A Lloyd's of London syndicate is not obligated to pay claims under a professional liability policy issued to a securities dealer because the claims involved relate to other claims that fall outside the policy period, says an appellate court in reversing a lower court's ruling.

According to Monday's ruling by the 10th U.S. Circuit Court of Appeals in Denver in Brecek & Young Advisors Inc. v. Lloyd's of London Syndicate 2003, Paul and Marie Wahl filed a claim in May 2007 against defendants including the Folsom, Calif.-based securities dealer Brecek & Young in connection with investment products they had been sold. Brecek & Young had acted as a broker-dealer in the transactions.

Lloyd's syndicate 2003, which is part of Bermuda-based Catlin Group Ltd., had issued a claims made “broker/dealer and registered representatives professional liability policy” to the firm for the period spanning Dec. 1, 2006, to Dec. 1, 2007.

Meanwhile, other claims for periods that fell outside of the Lloyd's policy period were also filed against the firm. All three groups of claims went through arbitration.

Brecek & Young subsequently filed suit against the syndicate in connection with the Wahl arbitration, claiming the $385,000 it had been paid by Lloyd's was insufficient.

The U.S. District Court in Topeka, Kan., eventually issued a judgment in the firm's favor for $1.2 million. Lloyd's appealed, arguing that the Wahl case related to the two other arbitration proceedings claims “that are wholly outside the policy coverage,” said the appeals ruling.

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The appeals court agreed with Lloyd's. “Under the express terms of the Policy, wrongful acts are interrelated if they are 'connected by reason of any common fact, circumstance, situation, transaction, casualty, event, decision or policy or one or more series' of such,” said the appellate court in quoting the policy. “Several common facts connect” the Wahl arbitration with the two others, said the 10th Circuit's unanimous three-judge panel.

All of the arbitrations named the firm and three other defendants as respondents, and the Wahl arbitration and one of the others included claims against two broker-agents, said the ruling. “All the claims allege the misconduct was alleged to have taken place during roughly the same time period,” said the ruling.

“All claims allege the respondents sold unsuitable investment products including various types of annuities,” said the ruling. “Further, all claims involved allegations of churning or flipping of investment accounts in order to enrich the broker/agents at the expense of account holders.” Finally, the firm's liability “was predicated on theories of vicarious liability and failure to supervise its broker/agents in each of the claims.”

“Because, applying the plain language of the policy,” the Wahl and the two other arbitrations “were connected by common fact, circumstances, decisions, and policies, the district court erred in concluding the claims asserted in the Wahl arbitration did not arise from wrongful acts interrelated to the wrongful acts committed outside the Lloyds policy period,” said the appellate ruling in reversing the lower court and remanding the case for further proceedings.