San Francisco Office Obtains Binding Arbitration Victory in Complex Professional Liability Coverage Case

June 6, 2013

Linda Wendell Hsu and T.J. Kitchen of our San Francisco office obtained a binding arbitration victory on behalf of an insurance company client in a complex coverage case involving a financial broker-dealer claims made and reported policy. Had the insurer lost the arbitration, it would have been liable for $1 million in breach of contract damages, and possibly several million more in bad faith / punitive damages.

In summary, the carrier insured a financial broker-dealer and its registered representative. The claimants had invested 97% of their retirement savings into two equity funds run by a limited partnership. The limited partnership invested in real estate in Southern California.

Before the policy was issued, the limited partnership sent a letter to all of its investors which advised that it was reducing its distributions to its investors and restricting its investors' right to withdraw funds due to the well-publicized downturn in the real estate market. This caused claimants to bring a binding arbitration claim under FINRA against the insureds and the limited partnership.

The insureds tendered the FINRA statement of claim to the insurer. The insurer denied coverage based mainly on a Troubled Securities Endorsement in the policy, which stated in part that the policy would not provide coverage for:

"any claim arising out of or in any way related to 'financial services' provided in connection with any 'security'... issued by... any 'entity'... which has, as of the effective date of this policy, actually or allegedly... in the case of a limited partnership... ceased or significantly reduced the amount of its distributions due to its financial difficulties."

The insureds hired counsel to defend them at their own expense. The FINRA action went to binding arbitration. After the arbitration but before the award, the named insured settled with claimants. Claimants then obtained a multi-million dollar award against the registered representative (and the limited partnership).

The subsequent coverage arbitration centered around how the terms "distributions," "significantly reduced" and "financial difficulties" in the Troubled Securities Endorsement should be interpreted both legally and based on the hotly-disputed facts. The insureds contended that the reductions in "distributions" were not "significant" and were not due to the limited partnership's "financial difficulties," and that even if they were, the insurer did not have enough information on these issues at the time of tender to deny coverage.

The parties introduced thousands of pages of documents as evidence and the arbitration panel heard from ten witnesses over the course of the three-day arbitration. After reviewing all of the evidence and hearing all of the arguments, the majority of the panel found for our client on all claims.


Selman Breitman provides this information for educational purposes. Case results depend upon a variety of factors unique to each case. Case results do not guarantee or predict a similar result in any future case. This information should not be construed or relied on as legal advice or to create a lawyer-client relationship.