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January 21.2009

Identical Financial Advice Can Constitute Separate Claims

by Amanda Hairston

These days, putting your money in the stock market isn’t for the faint of heart.  Even before the recent economic downturn, many individuals were turning to financial advisors to give them the inside scoop on the best stocks, funds, and bonds.  But what happens when those investments perform poorly? Or when it comes to light that a particular advisor has been giving the same bad advice to his clients for years?  For insurance purposes, does giving the same advice to two different investors count as one act or two?  One recent Ninth Circuit decision sheds light on the increasingly important issue of whether giving bad investment advice over different policy years qualifies as related wrongful acts or not and whether an insured can access multiple years of coverage. 

In Financial Management Advisors v. American Int’l Specialty Lines Ins. Co., 506 F.3d 922 (9th Cir. 2007), one investor sued the policyholder in December 2002 for making material misrepresentations related to investment advice.  Namely, the investor accused the advisor of failing  to accurately represent the riskiness of a particular fund and made misrepresentations to dissuade the investor from liquidating his investments.  The policyholder tendered the claim in 2002 and exhausted its coverage limitation under its 2001-2002 policy.  In 2004, a second investor brought a claim alleging breach of contract and accusing the policyholder of misleading him as an investor.  The policyholder tendered that claim to its 2003-2004 insurer who denied the claim on the ground that it arose out of the same or related wrongful acts at issue in the 2002 suit.
  
Although both suits included the same claim that the financial advisor misrepresented the riskiness of a particular fund, the Ninth Circuit held that the claims were not related.  The court based its holding on the facts that the investors were unrelated, each had unique investment objectives, they were advised at separate meetings on separate dates according to their unique financial positions, and each chose a different investment package.  Id. at 930.  Moreover, the wrongful acts alleged by the two clients were different.  Id.   The court stated that it did not “believe the term ‘related’ was intended to bar recovery whenever two parties are advised to invest in the same fund" and that the claims were not “logically related simply because both claimants blamed the same financial advisor.”  Id.

This case, which was decided back when the Dow was sitting above 13,000, may have increasing relevance if we see a flood of litigation filed against financial advisors, many of whom may have been dispensing the same advice to their clients for years.  A firm who finds itself on the receiving end of one of the these suits may find cold comfort in that fact that multiple years of insurance coverage may be available to cover the malfeasance of its advisor.

Posted in D & O, Financial Crisis | Permalink

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