Unlawful copying and distribution by an investment advisory firm of industry publications to firm employees is not covered by the Professional Liability Policy | Carlton Fields

A A California court recently held that the losses of an investment advisory firm resulting from its alleged copying and distribution of Daily Oilan energy industry publication, to the firm’s advisers were not covered by investment advisory professional liability policies held by the firm.

Energy Intelligence Group Inc. is the publisher of “newsletters and other publications for the highly specialized global energy industry”, including Daily Oil. Energy Intelligence alleged in the underlying complaint that employees of Kayne Anderson Capital Advisors “regularly send Daily Oil about 20 people in Kayne Anderson’s office, including a majority of senior Kayne Anderson executives. A jury in Energy Intelligence’s underlying action against Kayne Anderson found 39 separate copyright violations. After an appeal, the parties finally settled for $15 million. Kayne Anderson also reportedly incurred approximately $7.3 million in defense costs in the case.

Kayne Anderson subsequently sued her primary and excess insurers seeking compensation for the settlement and defense. The insurers had denied coverage stating that Kayne Anderson’s conduct giving rise to the claim did not constitute “investment advisory services” as that term was defined in the policies. The policies defined “investment advice services” as “financial, economic or investment advice or investment management services (including the selection and supervision of investment advisers) provided to third parties for consideration and pursuant to a written contract”. The policies defined “wrongdoing” as “any actual or alleged breach of duty, negligence, error, misrepresentation, misrepresentation, omission or act.”

Kayne Anderson presented evidence showing that her use of Daily Oil was material to his investment advisory business, including his managing partner’s testimony that Daily Oil “was something I looked into in my investment decision-making process.” However, the court noted that “the essential issue here is whether the copyright infringement alleged in the underlying action was an act ‘in the performance or inability to perform’ of the services of investment advice”. The court determined that the wrongful act alleged in the underlying action did not relate to the provision of investment advisory services, as defined in the policies, but rather to the copying and distribution of copyrighted material. author without the permission of the copyright holder.

The fact that “the review of industry publications, including Daily Oil, is a business necessary and typical of … investment personnel” did not result in coverage. “If Kayne Anderson had bought subscriptions to Daily Oil for all his investment advisers…no copyright infringement could have been alleged. The “wrongdoing” giving rise to the underlying action was the unauthorized copying and distribution of the copyrighted work, without using the contents of that work to provide advice on of investment. Since the copyright infringement was not committed in the course of providing investment advice, it was not covered.

Further, the court said that under California law, “claims arising out of an insured’s general administrative or business decisions are not covered by professional liability insurance.” Here, the court noted that Kayne Anderson’s liability “resulted from a decision not to pay for a tool important to his profession…and not from the provision of financial or investment advice, no matter how significant. the copyrighted work for investment advisory services of Kayne Anderson. .” As such, the copyright infringement “was an administrative action that formed part of the management of the business, and not an action taken by Kayne Anderson in her professional capacity”, and was therefore not the type of conduct covered by a professional liability policy.

The policies also provided separate general liability insurance for losses suffered by Kayne Anderson in the course of carrying on her business, which could have covered her losses, but for an exclusion which expressly applied to claims alleged or arising out of copyright violations.

Finally, because there was “no potential coverage” of Kayne Anderson’s claims in this case, the insurers had no obligation to defend Kayne Anderson in the underlying case. Thus, the court granted summary judgment in favor of the insurers.

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