PropertyCasualtyFocus

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

Energy Intelligence Group Inc. is the publisher of “newsletters and other publications for the highly-specialized global energy industry,” including Oil Daily. Energy Intelligence alleged in the underlying complaint that Kayne Anderson Capital Advisors’ employees “regularly sent Oil Daily to twenty or so individuals in Kayne Anderson’s office, including a majority of senior executives of Kayne Anderson.” A jury in Energy Intelligence’s underlying action against Kayne Anderson found 39 separate copyright infringements. After an appeal, the parties eventually settled for $15 million. Kayne Anderson also allegedly incurred approximately $7.3 million in defense costs in the matter.

Kayne Anderson subsequently sued its primary and excess insurers seeking indemnification 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 advisory services” as “financial, economic or investment advice or investment management services (including the selection and oversight of investment advisers) provided to others for consideration and pursuant to a written contract.” The policies defined a “wrongful act” as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act.”

Kayne Anderson presented evidence showing that its use of Oil Daily was important to its business of investment advice, including testimony from its managing partner that Oil Daily “was something that I reviewed in my investment decision-making process.” However, the court noted that the “salient question here is whether the copyright breach alleged in the Underlying Action was an act ‘in the performance of or failure to perform’ Investment Advisory Services.” 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 instead was the copying and distribution of copyrighted material without the permission of the copyright owner.

The fact that “review of industry publications, including Oil Daily, is a necessary and typical undertaking by … investment personnel” did not result in coverage. “If Kayne Anderson had purchased subscriptions to Oil Daily for all of its investment advisers … no copyright violation could have been alleged.” The “wrongful act” giving rise to the underlying action was the unauthorized copying and distribution of the copyrighted work, not using the content of that work in giving investment advice. Because the copyright violation was not done in the course of performing investment advice, it was not covered.

In addition, the court stated that, under California law, “claims arising out of an insured’s administrative or general business decisions are not covered by professional liability insurance.” Here, the court noted that Kayne Anderson’s liability “arose out of a decision not to pay for a tool important to its profession … not the performance of giving financial or investment advice, no matter how important the copyrighted work was to Kayne Anderson’s investment advisory services.” As such, the copyright violation “was an administrative action that was part of running the business, not an action taken by Kayne Anderson in its capacity as a professional,” and therefore was not the type of conduct covered by a professional liability policy.

The policies also provided separate general liability insurance coverage for losses incurred by Kayne Anderson in the operation of its business, which may have provided coverage for its losses but for an exclusion that expressly applied to claims that alleged or arose out of violations of copyright.

Lastly, because there was “no potential for coverage” of Kayne Anderson’s claims in this matter, the insurers did not have a duty to defend Kayne Anderson in the underlying matter. As such, the court granted summary judgment in the insurers’ favor.