Fifth Circuit Affirms Application of Securities Exclusion 

August 26, 2019

On July 30, 2019, the U.S. Court of Appeals for the Fifth Circuit, in Gleason v. Markel American Insurance Company, ---Fed. Appx. ---, 2019 WL 3437642 (5th Cir. 2019), affirmed a district court’s holding that, because a securities exclusion applied to an underlying lawsuit arising from the sale of equity interests, Markel American Insurance Co. (MAIC) did not have a duty to defend or indemnify its insureds. Gleason v. Markel American Insurance Company, 2018 WL 538324 (E.D. Tex. January 24, 2018).


Tom and Julie Gleason (the Gleasons) were officers of Oregon Ice Cream, LLC. On October 1, 2014, the Gleasons sold their equity interest in Oregon Ice Cream, LLC to OIC Holdings, LLC (OIC). Subsequently, OIC filed suit against the Gleasons, alleging they made false representations during negotiations and in an equity purchase agreement.

MAIC issued a management liability policy to Oregon Ice Cream, LLC effective August 31, 2014, through October 2, 2020. This policy included Directors and Officers and Company Liability  coverage. The Gleasons, who qualified as insured persons under the policy, tendered OIC’s lawsuit to MAIC, but MAIC denied coverage. MAIC contended that the OIC lawsuit was not covered because allegations indicated that the Gleasons were not acting within an insured capacity and thus no “wrongful act” was alleged. Moreover, even if a wrongful act was alleged, MAIC contended that a securities exclusion barred coverage.

Although the district court rejected MAIC’s insured capacity argument, it concluded that the policy’s securities exclusion barred coverage. Specifically, it provided that MAIC would not be liable for any claim based upon, arising out of or in any way involving the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities. This securities exclusion also contained an exemption, however, providing that it did not apply to claims based upon, arising out of, or in any way involving the purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities in a private placement transaction exempt from registration under the Securities Act of 1933, as amended.

The district court first noted that the “words ‘arising out of’ are words of much broader significance than the words ‘caused by,’ and are ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ ‘flowing from,’ ‘incident to,’ or having connection with.” Put differently, the court acknowledged that an exclusion including this phrase is given a broad, general, and comprehensive interpretation. As such, the court stated that all the allegations in the OIC lawsuit bear, at the very least, an incidental relationship to the Gleasons’ sale of their equity interest.

The Gleasons, however, argued that the exemption to the securities exclusion applied because the phrase “private placement transaction” was not defined. The Gleasons, therefore, contended that the court should use a definition most favorable to the insured and thus its equity sale was a private placement transaction exempt from registration under the Securities Act of 1933. The court rejected this argument, however.  It reasoned that the Gleasons were not exempt from registration because a private placement transaction required the issuance of securities from an issuer. In doing so, the court relied on the language used in Section 4(a)(2) of the Securities Act of 1933 and the safe harbor provided by Rule 506 of Regulation D to the Securities Act of 1933.

The court concluded that the Gleasons were not issuers because no security was issued in the equity sale to OIC; rather, the transaction involved the resale of securities that had previously been issued.  Accordingly, the district court held, and the 5th Circuit affirmed, that the claim did not fit into the private placement exemption and was thus excluded pursuant to the securities exclusion.


Although securities exclusions are virtually non-existent in public company D&O policies, Gleason illustrates that they still play an important role for insurers in minimizing risk when issuing private company D&O insurance policies. Moreover, the wording of securities exclusions in such policies is very important. Gleason highlights that courts are willing to apply broad, preclusionary language to exclude coverage when a policy is unambiguous. It also highlights the fact that courts will reference statutory language cited in a securities exclusion to understand the meaning of a phrase, rather than simply affording an insured a favorable interpretation. This approach aligns with the underlying purpose of the securities exclusion, and facilitates greater certainty for parties in the insurance marketplace.


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Rafael Rivera


(212) 453-3879

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Rafael Rivera, Jr., is an associate in Cozen O’Connor’s New York City office, and concentrates his practice in the areas of Director and Officer, Professional Liability, and Commercial General Liability Insurance.