California Court of Appeal Confirms Investment Advisor’s Unauthorized Copying of Trade Publication Is Not a Wrongful Act in the Performance of Investment Advisory Services

In a win for Wiley’s client, the California Court of Appeal, applying California law, affirmed the grant of an insurance tower’s motion for summary judgment, finding that an investment advisor’s unauthorized copying of a trade publication did not constitute a Wrongful Act in the performance of Investment Advisory Services so as to fall within scope of coverage under a professional liability insurance policy. Kayne Anderson Cap. Advisors, v. AIG Specialty Ins. Co., No. B324066, 2024 WL 238415 (Cal. Ct. App. Jan. 23, 2024). The court held that “[t]he language of the policy unambiguously limited coverage to wrongful acts in the performance of [the insured’s] professional investment advice services, and did not include wrongful administrative acts ancillary to such professional services such as the illegal copying of a subscription news periodical.” The court noted that “[e]ven if [the publication] was an important resource to [the insured’s] employees, the manner in which [the insured] accessed [the publication] was not relevant to the investment advice it provided.”

An investment advisor subscribed to a trade publication on a subject pertinent to its investments. Rather than purchase subscriptions for all of the individuals who read the publication, the advisor purchased a single subscription and had administrative personnel systematically forward it around the office each day. The advisor faced a copyright infringement suit from the publisher, which ultimately settled for $15 million after more than three years of litigation. The advisor tendered the matter to its professional liability insurance program, which covered, in relevant part, “Loss of an Investment Adviser or Insured Person that arises from any Claim made against such Insured for a Wrongful Act by or on behalf of such Insured in the performance of or failure to perform Investment Advisory Services.” The insurers denied coverage on the basis that the copyright action did not allege a Wrongful Act in the performance of Investment Advisory Services. Coverage litigation followed, and the trial court granted the insurers’ motion for summary judgment. The insured appealed, emphasizing that the trade publication was integral to their performance of Investment Advisory Services.

The California Court of Appeal affirmed. The court found that the illicit copying of the publication was not in the performance of Investment Advisor Services. The court observed that there was no “doubt that [the insured’s] employees found it helpful, or even necessary, to consult [the publication] as a means of staying informed about the oil industry and better advising the firm’s clients.”  Nonetheless the “manner in which [the insured] acquired its copies of [the publication]… had nothing to do with … being an investment advisor.” As the court reasoned, “[t]he advice to the clients would have been the same even if [the insured] had paid for every copy of [the publication] it used.”

The court rejected the insured’s attempt to distinguish cases involving “traditional” malpractice policies (which, it argued, afforded a narrower scope of coverage) from the professional liability policy at issue (which, it contended, offered broader coverage). The court noted that investment advising “is a traditional profession for which practitioners seek professional liability insurance.” And, at any rate, the policy at issue did not offer broader coverage than those in the cases on which the insurers relied. Rather, the court found that “[t]he  only reasonable way to interpret the language of the policy is that the wrongful acts must occur “in,” that is as a part of, the special risks of providing investment advice and not administrative-type tasks, regardless of how essential such tasks may be to the investment professional.”