In a recent case in the state of Florida, a group of investors alleged they were victims of a Ponzi scheme and filed an action against a company and its directors. The group of creditors, the plaintiffs in the case, fell victim to a Ponzi scheme when they invested in a company that was in the business of providing medical monitoring devices to people, mainly the elderly, which enabled them to alert emergency services in the event of an in-home emergency. Evidently, the company purchased only a fraction of the devices it had purported to put into service. Instead, the company used investors’ money to pay new investors in a classic Ponzi scheme. The scheme was apparently perpetrated by the company president.

The company had an insurance company that provided coverage to the company under two commercial comprehensive general liability insurance policies that included liability coverage and an umbrella policy, but the insurance company refused to defend the directors of the company in the lawsuit on the basis that there was no coverage for the type of claim asserted by the plaintiffs. The directors sued the insurance company for breach of contract and declaratory relief. The directors then entered into a consent judgment with the plaintiffs and assigned their claim against the insurance company to the plaintiffs. The plaintiffs moved for a judgment to be entered against the insurance company in the amount of the consent judgment. The defendant insurance company filed a motion to dismiss the complaint on the grounds of failure to state a cause of action.

The trial court held that the insurance company had no duty to defend the directors under the terms of the policy and granted the motion to dismiss. The plaintiffs appealed.

The appellate court pointed out that ultimately the sufficiency of the coverage complaint hinged on whether the allegations that the insurance company had a duty to defend the directors in the lawsuit were negated by the terms of the insurance policies. The court pointed out that the complaint alleged that the defendant directors breached their fiduciary duty to the plaintiffs by failing to examine the financial books and records of the company, failing to follow the recommendation of its accounting firm to obtain counsel and negligently relying on the assertions of the company president, thus alleging that the directors owed them a duty to protect them from the Ponzi scheme.

The court pointed out that the professional liability endorsement provided coverage “for those sums that the insured becomes legally obligated to pay as damages because of negligent acts, errors or omissions arising out of ‘professional services’ rendered for others by the insured.”

The policy defined “professional services” as professional services rendered in the business of selling, installing, maintaining, monitoring or providing connection services for: 1) alarm and security systems; 2) phone networks; 3) video/video dial-a-tone; 4) wireless communications; 5) cable; 6) Internet; and 7) Web and fax services. This includes design, feasibility studies and consulting that may result in the sale or installation of the services listed above.

The court concluded that the acts and omissions of the directors alleged in the complaint did not constitute “professional services rendered for others by the insured” under the policies issued by the defendant insurance company.

Therefore, the trial court was correct in granting the motion to dismiss for failure to state a cause of action and in denying the plaintiffs’ motion for entry of a final judgment.

READERS ASK

Q In a prior conversation, you advised me that e-mail signatures were acceptable on our contracts with subscribers.  I just negotiated a secured loan from my bank and my bank now insists that the contracts they will be holding as security for the loan must have original signatures, stating that digital signatures will not suffice.

A Although digital signatures are valid and enforceable between you and your subscriber, when the bank makes a loan and takes your contracts as security, they may well want original signatures on the contract. This is a security measure required by the banks to make certain that the contracts that they hold as security are not compromised by the possible distribution of the same contract bearing a digital signature to other third parties.

 To ask Les Gold a question, e-mail sdm@bnpmedia.com.