Stout Risius Ross, LLC v. Aspen Specialty Insurance Company

Background

Stout Risius Ross, LLC sued Aspen Specialty Insurance Company for breach of contract and a declaration that Aspen was obligated to defend and indemnify Stout in a separate lawsuit brought by Stout’s former client, Wilmington Trust Retirement and Institutional Services Company.

The former client had served as trustee for an employee stock ownership plan involving Constellis Group, Inc. It hired Stout to provide valuation and financial-advisory services for an employee stock ownership plan transaction. In an earlier related proceeding, the former client was found liable for violating the Employee Retirement Income Security Act of 1974 and was ordered to pay approximately $29.8 million. The earlier courts criticized the former client’s reliance on Stout’s valuation report. The judgment was affirmed, and the former client later sued Stout for breach of contract, negligence, and contribution. The former client’s contribution claim sought payment related to the judgment.

Stout and Aspen later entered an insurance policy covering professional services, including valuation services. The policy contained a prior-knowledge condition: before September 1, 2019, the insured could not have known or reasonably foreseen that a wrongful act might give rise to a claim. Aspen denied coverage for the former client’s lawsuit, relying on that condition.

Motions and legal standard

Aspen moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legally valid claim. Stout filed a cross-motion for partial summary judgment under Rule 56 on Aspen’s duty to defend. Summary judgment is appropriate when there is no genuine dispute over a material fact and the moving party is entitled to judgment under the law.

The parties agreed that New York law governed. The court stated that unambiguous insurance-policy language must be enforced as written. It also applied a two-part test to the prior-knowledge condition: first, whether Stout actually knew the relevant facts before the knowledge date; and second, whether a reasonable professional with that knowledge could have expected those facts to form the basis of a claim.

Court’s analysis

The court concluded that it could consider the opinions from the earlier related proceeding because Stout’s complaint referred to them and incorporated them by reference. The court considered those opinions for their existence and for the fact that the former client had been subject to the approximately $29.8 million judgment, not as proof that Stout’s valuation work was actually deficient.

The court found that the first part of the prior-knowledge test was satisfied because Stout knew about the earlier proceeding before September 1, 2019. Stout acknowledged that it knew about the proceeding and its decisions and had been involved in the former client’s defense. The court found the second part satisfied because a reasonable professional could have expected the judgment against the former client, combined with the earlier courts’ criticism of reliance on Stout’s valuation report, to lead to a contribution claim against Stout.

The court rejected Stout’s arguments that the claim was not foreseeable because Stout was not a party to the earlier proceeding, the former client could have pursued another appeal, the judgment was not paid until August 2019, or the former client’s legal duties differed from Stout’s. The court explained that the issue was only whether a claim might reasonably have been foreseen before the knowledge date, not whether the former client’s later claim would succeed.

Because the prior-knowledge condition barred coverage, the court concluded that Stout had failed to state a claim. It also ruled that the policy’s broad duty to defend did not apply because the former client’s lawsuit was outside the policy’s coverage.

Disposition

The court granted Aspen’s motion to dismiss and denied Stout’s cross-motion for partial summary judgment. The court determined that amendment would be futile, denied Stout leave to amend, dismissed the case with prejudice, and directed the Clerk of Court to close the case.