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Insurance Agent Should not Sell Unregistered Securities


 Barry Zalma at

 Unregistered Security Exclusion Eliminates Duty to Defend or Indemnify

William Saoud sells insurance-related products. Beginning in 2017, he offered some of his clients a new financial instrument: a Memorandum of Indebtedness issued by 1 Global Capital, LLC. The investment opportunity was too good to be true.

In William Saoud, Patricia Boland- Saoud, and Bill Saoud Financial, LLC v. Everest Indemnity Insurance Company, No. 21-1621, United States Court of Appeals, Sixth Circuit (July 14, 2022)


Global Capital declared bankruptcy, and the SEC sued the company for alleged violations of the Securities and Exchange Act. Saoud's clients also sued him. Saoud sought indemnification from his insurer, Everest Indemnity Insurance Company, and ultimately sued seeking a declaratory judgment and breach of contract. The district court granted summary judgment in favor of Everest.


The Everest policy included an "Unregistered Security Exclusion." That provision excludes coverage for any claim "[b]ased upon, attributable to, or arising out of the use of or investment in any security that is not registered with the Securities and Exchange Commission."

The Saouds argued that the "Unregistered Security Exclusion" applies only if the complaints alleged that the Saouds sold "securities" that were required to be registered with the SEC and concluded that the Security Exclusion does not apply.

The Saouds argued that waiver or estoppel should preclude Everest's reliance on the "Unregistered Securities Exclusion" because Everest failed to timely disclaim coverage. 

In limited circumstances, Michigan courts prohibit insurers from raising defenses to coverage that they could have raised earlier. But this doctrine cannot broaden the coverage of a policy to protect the insured against risks that were not included in the policy or that were expressly excluded from the policy.

Contrary to the Saouds' argument, the duty to defend is not unlimited. The insurer is not required to defend against claims for damage expressly excluded from policy coverage. In other words, there is no duty to defend if there is no duty to indemnify as a matter of law. 

Both the duty to defend and the duty to indemnify turn on whether the "Unregistered Security Exclusion" applies. Because the Sixth Circuit concluded that the exclusion applies Everest had no duty to defend.


Everest had an effective exclusion. It refused to defend or indemnify. Although the duty to defend is broad it is not unlimited. Since there was no duty to indemnify there was no duty to defend especially when it was determined they were defrauding their clients selling the unregistered securities and that fraud should never be an action where insurance protects the fraudsters.