U.S. Court Applies "Interrelated Wrongful Acts" And Client‑Services Limits To Defeat PI Claim

A U.S. federal court, applying California law, has recently held that a financial services firm had no cover under its professional liability policy for a client's claim because the alleged misconduct was part of a single, interrelated course of conduct that began before the policy incepted. The court also found, independently, that cover failed because the alleged wrongful acts did not solely arise from "financial services" provided to clients of the insured firm.

Background

A client accused his broker of speculative trading and inadequate oversight that allegedly caused substantial losses. The broker began advising the client in October 2019 while employed at another firm. He joined the insured firm in September 2021, and the client transferred his accounts to continue working with him. By May 2023, the client alleged his accounts had been "decimated". The insured sought a defence and indemnity under its professional liability policy. The insurer denied cover, arguing that the claim arose from conduct commencing in 2019, before the policy's September 2021 inception, and that the claim did not solely arise from covered services to the insured's own clients.

Policy Language and Interrelated Wrongful Acts

The policy conditioned cover on the alleged "wrongful acts" or any "interrelated wrongful acts" occurring during the policy's coverage period. It defined "interrelated wrongful acts" broadly as wrongful acts connected by a common fact, circumstance, situation, event, or transaction. The policy also limited cover to claims solely arising out of "financial services" provided to clients of the insured or its "representatives".

The insured maintained that the complaint described multiple, discrete episodes of advice across different investments after the broker joined the firm, and thus included acts within the policy period. The court disagreed. Reading the policy's expansive definition together with California authority on similar provisions, it concluded the allegations described a single, logically connected course of conduct – the broker's trading and oversight of the client's accounts – spanning both employments. Because that unified course began in October 2019, the "interrelated wrongful acts" pre‑dated inception and fell outside the policy's temporal grant.

Court's Analysis

On the timing issue, the court held that the earliest related act controls. Where alleged wrongful acts are connected by a common purpose, method, or factual nexus, they are treated as one claim or one sequence of wrongful acts. Here, the initial advice and trading commenced in 2019; everything that followed was interrelated to that start point. As a result, the claim did not involve wrongful acts occurring during the coverage period, and no cover was available.

Separately, the court found that the claim did not "solely arise" from financial services provided to clients of the insured. The fulcrum was the policy's focus on the first wrongful act. Because the earliest alleged misconduct occurred before the broker joined the firm – and before the client became a client of the insured – this coverage element failed at the threshold. The insured's argument that later, in‑period services should trigger a prophylactic duty to defend was rejected in light of the unambiguous wording tying cover to the origin of the alleged wrongful acts.

Takeaway

Interrelated‑acts wording can be decisive. Broad definitions allow courts to anchor a claim to the earliest related act – often before policy inception or outside a retroactive date -extinguishing both the duty to defend and indemnity. A separate "financial services to clients of the insured" requirement may independently bar cover where a representative's relationship and the client's account migrate mid‑course. Firms should scrutinise retroactive dates, interrelated‑acts formulations, and client‑status conditions, particularly when onboarding advisers and their books of business.