Clear and Unambiguous Policy Language Must be Applied

Every Insured Must Read and Understand the Policy before Buying

I have argued for the last 51 years that insurance disputes can be avoided by the people insured actually reading and understanding the policy before buying it. Very few people have listened.

In Allegis Investment Services, LLC, Allegis Investment Advisors, LLC v. Arthur J. Gallagher & Co; Indian Harbor Insurance Company; and Paige Nabavian, Case No. 2:17CV515DAK, United States District Court for the District of Utah Central Division (March 1, 2019) a failure to read and understand an insurance policy before it was purchased resulted in federal litigation that should have been avoided.


Allegis Investment Services, LLC, (“AIS”) is a broker-dealer investment company and Allegis Investment Advisors, LLC (“AIA”), is a registered investment advisor company (collectively, “Allegis”). Allegis seeks insurance coverage for claims against AIS and AIA relating to a “Net Credit Spread” investment strategy that Allegis employed in 2015. Allegis, with full discretionary authority for its clients, executed a “put credit spread” based on the Russell 2000 index on a total of 39,200 put options on each side of the spread. This trade had a maximum potential profit of $313,600, and a maximum potential loss of $38,886,400. Allegis’ investor accounts suffered the maximum potential losses from the trade, and many of the investors initiated arbitrations against Allegis to recover their losses.

Gallagher, after receing an application, proposed a policy to Allegis through Indian Harbor Insurance Company. The broker warned that it would seek to bind those coverages based upon Allegis’ authorization; however, it reported that it could make no warranties in respect to policy limits or coverage considerations of the carrier. Actual coverage, it warned, is determined by policy language and implored Allegis to read all policies carefully.

Allegis admited that it received a copy of the 2014 E&O Policy. The Policy contains the following exclusion: “This insurance does not apply to any Claim or Defense Expenses: . . . Arising out of the actual or alleged purchase, sale, attempted sale, solicitation or servicing of any of the following: . . . . Commodities, any type of futures contracts, any type of option contract or derivative. However, this exclusion shall not apply to fully covered put or call options.”  (emphasis added) The 2014 policy was renewed and Allegis received a copy of the 2015 E&O Policy that contained the same terms and exclusions as the 2014 policy.

FINRA Rule 2360 addresses “options” and defines the term “covered” in connection with put options. AIA placed a block trade for all of its options investors employing a bull put/net credit spread, with the cost and losses distributed pro rata among the investors. AIA received a premium from each contract of $0.5272.

Indian Harbor alleges that the trade was not “covered” as that term is defined by FINRA Rule 2360 and Cboe Rule 1.1(y) because instead of buying puts at the same or higher strike price than the puts AIA sold, AIA bought puts at a lower strike price, which was solely a play for premium.

With all of Allegis’ options investors losing half of their accounts on one trade, between September and mid-November 2015, AIA investors began to complain and threaten lawsuits and arbitrations. For example, one investor lost $50,000 for a potential gain of only $381.

Following assessment of the submitted claim materials, Indian Harbor determined that the Policy did not provide coverage for the options investors’ claims. Indian Harbor declined coverage for the eight noticed claims.

Until suit was filed June 5, 2017 no one associated with Allegis ever disputed Indian Harbor’s coverage determination or provided Indian Harbor with any additional information for it to consider.


Allegis seeks insurance coverage from Indian Harbor under the E&O Policy in relation to its investors’ arbitrations against it, claiming that Indian Harbor had a duty to defend and indemnify it for the investors’ actions under the terms of the Policy. Indian Harbor contends that the Options Exclusion in the E&O Policy barred coverage for the investors’ actions against Allegis because Allegis’ August 2015 trade did not involve fully covered put options.

Under Utah law, an insurance policy is merely a contract between the insured and the insurer and is construed pursuant to the same rules applied to ordinary contracts. Like other contracts, an insurance policy is interpreted to give effect to the intent of the parties as expressed by the plain language of the instrument itself.

If the policy language is clear and unambiguous, the court must construe it according to its plain and ordinary meaning. The proposed interpretation must be plausible and reasonable in light of the language used.

The insured bears the initial burden of showing that there is coverage for a particular claim under the policy. The insurer then bears the burden of proving by a preponderance of the evidence that an exclusion to coverage applies.

Duty to Defend

Utah courts generally apply the “eight-corners rule” to determine potential liability for an insurer’s duty to defend. The eight-corners rule compares the language of the insurance policy with the allegations of the complaint. The duty to defend arises when the allegations in the underlying complaint, if proved, could result in liability under the policy. Where the allegations, if proved, show there is no potential liability under the policy, there is no duty to defend.

In this case, Indian Harbor has the burden to demonstrate that none of the allegations of the underlying claims are potentially covered (or that a policy exclusion conclusively applies to exclude all potential for such coverage).

The Policy’s Options Exclusion bars coverage for the August 2015 options trade.

None of the underlying claimants refer to other types of trading or investments, such as mutual funds or annuities. The claimants refer only to their options trading accounts and what occurred in those accounts. The complaints are that funds were used instead for options trading.

The Policy exclusion Indian Harbor relies on applies to any claim arising out of options trading. The term is “very broad, general and comprehensive,” and means originating from, growing out of or flowing from. The exclusion applies irrespective of the legal theory of recovery as long as it is arises out of options trading.

Each of the underlying claimant’s complaints arises out of, grows out of, or flows from the actual or alleged purchase, sale, attempted sale, solicitation, or servicing of option contracts. The language of the exclusion is plain, unambiguous, and broadly applies to all claims arising out of options trading. The court concluded, therefore, that no claim falls outside of the Policy’s Options Exclusion.

In this case, both the allegations in the underlying claims and the undisputed facts demonstrate that there is no coverage afforded for the options investor claims.

Duty to Indemnify

Allegis did a single-day trade solely for the purpose of collecting a one-time premium. Allegis did not have cash or treasury bills to buy the underlying instrument. Allegis was a naked put writer. Allegis’ options investors suffered permanent losses from the August 2015 trade.

Bad Faith Claim & Punitive Damages Claims

Because the Policy does not cover the underlying investor claims against Allegis, Allegis’ bad faith claim and request for punitive damages necessarily fail.

Claims Against Brokers

Allegis has not demonstrated any contractual obligation Gallagher had to Allegis other than to procure an E&O insurance policy. Gallagher procured a policy, proposed the policy to Allegis, and Allegis authorized Gallagher to bind coverage. Allegis had ample time to review the E&O Policies and never rejected the insurance Gallagher proposed.

Negligent Failure to Procure Claim

It is undisputed in this case that Allegis obtained insurance in the amount it requested from Gallagher. Allegis never made a specific request that Gallagher obtain coverage for claims that may arise out of Allegis’ net credit spread strategy. The undisputed facts establish that Allegis and Gallagher had nothing more than a standard broker/insured relationship.

Plaintiffs Allegis Investment Services, LLC, and Allegis Investment Advisors, LLC’s Motions for Summary Judgment was denied while defendant Indian Harbor Insurance Company’s Motion for Summary Judgment and the motions of the brokers were granted.


Had Allegis read and understood the policy provided to them while knowing that they were advising clients to invest in options, they would have rejected the proposed policy since it excluded, clearly and unambiguously, liability as a result of option trading. They apparently did not read or understand the policy and tried to convince a judge that their mistake was the fault of the insurer and the broker.By refusing to accept their own negligence Allegis spent a great deal of money for lawyers only to have the attempt fail.  Much money in legal fees, on both sides and the time of an appellate court was wasted.

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Ten Volumes Comprising A Comprehensive Group of Materials on Property & Casualty Insurance Claims

Insurance claims professional and expert witness Kevin Quinley said about the following ten volumes: “Zalma’s series of books is a terrific blend of both the legal underpinnings and the practical implications for the claim practitioner.

Insurance Maven Bill Willson said: “Zalma On Insurance Claims” is a tour de force, an indispensable tool that should be a part of every claims training program in America and in the library of every claims professional for quick and frequent reference. This comprehensive guide belongs in the library of every insurance defense AND policyholder law firm. It should be a part of every claims training program of carriers, independent adjusting firms, and public adjusters. Many of these parts should be part of the training or reference programs for non-claims personnel, from agents to underwriters to risk managers.”

Zalma on Insurance Claims Volume 101




About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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