Professional services companies need to be extra-careful when placing Directors and Officers liability ("D&O") coverage to ensure that their policies don't take away with one hand what they appear to give with the other. A new district court ruling suggests that a professional services exclusion found in most D&O policies may erase most of the coverage such companies believe they're purchasing.

Banks and other financial institutions, like most companies, usually carry D&O insurance to protect themselves and their decision-makers from claims of alleged "Wrongful Acts," including alleged negligence or misleading statements. They may also have Errors and Omissions or Professional Liability ("E&O") coverage to respond to claims arising from the performance of services requiring special training or expertise. To avoid overlapping coverage for claims that may be covered under an E&O policy, D&O policies typically include a so-called "professional services" exclusion that draws a line between these two lines of coverage. When applied to a professional services company, however, this line becomes blurred. As demonstrated by a recent decision from the U.S. District Court for the Southern District of Florida, broadly applying this exclusion to services companies like financial institutions threatens to eviscerate the companies' D&O coverage.

In Goldberg v. National Union, the court needed to decide whether the professional services exclusion in a bank's D&O policy excluded coverage for allegations that the bank aided and abetted the commission of a Ponzi scheme. Like most D&O policies, Gibraltar's policy provided liability coverage for a variety of alleged Wrongful Acts, including "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act...." The insurers denied coverage under the professional services exclusion, which provided:

The insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured alleging, arising out of, based upon, or attributable to the Organization's or any Insured's performance of or failure to perform professional services for others, or any act(s), error(s) or omissions relating thereto.

The district court, applying Florida law, agreed with the insurers, and held that the exclusion barred coverage for the underlying action. Even though "professional services" was not defined in the policy, the court held that the term was unambiguous and that banking services are professional services, since they require specialized skills, training and knowledge, and are regulated by state and federal governments.

The court rejected the bank's argument that the underlying claims arose out of internal management and regulatory functions, not services for others. The court focused on the "arising out of, based upon, or attributable to" language of the exclusion, which it found broad enough to encompass the alleged wrongful conduct.

The court acknowledged that the duty to advance defense costs under the policy is as broad as the duty to defend under other policies. It reaffirmed that "[a]ny doubts regarding the duty to defend must be resolved in favor of the insured." Yet the court ruled that the allegations of the complaint fell squarely within the broad professional services exclusion, so that the insurer did not even owe the insured a defense of the claim. (See this article for a discussion of the broad duty to advance defense costs.)

The district court's affirmance of the insurer's expansive reading of the professional services exclusion is troubling. It suggests that anything a bank or other services company does "arises out of" or "is attributable to" the provision of professional services. If so, then the coverage such companies purchase when they buy D&O policies would be largely illusory. Any alleged wrongful act will arguably "arise out of" its professional services business. In fact, this argument was raised in Goldberg, but the district court rejected it. The court pointed out that coverage will still exist for employment practices claims or securities claims. But these are only the proverbial exceptions that prove the rule—the policy provided coverage for "Wrongful Acts" that included "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act," but then, under the court's interpretation, snatched away this coverage by including a broadly-worded professional services exclusion. Very likely, the policyholder paid as much premium for the coverage that the court voided as any company outside the professional services industry.

A professional services company, like any company, doesn't purchase D&O insurance for itself and its directors and officers solely to protect against employment or securities claims, and a reasonable interpretation of the policy is that it provides more. The Goldberg court's reading of the policy falls far short of the coverage expectations insureds have when they purchase D&O coverage, and renders much of the coverage illusory. Applying this exclusion so broadly against professional service companies also conflicts with the widely-accepted principle that grants of coverage should be interpreted broadly to afford the greatest protection to the insured, and that exclusions are to be read narrowly.

Financial institutions and other service companies should be mindful that their insurers may seek to apply the professional services exclusion broadly to avoid coverage under their D&O policies, putting at risk coverage for some of the most likely and anticipated claims. When placing or renewing coverage, they should seek to remove such "arises out of" language from the professional services exclusion.

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