Readers familiar with my background know that while I have spent the last ten years representing policyholders, I spent the first 25 years or so of my career on the insurer side of the aisle, first as a lawyer representing insurers and later as an insurer employee. Because of that long prior experience, I am generally able to see the insurer’s side of most issues, even when I am advocating on behalf of a policyholder. Though I generally can see where the insurer is coming from, there are two issues that I think the insurers regularly get wrong. Both of these issues arise in the context of private company D&O insurance. The first relates to the wording of the contractual liability exclusion. The second involves the wording of the professional liability exclusion. I discuss both of these issues below.
The Contractual Liability Exclusion
My concern with the standard contractual liability exclusion found in most (but not all) private company D&O insurance policies is that they typically use some for of the broad “based upon, arising out of, or in any way relating to” exclusion preamble, rather than the narrower “for” preamble. In several prior posts on this blog (most recently here), I have argued that the proper preamble for the contractual liability exclusion is the narrower “for” wording.
A typical wording of a contractual liability exclusion with the broad preamble provides that no coverage will be available under the policy “based upon, arising from, or in consequence of any actual or alleged liability of an Insured Organization under any written or oral contract or agreement, provided that this Exclusion … shall not apply to the extent that an Insured Organization would have been liable in the absence of the contract or agreement.” An exclusion with the alternative wording would substitute the word “for” in the stead of the words “based upon, arising from or in consequence of.”
My problem with the use of the broad preamble in the contractual liability exclusion is that it allows insurers to routinely use the exclusion to preclude coverage for claims that are and ought to be covered under the policy. For example, in once case on which I recently commented, a federal district court upheld a D&O insurer’s right to deny coverage in reliance on the contractual liability exclusion for a negligence claim that was asserted along with a breach of contract claim. In another recent case (discussed here), a court held that the contractual liability exclusion precluded coverage for negligent and fraudulent misrepresentation claims. In both cases, the exclusions at issue had the broad preamble language.
My view is that if a claim against an insured person is covered, then the policy should provide coverage, even if the claim arises out of a contractual dispute between the claimant and the insured. The fact is that the vast majority of private company D&O claims involve in some degree a fight about a breach of some type of an agreement. Merely because a complaint includes claims that are precluded from coverage should not mean that all claims asserted in the complaint should be precluded from coverage. If there are both covered and non-covered claims, then there should be an allocation. However, carriers that have the contractual liability exclusion with the broad preamble seek to rely on the exclusion to deny coverage for all of the allegations.
It has in fact become an all-too-frequent occurrence in my own portfolio that an insurer is trying to deny coverage for all of the allegations in a complaint even though only some of the allegations sound in contract. I am dealing with this problem as often as once a week these days.
Here is where the insurers go off track in their analysis of these issues. They forget how things worked before policies included an express contractual liability exclusion. In those days, the insurers still argued that contractual liability claims were not covered, because contractual liability is a voluntarily undertaken liability, rather than a liability imposed by law. The insurers would argue that liability insurance policies were intended to provide insurance only for liabilities imposed by law, not for voluntarily undertaken liabilities, like those based on a contract. (The reason I know that insurers made these arguments is that I made these arguments myself on behalf of insurers as a young carrier-side attorney early in my career.)
When entity coverage became a standard part of private company D&O insurance policies, insurers added the contractual liability exclusion as a precaution. (Public company D&O insurance policies do not have a contractual liability exclusion because the entity liability coverage in public company D&O insurance policies applies only to Securities Claims.) Unfortunately, rather than restricting the scope of the contractual liability exclusion to preclude coverage only for the voluntarily undertaken liabilities, some insurers worded their exclusion broadly, so as to preclude coverage not only for voluntarily undertaken liabilities but also to preclude coverage for liabilities imposed by law – that is, the very types of claims for which the policies were intended to provide coverage.
My view is that the contractual liability exclusion should be applied so as to preclude coverage only for the voluntarily undertaken liabilities, but not to preclude coverage for the liabilities imposed by law. For that reason, the appropriate preamble for the contractual liability exclusion is the “for” wording, not the broad “based upon, arising out of” wording.
I know that many insurers are unwilling to change their policies to substitute the “for” wording for the “based upon, arising out of” wording. The reason I continue to harp on this issue is that time after time I see insurers’ claims adjusters relying on the broadly worded contractual liability exclusion to deny coverage for claims that ought to be covered under the policy and that indeed are the very type of claims for which the insurance exists. All too often, as applied by aggressive claims handlers, the contractual liability exclusion becomes a preclusion that swallows up the coverage that the policy should be providing.
I have made this argument before. I am making it again here to make an appeal to two different audiences.
First, I appeal to the D&O insurers to reconsider their position on this issue and to change the wording in their policies so that the policies provide the insurance that they should be providing. Private company D&O insurers looking for a way to differentiate themselves in a crowded marketplace will want to take this step as a way to promote their product.
Second, I appeal to my colleagues on the policyholder side to press the insurers on this issue. It is time to bring the hammer down, so that the insurers provide the coverage for which they are charging premium and so that they stop denying coverage for claims (or parts of claims) that ought to be covered. It is time to start demanding that carriers make this change.
One last bit of history before I move on to the next topic. There was a time when many carriers’ forms used the broad “based upon, arising out of” preamble for the bodily injury/property damage exclusion found in most D&O insurance policies. Worded this way, the exclusion swept far too broadly. A concerted effort on behalf of policyholders got the insurers to change their wording. Most D&O insurance policies BI/PD exclusions now use the “for” wording rather than the broader “based upon, arising out of” wording. Indeed, the “for” wording for the BI/PD exclusion is now pretty much standard. Time to bring the contractual liability exclusion into the modern era as well; the industry needs to move to a “for” wording standard for the contractual liability exclusion.
The Professional Services Exclusion
Most private company D&O insurance policies typically have a professional services exclusion. All too often these exclusions are worded with the broad “based upon, arising out of” preamble. An exclusion with the broad preamble would be worded something like this: “The insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insurer alleging, arising out of, based upon, or attributable to the Organization’s or any Insured’s performance of or any failure to perform professional services for others, or any act(s), errors or omission(s) relating thereto.”
The purpose of this exclusion is similar to the purpose of several other exclusions in private company D&O insurance policies, and that is to make sure that claims stay in their proper lane. For example, an ERISA exclusion in a D&O insurance policy ensures that the D&O insurance policy is not called upon to address a fiduciary liability claim that properly should be addressed by the policyholder’s fiduciary liability policy. Similarly, the D&O insurance policy’s BI/PD exclusion properly ensures that the D&O insurance is not called upon to address claims for bodily injury or property damage as those claims properly should be addressed by the policyholder’s CGL policy. The exclusions avoid overlapping coverages between the policyholder’s various policies.
The purpose of the professional services exclusion in the D&O insurance policy is to avoid overlapping coverages between the D&O policy and the policyholder’s E&O insurance policy – that is, to ensure that the D&O policy is not called upon to address claims that properly should be addressed by the E&O policy. Because this is the purpose of the professional services exclusion, in my view the appropriate wording to be used in the exclusion is the narrower “for” wording. I have always felt that the use of the broad “based upon, arising out of” preamble sweeps far too broadly for the exclusion’s purpose and threatens to extend the exclusion’s preclusive effect beyond the exclusion’s purpose of keeping the various liability claims in the appropriate insurance lane.
The broad wording is a problem for all types of policyholders, but it is particularly inappropriate for policyholders in service industries. Basically, everything a policyholder does in a service industry arises out of their performance of professional services. An exclusion with this wording threatens coverage for the most likely claims the policyholder could encounter. The problem is that for a services business all likely claims will arise out of or relate in some way to the company’s services.
And unfortunately, all too often, I see private company D&O insurance claim adjusters trying to rely on this kind of exclusion in order to deny coverage for a claim, even though the claim does not involve an E&O claim but merely because it involves in some way the services of a service company policyholder. In prior blog posts, I have written (most recently here) about cases in which the insurer has successfully relied on a professional services exclusion to preclude coverage for claims, even though the claim is not an E&O claim. Indeed, it is becoming a far too regular occurrence in my own portfolio as well. The problem with the way that the insurers are trying to apply the exclusion in reliance on the broad preamble is that it threatens to render the policy meaningless and the supposed coverage under the policy illusory.
The solution to this problem is that the D&O insurers should change their policies to use the narrow “for” wording rather than the broad “based upon, arising out of” wording. Unfortunately, there are some carriers that will not agree to make this change. The fact is that in light of the exclusion’s purpose — that is, to keep the D&O policy properly aligned with the policyholder’s E&O coverage — there is absolutely no reason whatsoever for the carrier to use the broader wording. With the narrow “for” wording, the D&O insurer has all the protection it needs to ensure that the D&O policy is not called upon to address claims that properly should be addressed in the policyholders’ E&O policy.
I have made this argument before, too. I am raising this argument again here for the same reason I made the prior argument with respect to the contractual liability exclusion. That is, I want to appeal to carriers to make this change on their own, and I want to rally my fellow professionals on the policyholder side to press the insurers on this issue.
There is one more point I want to make on this issue. That is that the underwriters who are working on policies with the broadly worded professional services exclusion need to see how broadly their colleagues on the claims side are trying to apply this exclusion. The extent to which some claims adjusters stretch to try to apply this exclusion to preclude coverage is truly appalling; the underwriters need to see that their claims adjuster colleagues are applying the exclusion so broadly that there is literally nothing left of the policy’s purported coverage. If these claims adjusters’ position with the exclusion is correct, there is absolutely no reason why anybody would ever even think of buying the insurance. The underwriters need to reconsider their position on this issue and to allow the “for” wording on the professional services exclusion, so that that their policies are not irrelevant and pointless.
I urge my fellow policyholder-side colleagues to press the insurers on this issue.
Distractions: You could waste the next 20 minutes and read The New Yorker’s recent biographical article about Melania Trump (here), who could be the next First Lady of the United States. However, if you find that prospect too depressing to contemplate or if you would rather spend the next 20 minutes doing something improving, then you will want to read Sidhartha Mukherjee’s fascinating May 2, 2016 New Yorker article “Same But Different” (here) about the emerging field of epigenetics and how it blurs the nature vs. nurture debate.
By the way, so that you are prepared just in case, you will want to know that Mrs. Trump pronounces her first name “Meh-LAH-nya.”
What on Earth?: Apparently, some of the water molecules that arrived in our area Sunday morning thought it would be amusing to show up in the form of a solid, notwithstanding the fact that the calendar on the wall clearly said “May 15.” They brought along some thunder, too, to add noise to the equation. What a thoroughly revolting development.
