In a December 6, 2012 opinion (here), a New York state court judge applying New York law has denied a D&O insurer’s motion seeking a summary judgment determination that its policy’s “professional services” exclusion precluded coverage for attorneys’ fees that the Andy Warhol Foundation incurred in defending claims brought by art owners disgruntled by the Foundation’s determination that Warhol had not painted the owners’ paintings.

 

Background

The Foundation is charged with protecting the legacy of the painter, Andy Warhol. The primary purpose of an affiliated entity, The Andy Warhol Art Authentication Board, is to review pieces of artwork submitted t it to determine whether or not they were created by Warhol.. (The related entities are collectively referred to in this post as the Foundation.).

 

 In 2007, an art owner filed a class action lawsuit against the Foundation and related entities on behalf of all persons who had sought authentication from the Foundation that art they owned had been painted by Warhol. A separate art owner later filed an individual action against the Foundation. The claimants, who included persons whose artwork had been determined not to have been created by Warhol, asserted claims of fraud, violations of the Lanham Act and violation of the Sherman Act. After extensive litigation, the claimants ultimately withdrew their claims.  

 

The Foundation sought coverage for its defense fees from the insurer that had issued the organization a $10 million D&O policy and a $2 million E&O policy. The insurer initially denied coverage under both policies, but ultimately wound up paying the full limit of $2 million under the E&O policy. The Foundation sought to recover the remaining balance of its defense costs ($4.6 million plus interest) under the D&O policy. The insurer refused to pay and the Foundation filed suit.

 

The insurer filed a motion for summary judgment in the coverage action, arguing, among other things, that coverage for the remaining defense fees was precluded under the D&O policy’s “professional services” exclusion, which provides that:

 

In consideration of the premium paid, it is hereby agreed that the Company shall not be liable to make any payment for “loss” or “defense cost” in connection with any “claim” made against the “Insured” based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving:

1. The furnishing or the failure to furnish professional services by an attorney, architect, engineer,, accountant, real estate agent, financial consultant, securities dealer, veterinarian or insurance agent or broker.

2. The furnishing or failure to furnish professional services by an [sic] physician, dentist, psychologist, anesthesiologist, nurse, nurse anesthetist, nurse practitioner, nurse midwife, x-ray therapist, radiologist, chiropodist, chiropractor, optometrist, or other medical or mental health professional.

3. A “professional incident” as defined herein. “Professional incident” means any actual or alleged negligent:

a) act;

b) error; or

c} omission

in the actual rendering of services to others including, counseling services, in your capacity as [sic] social services organization. Professional services include the furnishing of food, beverages, medications or appliances in connection therewith.

 

The insurer argued that the Foundation’s authentication services constitute “professional services,” precluding coverage for the defense fees. The insurer also argued that the Foundation fits within the category of a “social services” organization under Section 3 of the exclusion.

 

The Court’s Order

In his December 6, 2012 Decision and Order, Justice Peter Sherwood of the New York (New York County) Supreme Court, applying New York law, denied the D&O insurer’s motion for summary judgment. With respect to the professional services exclusion, Justice Sherwood found that the insurer could not carry its “heavy burden” of proving that the exclusion applies, noting that “the Exclusion lists specific occupations that involve specialized training and skill. Authentication services are not listed.” Justice Sherwood further noted that examples supplied in the exclusion “do not relate in any way to art authentication services.” Because the exclusion is “at best ambiguous,”  it must be construed in the policyholder’s favor,  Justice Sherwood denied the insurer’s motion for summary judgment.

 

Discussion

Although Justice Sherwood denied the insurer’s motion for summary judgment, he did not enter summary judgment in Foundation’s favor. Indeed, the docket cover sheet attached to the decision and order indicates that the ruling is a “non-final disposition.” It is unclear whether or not there are other bases on which the insurer is contesting coverage that were not addressed in its summary judgment motion or what other issues may remain for trial.

 

That said, Judge Sherwood’s ruling represents a serious set back for the insurer in this case. There is a peculiar irony in the court’s determination that the professional services exclusion did not preclude coverage yet at the same time the carrier (ultimately) acknowledged coverage for the claim under itsE&O policy. The general expectation between these kinds of policy’s is that a professional liability claim would be covered by one or the other of the two policy’s but not both; indeed, the general purposeof the professional services exclusion is to ensure that the D&O insurer does not pick up coverage for claims that properly belong under an E&O policy.

 

The problem for the insurer is not that the authentication services didn’t involve the delivery of a kind of professional service. Indeed, I think most people would agree that the art authentication services are professional services, as commonly understood. However that does not mean that the authentication services represent professional services within the meaning of the D&O policy’s exclusion. To make that determination, the actual language used in the policy must control. And that’s clearly where the insurer got in trouble here.

 

The exclusionary language used would seem to have little to do with circumstances of the Foundation’s operations. There is no general catch-all language, either — or at least no language obviously intended to provide a catch-all provision. There is no doubt that had the insurer used language better matched to the Foundation’s activities and circumstances that the exclusion might have operated to preclude coverage. Any underwriting manager responsible for policy issuance quality control will want to take a close look at what happened here and draw some obvious lessons about the steps necessary to ensure that the policy as issued reflects the terms and conditions required to meet the risks accepted.

 

Lisa Scuchman’s December 10, 2012 Am Law Litigation Daily article about Judge Sherwood’s summary judgment ruling can be found here.

 

More About that $168.8 Million Verdict in the IndyMac Case: Readers interested in the massive $168.8 million jury verdict entered last Friday on behalf of the FDIC in its capacity as receiver of the failed IndyMac bank against thee banks former directors and officers will want to take a look at Alison Frankel’s December 11, 2012 post on her On the Case blog (here). As I noted in my discussion about the verdict, the FDIC’s strategy in the case is to try to recover under a second $80 million tower of D&O insurance. The agency’s strategy was dealt a major setback earlier this year, in the form of a ruling in a separate proceeding that all of the IndyMac lawsuits relate back to a prior claim and therefore trigger only a single, virtually depleted $80 million tower. That coverage determination is now on appeal. Frankel’s post does an a good job summarizing the FDIC’s strategy as well as its procedural maneuvering with respect to the second $80 million tower. The FDIC apparently hopes not only to be able to argue that the second $80 million tower is triggered, but that the D&O carriers are liable for  amounts awarded in excess of the $80 million as well.

 

Readers may also be interested in taking a look at the Alston & Bird law firm’s memo about the verdict as well. The firm’s December 11, 2012 memo argues that the verdict is of limited relevance outside of California or in any jurisdiction in which a corporate officer cannot be held liable for mere negligence. The law firm, which represents former directors and officers in a host of the FDIC’s failed bank cases, contends that in many of the cases that the FDIC has filed, “the FDIC will be required to demonstrate that the former bank officers and directors committed gross negligence, which is far more difficult to prove than simple negligence or breach of fiduciary duty.”