Well-advised professional services firms will carry both errors and omissions insurance and management liability insurance. A recurring problem under management liability insurance policies for all types of professional services firms relates to the very broad professional services exclusions often found in these polices. These exclusions preclude coverage for claims relating to the professional services firm’s delivery of professional services. Insurers sometimes attempt to apply a very broad preclusive effect to these exclusions, even with respect to claims for which the professional services firm rightfully expects coverage under its management liability policy.
In a recent case, a federal district court applying Rhode Island law ruled that the Legal Services Exclusion in a law firm’s D&O insurance policy did not preclude coverage for false advertising claims asserted against the law firm and two of its attorneys, and therefore that the insurer had a duty to defend the underlying lawsuit. The case provides a good example of the kinds of problems that can emerge when carriers broadly apply the professional liability exclusion in a professional services firm’s management liability insurance policy. A copy of the district court’s February 3, 2014 opinion can be found here.
Levine & Associates, a small law firm, advertises on the Internet and on television using the tag line “Call a Heavy Hitter® Today!” Two clients of the law firm filed an action in Rhode Island Superior Court against the law firm and two of its attorneys. The third count of the claimants’ complaint alleges a class action for “Deceptive Trade Practices.” Specifically, the plaintiffs allege that the defendants “deceptively advertised in all media in Rhode Island” and that the defendants “gave the false impression to Plaintiffs and …to future clients that they have special expertise in personal injury cases and disability cases.”
The law firm submitted the lawsuit as a claim under its D&O Insurance policy. The D&O insurer denied coverage for the claim, citing the D&O policy’s Legal Services Exclusion, which precludes coverage for “Loss for any Claim based upon or arising out of any Wrongful Act related to the rendering of, or failure to render, professional services.” The law firm filed an action against the D&O insurer seeking a judicial declaration that the law firm defendants are entitled to defense and indemnification for the underlying lawsuit. The parties cross-moved for summary judgment.
The Court’s Opinion
In a February 3, 2014 opinion, Rhode Island District Court Judge John J. McConnell, Jr. granted the law firm’s motion for summary judgment and ruled that the D&O insurer had a duty to defend the defendants in the underlying claim.
The D&O insurer had sought to rely on the Legal Services Exclusion’s broad “arising out of” preamble, arguing that courts have interpreted exclusions with this language very broadly. The insurer argued further that the allegations of false and deceptive advertising are “inextricably intertwined with the rendering of professional services” and that the allegedly deceptive advertising would not constitute a Wrongful Act within the meaning of the policy unless the law firm was hired by a claimant and then failed to deliver services as advertised. For its part, the law firm argued that the alleged deception related to advertising not to the delivery of legal services.
Judge McConnell looked at the dictionary definition of the term “render,” which means “to do; perform; to render a service” and “to do (a service) for another.” Based on this, he said that “the plain and ordinary language of the Legal Services Exclusion therefore eliminates from coverage only conduct that relates to Levine & Associates providing legal services.” He noted that the claimants’ claim “is about advertising not about the provision of legal services.” He added that “applying the Legal Practices Exclusion to this alleged deceptive advertising would ignore the meaning of the word ‘rendering’.”
Judge McConnell concluded by saying that “if the Court were to adopt the expansive reading” of the exclusion urged by the D&O insurer, “then any conduct by Levine & Associates would be excluded from coverage since Levine & Associates’ business is ‘related to the rendering of …professional services’.” He added that “if this were the case, the D&O Policy would be meaningless and provide no coverage. The Court will not construe the contract to create such an absurd result.”
Judge McConnell added in a footnote the following observation: “What seems clear from the plain language of the exclusion is that it was meant to exclude claims commonly referred to as malpractice claims, as opposed to claims arising from the business side of running a legal business. The policy in question here was a Directors and Officers policy, not a legal malpractice policy.”
When the law firm in this case advertised itself, it was engaging in ordinary business activity of the type any business organization might undertake. It was not “doing what lawyers do,” it was “doing what any business might do.” The law firm rightfully expected that its D&O Insurer should provide coverage for the advertising-related claim to the same extent as it would provide coverage for a similar claim against any small business.
This case provides a perfect example of why I have long argued that the professional services exclusion within a D&O Insurance policy ought to have the narrower “for” wording rather that the broader “arising out of” wording – the danger is that with the broader wording the insurer could seek have the exclusion’s preclusive effect apply far beyond the relatively narrow delivery of professional services and apply it to anything a professional services firm does.
Unfortunately, as I have previously noted on this blog (refer here), the question of whether or not claims related to the activity of a professional services firm are precluded from coverage under the firm’s management liability insurance policy is a recurring issue. The use of the “for” wording in the exclusion’s preamble would provide some assurance that the exclusion is not applied overly broadly, and that the exclusion would apply only (as it should only apply) to “malpractice” claims and not to the business side of a professional firm’s business. Regrettably, many carriers decline to give the narrower “for” wording, and so problems continue to arise when carriers seek to apply the exclusion broadly.
Judge McConnell was right when he said that if a D&O insurance policy’s professional services exclusion is applied broadly to apply to the business side of the professional firm’s business, it threatens to render the policy meaningless and to lead to an “absurd result.” If a carrier will not (as it should) agree to change the professional services exclusion preamble to the “for” word, then it is incumbent on the carrier to ensure that it does not rely on the breadth of the broader “arising out of” preamble wording to try to make the exclusion apply to the business side of a professional firm’s business.
As the Jones Lemon Graham law firm’s blog post notes, the Court’s opinion discusses only the third count in the underlying complaint, it does not discuss the other counts. Nor, as the blog post notes, “is the firm’s commercial general liability advertising injury coverage addressed.” I would note that the opinion also does not discusses whether or not the law firm’s D&O policy has a so-called “antitrust” exclusion, which as sometimes worded will preclude coverage for allegations of unfair or deceptive trade practices.
I suspect some readers may have some strong responses to my comments in the blog post. Readers are strongly encouraged to add their comment to this post using the blog’s comment feature.