dcOn May 15, 2014, in an interesting decision illustrating how complex insurance contract wordings can interact to produce outcomes policyholders may not have expected or intended, District of Columbia Superior Court Judge Frederick H. Weisberg held that as worded a broad professional services exclusion in The Carlyle Group’s management liability insurance policy precluded coverage for defense costs incurred in defending against securities law and mismanagement claims filed in the wake of the credit crisis-related collapse of Carlyle’s affiliate, Carlyle Capital Corporation (“CCC”).  


In a ruling that practitioners in this area will want to consider carefully, the Court held that what seems to have been intended as an exclusion for E&O type claims against CCC precludes coverage for what were essentially D&O type claims filed against the various Carlyle entities. A copy of the court’s May 15, 2014 opinion can be found here 



The Carlyle Group is the trade name of a global private equity firm. In 2006, Carlyle organized CCC, a Guernsey Island affiliate, to invest in residential mortgage backed securities (MBS). Carlyle Investment Management LLC (CIM) served as CCC’s investment manager pursuant to an investment Management Agreement (IMA). First in a private placement and later in a public offering, CCC shares were sold to investors. In 2008, the RMBS market collapsed and CCC slid into bankruptcy. 


As discussed here, numerous investors as well as CCC’s liquidators in bankruptcy filed lawsuits against the Carlyle entities and their respective directors and officers alleging various forms of misrepresentation and mismanagement. Carlyle notified their professional liability insurers of these lawsuits, seeking payment of their costs of defense. Carlyle’s insurers denied coverage for the claims. Carlyle then filed an action in the District of Columbia Superior Court seeking a judicial declaration that that defense costs were covered under the policies.  


The insurance company defendants moved to dismiss the Carlyle entities’ declaratory judgment action, arguing that all of the claims in the underlying litigation were precluded from coverage by an exclusion stating that the insurer is “not liable to make any payment for Loss in connection with any Professional Services Claim arising from Professional Services provided to Carlyle Capital Group.” The words “Professional Services Claim” and “Professional Services” are boldfaced in this exclusion. 


The policy defines the term “Professional Services Claim” as “a Claim made against any Insured arising out of, based upon, or attributable to Professional Services provided by an Insured.” The words “Professional Services” are bold-faced in this definition. 


The policy has a detailed definition of the term “Professional Services,” Which provides in pertinent part that the terms shall mean: 


(1) the giving of financial, economic or investment advice regarding investments in any debt, equity or convertible securities, collateralized debt obligations, collateralized loan obligations, collateralized bond obligations, collateralized mortgage obligations, asset-backed securities, limited partnership, limited liability company, private placement, entity, mutual fund, exchange traded fund, hedge fund, private equity fund, fund of funds, asset, liability, debt, bond, note, real property, personal property, commodity, currency, futures contract, index futures contract, option, option on a futures contract, warrant, swap, credit default swap, contract for differences (CFD), currency contract or other derivative instrument or contract, or any combination of any of the foregoing, including without limitation the giving of financial advice to or on behalf of any Fund (or any prospective Fund) or any separately managed account or separate account holder or any limited partner of any Fund (or prospective Fund) or any other investor or client of, in or with an Organization;

(2) the rendering of or failure to render investment management services, including without limitation investment management services concerning any of the foregoing investments, and including without limitation, the rendering of or failure to render investment management services to or on behalf of any Fund (or any prospective Fund) or any separately managed account or separate account holder or any limited partner of any Fund (or prospective Fund) or the rendering or failure to render investment management services to or on behalf of any other investor with an or client of, in or Organization;

(3) the organization or formation of, the purchase or sale or offer or solicitation for the purchase or sale of any interest(s) in, the calling of committed capital to, a Fund or prospective Fund; 


(5) the providing of advisory, consulting, management, monitoring, administrative, investment, financial or legal advice or other services for, or the rendering of any advice to, or with respect to, an Organization, a Fund (or any of its limited partners or members) or a Portfolio Entity (or a prospective Organization, Investment Fund or Portfolio Entity); … or  


(8) other similar or related services.


In opposing the insurers’ motion to dismiss, the Carlyle entities argued that the exclusion on which the insurers sought to rely was intended to exclude only claims arising from the delivery of professional services – that is, what is referred to in the insurance industry as “E&O claims” – not management liability claims such as those alleging acts errors or omissions in corporate governance, or what are referred to in the industry as “D&O Claims.” The Carlyle entities argued that because the underlying claims for securities violations and mismanagement were in the nature of D&O claims and not E&O claims, the exclusion on which the insurers sought to rely should not operate to preclude coverage. 


The May 15 Opinion  

In his May 15 opinion, Judge Weisberg granted the defendants’ motion to dismiss and dismissed the plaintiffs’ declaratory judgment action with prejudice. 


Judge Weisberg said with respect to the defined terms used in the policy such as Professional Services and Professional Services Claims, “whether or not the words mean something else in the insurance industry outside the context of this particular contract, those terms are specifically defined in the contract, the definitions are broad and unambiguous and, as used in the Exclusion, they operate to exclude coverage for all of the losses (and defense costs) at issue in this case.” 


Carlyle had argued that virtually all of the claims asserted in the various underlying lawsuits alleged misrepresentations or omissions with respect to the securities issued by CCC or with respect to the RMBS underlying the securities, or alleged mismanagement of the RMBS investments, and therefore that the claims  represented management liability claims that were not excluded by the terms of the Professional Services provisions of the exclusion on which the insurers sought to rely. 


However, Judge Weisberg found that the phrases used in the exclusion were defined in the contract “broadly enough to include virtually all of the conduct alleged” against the Carlyle entities in the underlying lawsuits, “whether or not such conduct would be characterized as professional services or corporate management in the industry generally or in some other insurance contract.” The question, Judge Weisberg said, is not whether the Carlyle entitles “thought those terms did not mean the same thing in the Exclusion as they meant in the coverage sections of the contract; by using defined terms in bold letters in the Exclusion, those terms can have only one meaning, and that is the meaning that the contract assigns to them.”   


It is important to note in this regard that Judge Weisberg applied the so-called “eight corners rule,” which considers only what it within the four corners of the policy and the four corners of the complaint. Under this rule, considerations outside of the four corners of the policy and of the complaint are irrelevant, including here consideration of arguments based on what the contract was intended to mean.


Judge Weisberg also expressly rejected what he described as the Carlyle entities’ invitation “to get down in the weeds to see if there may be some clever parsing of the language in any count in the many multiple-count complaints against them that could take that count outside of what would otherwise be the unambiguous language of the Exclusion.” He said in reviewing the various allegations that “each claim of each complaint arises from the provision of Professional Services to CCC.” He added that “to the extent that these claims – or some of them – would be classified as ‘management liability claims’ in the insurance industry generally or in some other insurance contract, in this contract they are Professional Services Claims arising Professional Services to CCC,” and therefore are precluded from coverage under the exclusion on which the insurers relied. 



I have some comments on this case, but I want to emphasize at the outset that I do not mean to criticize anyone or second-guess any decisions or actions that were made in the structuring or placing of this policy. I do not know what may have led to the inclusion of or wording of particular terms in this policy. Nothing I say here should be interpreted to suggest that I am finding fault in any way with this policy or the wordings in this policy. 


I will say that I can understand the Carlyle entities’ position here. When I read the exclusion at issue in this case, I interpreted the exclusion as directed toward E&O claims arising from the delivery of professional services to CCC. My interpretation would be that the exclusion was intended to preclude coverage for E&O claims arising from CIM’s delivery of professional services to CCC under the IMA.  


At the same time, while I feel comfortable with that interpretation of the intent of the exclusion, I can certainly understand the insurers’ position that regardless of what may or may not have been intended, the exclusion as written has a meaning based on its use of defined terms in the policy. And in that respect the policy’s broad definition of Professional Services appears sufficiently expansive to encompass the allegations in the underlying complaints. Judge Weisberg’s application of the “eight corners rule” prcluded consideration of matter outside the policy and the complaint in the interpretation of the policy.


Judge Weisberg’s determination that the exclusion precludes coverage is best understood by his comments in footnote 6, in which he notes that based upon the policy’s definition of Professional Services both the policy’s coverage section and the exclusion include “the rendering or the failure to render investment management services,”  “the providing of advisory, consulting, management, monitoring, administrative, investment, financial or legal advise to, or with respect to, and Organization or Fund,” “the organization or formation or, the purchase or sale or offer or solicitation for the purchase or sale of any interest(s) in, the calling of committed capital to, a Fund or prospective Fune,” and other or related services.” The exclusion, Judge Weisberg note, applies only when those activities related to CCC.


Judge Weisberg concluded that whether the allegation involved alleged false marketing of the CC shares; alleged failure to make required disclosures to purchasers of the CCC shares; alleged mismanagement of CCC under the IMA; alleged failure to take appropraite actions to mainatin liquidity when the RMBS market collpased; the operation of CCC with divided loyalties, the allegations fell within the Policy’s broad definition of Professional Services.


The irony here it was in Carlyle’s interests to have the broadest possible definition of Professional Services. Carlyle is a private equity firm. Insurance for organizations of this kind frequently include within a single policy or a single program of insurance both E&O coverage and D&O coverage. In order to secure the broadest possible coverage under the E&O insurance provisions in the policy, it was desirable for the term Professional Services to be defined as broadly as possible. However, the breadth of the term’s definition ensured that the exclusion on which the insurers relied here swept broadly in its preclusive effect for claims implicating the exclusion on which the insurers relied. 


This decision represents only a trial court’s interpretation. Carlyle Group has the option of seeking to appeal Judge Weisberg’s ruling to the Court of Appeals of the District of Columbia. It remains to be seen how this case might unfold in the event of an appeal. 


Nevertheless, this outcome in the Superior Court of this coverage dispute represents something of a cautionary tale, and a reminder that it is not always the case that the broadest possible policy terms and conditions will always operate to produce coverage outcomes in the insureds’ favor. This claim is also a reminder that professional liability insurance policies are complex and multifaceted, and a great deal of care must be taken to ensure that all of the policy provisions interact as intended to ensure that the policy operates as intended. Again, as I have stressed, I do not mean to second-guess or criticize anyone with respect to the policy at issue in this case. I am expressing no opinions about the way this policy was worded or structured.