In a coverage dispute arising out of the long-running Rothstein Ponzi scheme scandal, a Southern District of Florida judge, applying Florida law, has held that the professional services exclusion in the Rothstein bank’s D&O insurance policy precluded coverage for claims brought against the bank and certain of its directors and officers by the Rothstein law firm’s bankruptcy trustee. As discussed below, the court’s decision raises questions about the appropriate wording for the professional services exclusion in a service company’s D&O insurance policy. The May 18, 2015 decision in the case can be found here.
The Rothstein law firm bankruptcy trustee along with lead feeder fund’s bankruptcy trustee’s filed claims against Gibraltar Private Bank & Trust and certain of its directors and officers alleging that the defendants aided and abetted Rothstein in the perpetration of the Ponzi scheme fraud. The bank submitted the claims to its D&O insurers, which denied coverage for the claims in reliance on the professional services exclusion in the policies.
After the D&O insurers denied coverage, the bank and its directors and officers entered a series of settlements and related agreements (what the court later referred to as “Coblenz agreements”) with the bankruptcy trustees and with the claimants in the underlying actions whereby the bank and the individuals consented to the entry of a judgment against them in exchange for an assignment of their rights under the D&O insurance policies and a agreement not to enforce the judgment against them except as to the insurance policy proceeds. The assignees then filed a coverage lawsuit in the Southern District of Florida against the D&O insurers. The insurers moved to dismiss.
The professional services exclusion provided that:
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 any failure to perform professional services for others, or any act(s), error(s) or omission(s) relating thereto.
The May 18 Opinion
In her May 18, 2015 opinion, Southern District of Florida Judge Kathleen M. Williams granted the defendant insurers’ motion to dismiss with prejudice, ruling that the D&O insurance policies’ professional services exclusion precluded coverage for the underlying claims. In concluding that the professional services exclusion precluded coverage, Judge Williams rejected several arguments that the plaintiffs had raised.
First, Judge Williams rejected the plaintiffs’ argument that the exclusion operated severally (that is, separately as to each insured person) rather than jointly. Judge Williams said that “a plain reading of the Professional Services Exclusion demonstrates that it bars coverage for any Claim made against any Insured arising out of any Insured’s failure to perform professional services for others. The exclusion is not limited in its application to each Insured’s performance; instead it jointly bars coverage for all insureds for any Claim arising out of any insured’s performance or failure to perform professional service.” In reaching this conclusion, Judge Williams noted that the policies incorporated a so-called severability provision, which made certain of the policies’ exclusions (but not the professional services exclusion) severable, so that the conduct of one insured would not be applied to preclude coverage under the identified exclusions for other insureds.
Judge Williams also rejected the plaintiffs’ argument that because the exclusion did not define the term professional services, the exclusion is ambiguous and should be construed against the insurers. She reviewed several prior case decisions applying Florida law in which the courts had said that were a policy does not define the term “professional services,” the courts have considered whether the service at issue involves specialized skill, requires specialized training, is regulated, requires a degree, and/or whether there is an entity that provides certification or accreditation for individuals in the field. Judge Williams found that the provision of banking services represents the delivery of professional services within the meaning of the exclusion.
However, the plaintiff argued that the allegations against the bank and the individual directors and officers arose out of purely internal management and regulatory functions, not services to others. Judge Williams reviewed the allegations in the underlying complaint and concluded that the allegations in the complaint “arise out of, or are attributable to, the Insureds’ performance of or failure to perform professional services for other” – specifically banking services for the benefit of Rothstein and the Rothstein law firm accounts.
Finally, Judge Williams rejected the plaintiffs’ allegation that the application of the exclusion to preclude coverage for the delivery of banking services renders the coverage offered under the policy to be illusory, because every activity involved in the bank’s operations involves the delivery of banking services. In rejecting this argument, Judge Williams said that the D&O policies provide coverage for many claims that would not involve the delivery of services for others. She said, for example, the bank provides coverage for wrongful termination and harassment claims or for securities claims made against any insured.
Within the constraints of the policy language at issue, Judge Williams’s decision on this coverage dispute arguably is unexceptional. (I don’t by that comment mean to suggest that I do not appreciate the work and effort that went into contesting the legal issues involved, which I understand were quite challenging and hotly contested; I am merely reflecting my opinion on Judge Williams’s ruling, not the degree of difficulty that the parties faced in this case.) However, for me, this decision raises more general question about the language used in professional services exclusions in service companies’ D&O insurance policies. I suggest below that the specific exclusionary language used in this policy is not appropriate for companies, such as banks, engaged in a service business.
By raising this language concern, I do not mean to suggest in any way that different language should have been used on this particular policy. I have no way of knowing whether or not the alternative, preferred language I identify below would have been available in connection with the placement of this policy. Indeed, the alternative language usually is not available, and the language used in this policy often is viewed as standard – which is the heart of the problem with the language, as far as I am concerned.
My objection to the language used in the professional services exclusion in the policy at issue in this case is based upon the purposes for which a professional services exclusion is included in a D&O insurance policy in the first place.
The purpose of a professional services exclusion in a D&O insurance policy is to align the various coverages in the policyholders’ liability insurance program, so that the D&O policy does not apply to claims that the policyholder’s E&O insurance 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 “for” wording. I have always felt that the use of the broad “based upon, arising out of or in any way relating to” sweeps far too broadly for the exclusion’s purpose and threatens to extend the exclusion’s preclusive effect far beyond the exclusion’s purpose of keeping the various liability claims in the appropriate insurance lane.
But whatever the argument in general about the use of the broad “based upon or arising out of” language in a professional liability exclusion might be, I think the argument that the broad preamble sweeps too broadly is particularly compelling in the context of a business company in the services sector. I think there is merit to the plaintiff’s argument here that the way the broad preamble is interpreted and applied reaches into the very essence of the service company’s day-to-day operations. The plaintiffs’ argument that for a services business all likely claims will arise out of, relate to or in any way involve the company’s delivery of services is legitimate – and that is the reason why the professional services exclusion in a service business’s D&O insurance policy should have the “for” wording, not the “based upon or arising out of wording.”
The examples Judge Williams cites for the types of claims that are still covered under the policy notwithstanding the overbroad sweep of the exclusion to me unconvincing. The discrimination and harassment claims examples to which she referred are entirely inapposite. Those kinds of claims are employment practices liability claims not D&O insurance claims; the reference to those types of claims is entirely beside the point and proves nothing. Her reference to securities claims is closer to the mark but of less relevance to a private company; even if true, it leaves the entire remaining universe possible of D&O claims – that is, all of the various types of liability exposures for which a private company might buy D&O insurance – within the reach of the exclusion’s preclusive sweep.
Even if at the margins there are theoretical claims for which coverage might be preserved from the exclusion’s overbroad reach, that does not alter the fact that given the purposes for which the exclusion is in the policy, the exclusion should not – particularly for companies in services industries – be worded with the unnecessarily overbroad “based upon or arising out of wording.” Even though the narrower “for” wording is not available in many instances even in a competitive marketplace, the “for” wording is the wording that should be used, given the purposes for which the exclusion is included in the policy in the first place.
In addition, Judge Williams analysis of the “jointly” but not “severally” interpretation of the policy exclusion suggest further to me that the severability clause contained in management liability insurance policies arguably should be extended to preserve coverage for claims against insured persons against whom claims are alleged that do not trigger the professional services exclusion. Even if allegations are made against one insured that triggers the exclusion, there is no reason why coverage should be excluded for other insured persons if the allegations against the other insureds are not “for” alleged wrongful acts allegedly committed in the delivery of professional services.
Special thanks to James Kaplan of the Kaplan Zeena law firm for sending me a copy of this opinion. Kaplan represented the primary D&O insurer in this case. I should hasten to add the views I have expressed in this blog post are, of course, entirely my own.