ninth circuitThe problems that can arise from the wording of the professional services exclusion in the D&O insurance policy of a service company are perennial issues and a recurring topic on this blog (see most recently here). In an unpublished August 18, 2015 opinion (here), the Ninth Circuit affirmed the district court’s conclusion that coverage for a claim under a payroll services firm’s management liability insurance policy was precluded by the policy’s professional services exclusion. While the preclusion of coverage under the professional services exclusion in services firms’  D&O policies often can be questionable, this instance seems like a situation where the exclusion was applicable. As discussed below, however, there are still some important lessons from this case., Inc. was a small company in the business of providing payroll services. Clickbooks acted as payroll agent for a law firm, performing processing, payroll tax withholding, and deposit services. The law firm sued Clickbooks, its directors and officers, and its majority shareholder, alleging that Clickbooks and its directors and officers withdrew payroll tax withholding from the law firm’s bank account each pay period and deposited the funds in their own accounts rather than depositing the funds with the appropriate tax authorities.


Clickbooks tendered the lawsuit to its management liability insurer as a claim under the policy. The insurer denied coverage for the claim, in reliance on the policy’s professional services exclusion, on the grounds that the claim arose out of the provision of payroll processing services. The underlying claim ultimately was concluded and the individual directors and officers again tendered the claim to the insurer, including in their resubmission additional extrinsic evidence the individuals claimed established their right to coverage under the policy. The insurer again denied coverage for the claim.


The individual directors and officers then filed an action against the insurer in the Northern District of California, seeking to recover damages for the costs associated with the defense and resolution of the underlying claim. The district granted the insurer’s motion for summary judgment and the individuals appealed.


On August 18, 2015, in a unanimous unpublished per curiam opinion, a three-judge panel of the Ninth Circuit affirmed the district court’s ruling. The appellate court said that the district court properly concluded that the insurer had no duty to defend at the time the claim was initially tendered, because the claim was precluded by the policy’s professional services exclusion.


In reaching this conclusion, the appellate court said that “the claims in the underlying action centered on Appellants’ personal failure, or their failure as the alter egos of Clickbooks, to render payroll services” – which services, the court noted, “qualify as professional services under California law.”


The court said that the claims “thus arose from the performance of a professional services, not merely at the same time the insured was otherwise providing professional services to a third party.” (emphasis in original, citations omitted)  The court added that it is irrelevant whether the individuals themselves personally rendered the services because “the underlying action alleged deficiencies ‘arising out of’ the failure to provide professional services.”


The appellate court also affirmed the district court’s conclusion that the insurer had properly rejected the individuals’ subsequent claims tender. The court said that even considering all of the extrinsic evidence, the carrier had not duty to defend the individuals; even though the plaintiff in the underlying claim “made statements about Appellants’ failures as officers, he dis no to substantiate his alter ego theory, not to hold them liable in those roles.” In any event, the court noted, the insurer had no obligation to consider extrinsic evidence that was tendered after the claim was resolved.



The short, four-page per curiam opinion is quite terse, and some details that might help us to understand this situation better are not disclosed. For example, it would have been helpful to know more about the specifics of the allegations against the individuals in the underlying claim. And it would have been helpful if the appellate court would have cited in full the action language of the professional services exclusion at issue in the coverage dispute.


Just the same, at least based on the available record, this appears to be a case where a D&O policy’s professional services exclusion was applied appropriately to preclude coverage for a claim against a services company. As I have noted in prior posts, the problem with many professional services exclusions in services firms’ D&O policies is that the exclusions are written with the broad “based upon, arising out of, or in any way relating to” the rendering of or the failure to render professional services. Because services firms are in the business of providing professional services, most claims in which the firm will become involve will relate in some way to the firm’s professional services.


It isn’t entirely clear from the Ninth Circuit’s opinion whether or not the exclusion at issue here had the broad preamble, or whether it used the narrower “for” wording (which, I believe is the appropriate wording to be used in the exclusion in a services firm’s policy, in order to prevent the exclusion sweeping too broadly and swallowing up all of the policy’s coverage). The opinion does seem to suggest that the exclusion used the broader “arising out of language.” However, in this case at least, it does not appear that the preamble language used would have made a difference in terms of the availability of coverage, as it appears from the appellate court’s description of the claim that the underlying claim was “for” the rendering of or the failure to render professional services.


There isn’t anything particularly controversial about the Ninth Circuit’s ruling, which is probably why the court put its ruling in an unpublished per curiam opinion. Even though the outcome of this case is straightforward, there is a very important reason why I have reviewed the case at length. And that is: to show that even a professional services exclusion with the narrower “for” wording will provide D&O insurers with appropriate protection under the policy.


The carriers don’t need the broader “based upon, arising out of, or in any way relating to” language to be protected from having to cover claims that appropriately should not be covered under the D&O policy.


But – here’s the most important part – the use of the narrower wording would ensure that the policy covers the claims it should be covered, and that the exclusion does not sweep so broadly as to swallow up the coverage that should otherwise be available. These considerations apply regardless of the kind of company insured under the policy, but they are particularly true for companies in the services sector.


New Securities Suit Reflects Two Filing Trends: Defendant Companies Have Environmental Liability Issues, One Recently Completed Its IPO: Many new securities class action lawsuits reflect long-term filing trends, but a recent securities suit filed in the Central District of California against the pipeline company involved in the May 2015 Refugio Oil Spill reflects two different recent filing trends on which I have frequently commented on this blog – that is, it is one of several recent lawsuits allege damages against companies that have had environmental-related issues, and its is one of the many recent suits against companies that have recently completed their initial public offerings.


The lawsuit, which was filed on August 17, 2015 against Plains All American Pipeline and related entities, certain of their directors and officers, and against their offering underwriters, can be found here. The plaintiffs’ lawyers’ August 17, 2015 press release describing the lawsuit can be found here.


Plains is an interstate pipleline operator, organized as a Delaware master limited partnership. Plains Holdings, which was also named as a defendant in the lawsuit, is a limited partnership organized in 2013 to own an interest in the general partner of the master limited partnership and in incentive distribution rights of Plains. Plains Holdings completed its initial public offering on October 16, 2013.


Plains operates a pipeline – called Line 901 – that spans on about 10.6 miles in Santa Barbara County, California. On May 19, 2015, Line 901 ruptured, triggering an oil spill just north of Refugio State Beach. Ultimately, it was learned that about 142,800 gallons of oil leaked from the pipeline. The spill triggered an elaborate set of responses from the company and state and federal regulatory authorities, as well as adverse publicity for the company, that, among other things led to a decline in the decline of the share prices of Plains and Plains Holding. The company also reportedly is the subject of a U.S. Department of Justice criminal investigation in connection with the spill.


In their lawsuit, the investor plaintiff allege that the defendants misled investors by issuing false and misleading statements concerning the Company’s pipeline monitoring, maintenance and spill response measures, as well as its compliance with federal regulations governing its pipeline operations. Among other things, Plains told investors and regulators that it was in compliance with regulations governing its pipeline operations, and that its Line 901 pipeline and operations off the coast of Santa Barbara, California were “state of the art” and therefore a spill was “extremely unlikely.” The plaintiffs also allege that the defendants misrepresented the extent and severity of the spill.


This case is just the latest example of a phenomenon I have previously noted, which is the growing prevalence of securities class action claims arising out of company’s disclosures of their environmental compliance and liabilities. While other topics have predominated in recent years, these environmentally-related securities suits have continued to appear. As other topic, particularly those related to the financial crisis, have faded into the background, these environmentally related cases may grow in importance. And as this case shows, plaintiffs’ lawyers clearly have an interest in filing these kinds of cases.


The case also represents an example of another phenomenon I have noted, which is the increase in the number of suits involving companies that have recently completed their IPOs. As a result of an increase in the numbers of IPOs during 2013 and 2014, there has been an increase in IPO related litigation. While IPO activity this year has tailed off compared to last year, the pace of IPO-related litigation will likely remain elevated for some time, as the companies that completed their IPOs during 2013 and 2014 face challenges in their lives as publicly traded companies.


For a company that already has its hands full with the fallout from the oil spill, this new lawsuit means that it faces one more battle at time when it is already facing challenges on a number of fronts. Of course, whether or not this claim will prove to be successful remains to be seen. But for now at least it seems that publicly traded companies involved in high profile environmental events can expect that the issues with which they will have to deal include the filing of a follow-on securities class action lawsuit.