dcctofappealsThe problems that can arise from the wording of the professional services exclusion in a service company’s D&O insurance policy are perennial issues and a recurring topic on this blog (see for example here). When the exclusion in a service company’s management liability policy is interpreted broadly the exclusion can sweep so extensively that it can preclude coverage for the very types of claims the management liability policy was intended to insure. A recent decision from the District of Columbia’s highest court highlights these concerns.


In a February 11, 2016 District of Columbia Court of Appeals decision (here), the appellate court, applying District of Columbia law, reversed a lower court ruling that the professional services exclusion in the management  liability insurance policy of defunct Carlyle Management LLC precluded coverage for the various claims that had been asserted against Carlyle, related entities, and its senior officials. The Court of Appeals did not affirmatively conclude that the underlying claims were covered; rather, it held only that the broadly worded professional liability exclusion was ambiguous, and that the question of coverage is properly a question for a factfinder. While the appellate court did not affirmatively find coverage, the court’s opinion underscores the concerns with interpreting and applying the professional liability exclusion in a service firm’s management liability insurance policy too broadly.



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 (RMBS). 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 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 policy has a detailed definition of the term “Professional Services,” which provides in pertinent part that the term 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, aFund 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.


As discussed here, in a May 2014 opinion, D.C. Superior Court Judge Frederick H. Weisberg granted the insurers’ motion to dismiss, concluding with respect to professional services exclusion that “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 appealed.


The February 11 Opinion

In a February 11, 2016 opinion written for a unanimous three-judge panel by Senior Judge Inez Smith Reid, the District of Columbia Court of Appeals vacated the lower court’s ruling and remanded the case to the lower court for further proceedings.


The critical part of the appellate court’s ruling is its conclusion that, contrary to the lower court’s view, the professional services exclusion is ambiguous. The court said that the definition of “professional services” in the exclusion “is not a simple one, nor are the corporate structure of CCC and the underlying complaints simple.” The definition “consists of eight subparts and it is not easy to interpret” and “important terms are not defined.” The exclusion makes no mention of important terms such as “corporate governance” and whether it is subsumed under the concept of “management services.”


The appellate court concluded that it could not, as the lower court had, declare that parts of the definition were “irrelevant.” The court concluded that the term ‘professional services’ as used in the policy is “reasonably open to more than one construction” and therefore “ambiguous,” and thus the correct interpretation of the professional services definition and the contract is “a question for the factfinder.”


The appellate court added that there was another reason that they “are constrained to reverse” the trial court’s dismissal, and that is it had “substantial doubt as to whether the trial court properly applied the ‘eight corners rule’ in determining whether the appellees had the duty to defend.” The appellate court noted that the liquidators’ claim raised 19 claims, including, among other things, breach of fiduciary duty, gross negligence, and unjust enrichment. The court said “it is not clear from the trial court’s order why all of the aspects of these claims, as pled, fall under the policies’ professional services exclusion, as a matter of law, given our conclusion that the professional services definition is ambiguous.” The same, the court observed, could be said of the other complaints and allegations against the various Carlyle entities and individuals.



At the time of the trial court’s ruling, I noted that it appeared to me that an exclusion that had been intended to preclude coverage for E&O-type claims was being applied to preclude coverage for what very much appeared to be D&O claims. The trial court was not concerned with these kinds of distinctions, but rather was concerned only with the fact that the policy’s broad definition of “professional services” seemed to encompass all of the claims that had been asserted in the various underlying actions. To be sure, the appellate court’s decision does not depend on these kinds of distinctions either; it said only that the broad and complicated definition of professional services in the policy was ambiguous and therefore, contrary to the trial court’s conclusion, it wasn’t clear that the professional services exclusion did in fact preclude coverage for all of the claims asserted in the underlying proceedings.


The case will now return to the lower court for further proceedings; it is important to note that the appellate court specifically said that the case is being returned to the lower court for “discovery.” Presumably, the discovery will include fact-finding with respect to the intended meaning and purpose of the professional services exclusion. I suspect strongly that the discovery will disclose that, at least from the policyholder’s perspective, the professional services exclusion was intended to preclude coverage only for E&O-type claims, and not for the D&O claims asserted in the underlying complaints.


As I also noted at the time of the lower court’s ruling, this case presents something of a cautionary tale. The professional liability exclusion here was worded broadly to encompass the range of professional services that the Carlyle entities were providing. However, it was worded so broadly that it allowed the insurers to argue that the broad definition swept so broadly that it arguably even encompassed the very things for which the policy was intended to provide coverage.


As I have noted in prior posts, the issue of the preclusive effect of a broad professional services exclusion in a services firm’s management liability policy is a recurring concern. While the exclusion here was found to sweep so broadly by the trial court because of its extensive definition of professional services, it is often the case that the use of a broad “based upon, arising out of, or in any way relating to” preamble leads to a sweeping interpretation and application of the exclusion. As this case highlights, it is in the policyholder’s interest to ensure that the exclusion’s terms and conditions do not extend the exclusion’s preclusive effect too broadly; one way to try to avoid this overbroad sweep is through the use of the “for” preamble wording rather that the broader omnibus preamble wording.


Another important part of ensuring that the professional service exclusion does not sweep too broadly is the definition of “professional services” that the policy uses. As the sequence of events in this case shows, it can be a problem for both the policyholder and for the insurer if the definition of professional services is overly broad, as it may obscure a clear distinction between what is meant to be covered and what is not meant to be covered. In connection with a services firm in particular, the definition (and the exclusion as a whole) must be written in a way that the exclusion does not preclude coverage for management liability claims arising out of the services firm’s operations, all of which will involve professional services at some level.