Regular readers know that one of my hobby-horse issues is the way that some D&O insurers try to deny coverage for claims in reliance on an overbroad assertion of the professional services exclusion typically found in most private company D&O insurance policies. A D&O insurer’s sweeping assertion of exclusion’s preclusive affect can be a particular challenging for companies in services industries, because just about everything a services company does involves its services. When applied this way, the professional services exclusion exerts a preclusive reach that potentially could operate to swallow up the coverage available under the policy.
A recent decision from the Northern District of Georgia addressed these issues in a coverage dispute in which a private company D&O insurer had relied on the professional services exclusion to deny coverage for an underlying claim against a real estate listing Service Company. The Court concluded in its opinion granting the policyholder’s motion for summary judgment that because the underlying claim did not claims relate to the real estate listing service company’s “specialized knowledge,” the professional services exclusion did not apply. A copy of the March 22, 2016 opinion in the case can be found here. A May 26, 2016 memo from the Phelps Dunbar law firm about the decision can be found here.
First Multiple Listing Services provides real estate listing services for licensed real estate professionals. In October 2010, FMLS was named as a defendant in a putative class action lawsuit (the “Bolinger action”). The claimants in the Bolinger action alleged FMLS and other defendants engaged in an alleged kickback scheme in violation of the Real Estate Settlement Procedures Act. The defendants in the Bolinger action eventually succeeded in obtaining the entry of summary judgment in their favor. FMLS incurred legal fees of over $4 million in defending against the Bolinger action.
FMLS sought to have its defense costs reimbursed by its D&O insurer. The insurer denied coverage for the Bolinger action, in part in reliance on the policy’s professional services exclusion. The professional services exclusion provides that the insurer has no obligation to pay any loss in connection with any claim “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving the Insured’s performance of or failure to perform professional services for others.”
The D&O insurer filed an action in the Northern District of Georgia seeking a judicial declaration that there is no coverage under FMLS’s D&O insurance policy for the Bolinger action. FMLS filed a counterclaim asserting claims for breach of contract and bad faith. The parties filed cross-motions for summary judgment.
The Court’s Opinion
In a March 22, 2016 order, Northern District of Georgia Judge Richard W. Story, applying Georgia law, granted FMLS’s motion for summary judgment with respect to the question of the applicability of the professional services exclusion. (On other grounds, Judge Story denied in part FMLS’s motion for summary judgment.)
In considering the question of the applicability of the professional services exclusion, Judge Story reviewed Georgia case authority in which the courts had said that in order to a professionals actions to constitute a professional service, its activity must involve more than “an ordinary task”; rather the task must “arise out of the acts specific to the individual’s specialized knowledge or training.”
Judge Story said that the way the FMLS structured and remitted its fees “is nothing more than an ‘ordinary task’ associated with the business aspects of FMLS’s service and has nothing to do with FMLS’ professional services.” The allegations of wrongdoing in the Bolinger action “do not involve FMLS’ ‘specialized knowledge’ and skills in providing an electronic real estate listing database.” Accordingly, the company’s professional services are not the basis of the allegations in the Bolinger action, and the professional services exclusion is “inapplicable under the plain meaning of the Policy.”
Finally, Judge Story noted that even if he were to reach a different result with respect to the plain meaning of the exclusion, he would conclude that the undefined term “professional services” is “ambiguous” and therefore would be construed against the insurer as a matter of law.
Judge Story’s conclusion that the professional services exclusion in FMLS’s D&O insurance policy did not preclude coverage for the underlying claim is noteworthy in and of itself, but what makes it particularly notable is that he reached this conclusion notwithstanding the fact that the exclusion had the broad form “based upon, arising out of, in any way relating to” preamble. All too often courts interpreting exclusions with this broad preamble apply the exclusion in a sweeping way, precluding coverage even for matters that arguably ought to be covered. Certainly, insurers all too often try to extend the exclusion with the preamble to try to preclude coverage for matters that arguably should be covered. If nothing else, Judge Story’s opinion affirms that merely because the exclusion has the broad preamble does not alone determine that the exclusion will have the broadly sweeping preclusive effect that insurers often try to claim for the exclusion.
An even more important aspect of Judge Story’s opinion is the distinction he drew, for purposes of determining whether or not the underlying allegations involved FMLS’s delivery of professional services, between the company’s ordinary tasks associated with its business and activities involving its specialized knowledge and skill. This is an important distinction that could in many cases protect against an overly expansive application of the professional services exclusion.
All too often, particularly in connection with claims involving companies in the services industries, some D&O insurers will attempt to apply the professional services exclusion in a way that essentially extends the professional services exclusion to all of the service firm’s activities. However, not everything a services company does involves professional services. Ordinary tasks involving the day to day operation of a company’s business do not constitute the delivery of professional services. The delivery of professional services takes place only when the tasks involve the company’s specialized knowledge and skills.
This distinction between ordinary tasks and tasks involving a company’ specialized knowledge and skills is an important one, and one that should held protect against an overly broad application of the professional services exclusion. But while this distinction will help protect against the application of the professional services exclusion to try to preclude coverage for claims that properly should be covered, this distinction along is not enough. I continue to believe, for reasons I have outlined in prior posts (most recently here) that the in order to protect against an improperly sweeping application of the professional services exclusion, the exclusion should have the narrower “for” wording, rather than the broader “based upon, arising out of” wording.
More D&O Insurer Involvement in Securities Litigation Defense: In an interesting May 31, 2016 post on his D&O Discourse blog (here), Doug Greene of the Lane Power firm lays out the reasons why he thinks D&O insurers should be more involved in the defense of securities lawsuits. He contends that greater D&O insurer engagement in the lawsuits produces better outcomes both for the insurers themselves and for their policyholders. He also provides some suggestions for the steps to encourage greater D&O insurer involvement.