Regular readers know that one of my recurring private company D&O insurance coverage concerns has to do with the professional services exclusion and the way many carriers seek to phrase, interpret, and apply the exclusion, particularly with respect to insured companies engaged in service businesses. My concern is that all too often the exclusion is written over-broadly and applied over-broadly in a way that threatens to entirely swallow up coverage under the policy. A July 28, 2016 coverage decision by District of Maryland Judge J. Frederick Motz expressly addresses several of my recurring concerns about the professional services exclusion, as I discuss further below. A copy of the July 28, 2016 opinion can be found here.
Education Affiliates, Inc. is in the business of providing for-profit, post-secondary educational services. In 2010, the company received a subpoena, and then later, a complaint, from the Florida Attorney General’s Office, alleging that the company engaged in unfair and deceptive practices in its marketing to prospective students. The Florida AG alleged that the company had made misleading statements and misrepresentations to induce student to enroll in their programs. Shortly thereafter, several former students filed several different civil complaints against the company alleging that the company had made false statements and misrepresentations in its marketing materials about the company’s educational offerings in order to induce students to enroll.
The company submitted the Florida AG action and the student complaints to its D&O insurer, which denied coverage for the claims. The company filed a declaratory judgment action against the insurer, and then filed a motion for partial summary judgment seeking to establish that the insurer was obligated to provide the company with a defense in the underlying actions.
Among other things, in contending that it had no obligation to defend the company in the underlying actions, the insurer relied on the policy’s professional services exclusion, which provides that:
No coverage shall be available under Insurance Clause for any Insured Organization Claim … for any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty committed, attempted, or allegedly committed or attempted in connection with the rendering of, or actual or alleged failure to render, any professional services for others by any person or entity otherwise entitled to coverage under this Coverage Section.
The July 28 Opinion
In his July 28 opinion, Judge Motz granted the company’s motion for partial summary judgment, holding that the professional services exclusion did not preclude coverage for the company’s defense expenses and that the policy provided coverage for amounts the company incurred in responding to the Florida AG’s subpoena.
In arguing that the professional services exclusion did not apply to preclude coverage, the company had contended that the marketing of its educational services is not the rendering of professional services, much less professional services “for others,” as required to trigger the exclusion. Judge Motz said with respect to this argument, “that position is correct,” citing a Fourth Circuit decision that practices that are common to most businesses and that require no specialized knowledge are not professional services.
He also cited the same Fourth Circuit opinion for the proposition that if routine services were deemed to be excluded professional services, the result would be that coverage under the policies would be practically “eviscerated,” which would run counter to Maryland law that “does not permit an exclusion to be interpreted in a way that would render a policies [sic] grant of coverage to be illusory.”
Judge Motz went on to say that to accept the insurer’s interpretation of the exclusion “would ‘eviscerate’ the coverage that the policy affords.” He emphasized that the exclusion applies only to the rendering of services “to others,” noting that the alleged illegal marketing in which the plaintiffs allegedly engaged “was for their own benefit, not the benefit of ‘others’”. The fact that the marketing relates to the professional services to be rendered to others “cannot be said to conflate the two, in light of the fact plaintiffs’ core business is the rendering of educative services to others, such conflation would provide an ‘evisceration’ of coverage.”
Finally, Judge Motz also concluded that the costs incurred in responding to the Florida AG’s subpoena were covered. In reaching this conclusion, he rejected the insurer’s argument based on the fact that the definition of “Claim” for “Insured Organization[s]” differs from the definition of “Claim” for Directors and Officers, in that only the latter refers to a “subpoena,” but that the Florida AG’s subpoena was only served on the company and not on the individual directors and officers. Judge Motz overlooked this definitional distinction by noting that “the purpose of adding the ‘subpoena’ coverage was to provide protection for individual Directors and Officers who had subpoenas served upon them and were issued to an ‘Insured Organization.’”
As I have noted in my prior posts expressing concerns about the professional services exclusion, all too often carriers seek to enforce the professional services exclusion in an overly broad way, particularly with respect to companies involved in service businesses. 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. There are several important aspects of Judge Motz’s analysis that highlight the ways in which these attempts to stretch the exclusion’s preclusive effect are unwarranted.
First, Judge Motz noted that the marketing activities in connection with which the Florida AG and the student plaintiffs had alleged wrongdoing did not involve “specialized knowledge” separate and apart from that required in any business. This proposition that the professional services exclusion cannot be applied to ordinary business activities that do not involve specialized knowledge was an important part of a recent decision in the Northern District of Georgia (discussed here), in which the court rejected the efforts of the insurer to extend the professional services exclusion to the ordinary business activities of the insured.
Second, Judge Motz noted that in any event, the marketing activities did not involve the delivery of services “for others,” but instead the marketing activities were performed for the company’s own business benefit, to try to produce revenue.
Third, in the most important part of his analysis, Judge Motz noted that if the routine business activities that are at issue in this case were deemed professional services to which the exclusion’s preclusive effect applies, coverage under the policy would be eviscerated and the exclusion would render coverage illusory.
This analysis highlights the essence of what is wrong with insurers’ attempts to apply the professional services exclusion overly broadly; that is, if their position were correct, there would be no coverage left under the policy. This point is particularly acute with respect to services businesses, as there is basically no claim that could arise that did not in some way involve the delivery of services.
Insurers should pay particular attention to Judge Motz’s analysis in which he points out that if the position the insurer took in this case were valid, there would be nothing left of the coverage under the policy. The reason carriers should pay attention to this point is this: if the professional services exclusion has the preclusive effect that the insurer urged here, there not only would be no coverage left under the policy for any claim, but there would be little reason for anyone to buy the insurance.
There is an additional point I want to stress here, and that is that the exclusion at issue here did not have the broad “based upon, arising out of, in any way relating to” preamble that has caused so many problems in the past and has led carriers to try to apply the professional services exclusion overly broadly. The exclusion at issue in this case had the narrower “for” exclusion, and yet the carrier still sought to apply the exclusion overly broadly, in a way that Judge Motz had to warn could “eviscerate” coverage under the policy and render coverage “illusory.” In the past I have urged the adoption of the narrower wording as a way to prevent carriers from seeking to apply the exclusion overly broadly; unfortunately, as this case shows, even the narrower wording is not enough to prevent carriers from seeking to apply the exclusion overly broadly.
The fundamental problem is that the insurers have lost sight of the reason the professional services exclusion is in the policy in the first place. The professional services exclusion is one of several standard private company D&O insurance policy exclusions meant to keep claims in their proper lanes – that is, to ensure that claims that are properly insured under other types of insurance policies are not picked up by the D&O insurance policy.
For example, an ERISA exclusion in a D&O insurance policy ensures that the D&O insurance policy is not called upon to address a fiduciary liability claim that properly should be addressed by the policyholder’s fiduciary liability policy. Similarly, the D&O insurance policy’s BI/PD exclusion properly ensures that the D&O insurance is not called upon to address claims for bodily injury or property damage as those claims properly should be addressed by the policyholder’s CGL policy. The exclusions avoid overlapping coverages between the policyholder’s various policies.
The purpose of the professional services exclusion in the D&O insurance policy is to avoid overlapping coverages between the D&O policy and the policyholder’s E&O insurance policy – that is, to ensure that the D&O policy is not called upon to address claims that properly should be addressed by the E&O policy.
The reason I keep banging on and on about this topic is that, as I have commented before, I think the insurance industry regularly gets it wrong when it comes to the professional services exclusion. It is past time for senior managers at the insurance companies to take control of this issue in order to ensure that they are not undercutting the reason for which people buy this insurance in the first place.
This issue is a problem for everybody, and it is as big of a problem for the insurers as it is for everybody else.