If a D&O insurance policy exclusion precludes coverage for loss arising out of the performance of professional services, does the exclusion preclude coverage for all insureds or just the insureds who performed the services? In a July 5, 2017 opinion (here), the Eleventh Circuit, applying Florida law in a case related to the Rothstein law firm Ponzi scheme scandal, held that a bank’s D&O insurance policy’s professional services exclusion’s preclusive effect applied jointly and therefore precluded coverage for all insureds, not just for the individuals delivering the services. The decision raises some interesting issues, as discussed below.
Background
Scott Rothstein orchestrated a Ponzi scheme through his law firm, Rothstein Rosenfeldt Adler. The law firm maintained accounts at Gibraltar Private Bank and Trust Company. Gibraltar and certain of its executives were named as defendants in various lawsuits following the collapse of the scheme. Gibraltar noticed its D&O insurers regarding the claims. The insurers denied coverage. Gibraltar ultimately settled the liability lawsuits and assigned its rights under its insurance policies to the law firm’s bankruptcy trustee. The trustee then sued the Gibraltar’s insurer alleging breach of contract and bad faith. The insurers moved to dismiss the suit arguing that coverage was precluded by the policies’ professional services exclusion. The district court granted the motion to dismiss and the trustee appealed.
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 failure to perform professional services for others, or any act(s), error(s), or omission(s) relating thereto.
The July 5, 2017 Opinion
On July 5, 2017, the Eleventh Circuit, in an opinion written by Judge Adalberto Jordan for a unanimous three-judge panel, affirmed the district court’s ruling, agreeing with the district court that the exclusion as worded precluded coverage for all of the defendants, and not just those involved in delivering professional services.
In seeking to have the district court’s ruling overturned, the trustee had tried to argue that the exclusion should be read severally and therefore as barring coverage only as to the claims against the bank executives who directly provide the professional services to the law firm.
The appellate court rejected the trustee’s arguments, quoting with approval the district court’s statement that “the phrase any insured unambiguously expresses a contractual intent to create joint obligation.” The phrase, “any insured,” the appellate court said, “makes obligations under an insurance provision jointly rather than severally held and unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent coinsured.”
The appellate court noted further that the exclusion use the phrase “any insured” twice, once to refer to the claim made and once in referring to the professional services rendered, which, the appellate court said, “evinces an intent to create joint obligations.”
The court noted further that, under prior Florida precedent, a policy’s severability clause results in separate insurable interests such that each insured must be treated as holding a separate insurance contract. As a result, for example, coverage under a policy with a severability clause could only be denied under a bodily injury/property damage exclusion against an insured who actually committed the excluded act. However, the policies at issue here do not contain a severability clause, and “that difference is in policy language is fatal to the trustees’ argument.”
Discussion
I can’t think about the issues involved in this coverage dispute without considering the reason the professional services exclusion is included in D&O insurance policies. The professional services exclusion is one of several exclusions typically included in private company D&O policies to make sure that claims stay in their proper lanes. The bodily injury/property damage exclusion, for example, is there to make sure that the D&O policy does not pick up claims that properly should be picked up by a company’s General Liability insurance policy. The professional services exclusion is there to make sure that the D&O policy does not pick up claims that should be covered by a company’s E&O insurance policy.
In other words, the professional services exclusion is there to ensure that if a claim arises out of the performance of professional services for others, then the claim should fall under the E&O policy, not the D&O policy.
In my view, the reverse should also be true; that is, if a claim does not arise out of the performance of professional services, coverage should not be precluded.
So, for me, the starting point is that if the professional services exclusion operates the way it should, and only the way it should, coverage should be precluded under the exclusion, if at all, only for insured persons who are alleged to have engaged in the performance of professional services, and not for insured persons who did not perform professional services – which is exactly what the trustee argued here.
The Eleventh Circuit’s opinion clearly signals one way to try to ensure this result. The appellate court’s opinion suggests that the exclusion could be interpreted to apply severally – that is, separately as to each insured person – if the policy contains a severability provision. The policy at issue in this case (issued some time about or before the Ponzi scheme first came to light in 2009) did not contain a severability provision. Since the time this policy was issued, severability provisions (specifying that the preclusive effect of policy exclusions does not apply to persons who did not commit the precluded conduct) have become common and arguably standard. The suggestion is that a professional services exclusion in a policy with a severability provision would apply only to preclude coverage for those who actually performed the professional services, and not for those who did not perform the services.
The inclusion of a severability provision would then cure at least part of the ills involved with the way the professional services exclusion was interpreted to apply here. But even the inclusion of the severability exclusion would not cure the deeper flaw with the way the insurers sought to have the professional services exclusion applied here, and the way that other insurers all too often seek to have the professional service exclusion applied in many other circumstances.
This case in fact exemplifies the problem. The insured organization here was involved in the delivery of banking services. It is going to be a very unusual set of circumstances in which any management liability claim against the bank and its executives does not involve in some way the performance of professional services. This problem is exacerbated by the broad type of wording that the exclusion used here; just about every management liability claim you could think of involving the bank is going to arise out, be based upon, or attributable to the bank’s performance of banking services. Worded and applied as it was here, the exclusion sweeps so broadly that it threatens to swallow up any coverage available under the policy.
For me, the right way to think about these issues is to return to my first point; that is, the exclusion is there to ensure that the D&O policy does not pick up claims that properly belong under the organization’s E&O policy. Properly understood this way, the exclusion should not have the broad “arising out of, based upon” preamble language. Rather, the exclusion should use the “for” wording, so that it precludes coverage only for claims “for” the performance of professional services. Narrowing the exclusion in this way allow the exclusion to have its proper purpose – and only its proper purpose – of keeping claims in their proper lanes.
Wording the exclusion this way would also reinforce the view that the policy should be applied severally, that is as to each insured person separately, rather than jointly, as an exclusion with the “for” wording should not be applied to preclude coverage for persons who were not involved in the performance of professional services. Obviously, as reflected in the appellate court’s commentary, the inclusion of a severability provision would highlight the view that the exclusion should apply separately and preclude coverage only for those who specifically engaged in the precluded conduct.
As I discussed in a recent post (here), these issues about the proper scope of the professional services exclusion are involved in a case now pending on appeal in the Ninth Circuit. In the earlier post, I discuss at greater length my contention about the need to ensure that D&O insurance policy exclusions that are included to ensure that claims stay in their proper lanes should not be interpreted or applied more broadly; otherwise the exclusions’ preclusive effects could render coverage illusory.