As readers know, there has been a wave of business interruption coverage insurance disputes arising out the pandemic. But the business interruption claims are not the only insurance coverage disputes the coronavirus outbreak has caused. An interesting recent D&O insurance-related coverage dispute involves the denial by a D&O insurer of coverage for lawsuits a health industry technology trade association faced following the March 2020 coronavirus outbreak-related cancellation of the association’s annual trade show.
In a recent decision, a federal district court, applying Illinois law, rejected the insurer’s coverage denial, holding that the policy’s professional services exclusion and contract exclusion did not preclude coverage. The court also rejected the insurer’s contention that the damages sought in the underlying litigation represented uninsurable restitution. Northern District of Illinois Judge Robert W. Gettleman’s October 19, 2021 opinion in the case can be found here. A November 1, 2021 post on the Hunton Insurance Recovery Blog about the opinion can be found here.
Background
Health Information and Management Systems Society, Inc. (the “association”) is a non-profit industry association for the health information systems field. Among other things, the association holds an annual tradeshow that typically attracts nearly 50,000 attendees. In connection with this event, the association subleases convention center space to exhibitors who spend thousands of dollars on promotional displays. The 2020 tradeshow was scheduled to take place in Orlando the second week of March. Owing to the coronavirus outbreak, the association cancelled the event.
Several of the exhibitors sued the association seeking return of their exhibitor fees and damages for the significant resources the exhibitors had expended preparing for the event, including for travel, accommodation, signage, and booth development. The consolidated exhibitor litigation ultimately settled, with the exhibitor plaintiffs releasing the association from all claims related to the 2020 tradeshow.
The association notified its D&O insurer of the exhibitor litigation. The D&O insurer denied that it had a duty to defend or indemnify the association for the litigation, in reliance on the policy’s Professional Services Exclusion and Contract exclusion, and also based on the contention that any payment by the association would not constitute a Loss under the Policy.
The insurer instituted an action seeking a judicial declaration that there was no coverage under the policy for the underlying litigation. The association counterclaimed, asserting that the insurer had breached its contract and also that the insurer’s coverage denial was in bad faith. The insurer sought to have the association’s counterclaims dismissed for failure to state a claim.
Relevant Policy Language
The Professional Services Exclusion Provides that there no coverage under the policy for Loss on account of any Claim “based upon, arising from, or in consequence of an actual or alleged error misstatement, misleading statement, act, omission, neglect, breach of any duty committed, attempted, or allegedly committed or attempted in connection with the rendering of, or actual or alleged failure to render, and Professional Services … for others by any person or entity otherwise entitled to coverage …”
The Contract Exclusion provides that the insurer shall not be liable for Loss “other than Defense Costs, on account of any Claim based upon, arising from, or in consequence of any actual or alleged liability of [the policyholder] based upon, arising from, or in consequence of any actual or alleged liability of [the policyholder] under any written or oral contract or agreement, provided that this Exclusion 6(a) shall not apply to the extent that the [policyholder] would have been liable in the absence of such contract or agreement.”
The October 17, 2021 Opinion
In a ten-page October 17, 2021 opinion, Judge Gettleman denied the insurer’s motion to dismiss with respect to the association’s breach of contract counterclaims but granted the motion with respect to the association’s bad faith counterclaims.
In denying the motion to dismiss with respect to the association’s breach of contract counterclaims in the insurance coverage litigation, Judge Gettleman rejected the insurer’s argument that coverage for the underlying litigation was precluded by the policy’s Professional Services Exclusion.
Though Illinois courts have adopted an “expansive definition” of the term “professional services,” Judge Gettleman found that the exhibitors’ claims in the underlying litigation are not entirely based on defendant’s negligent provision of professional services, but instead seek reimbursement for the damages resulting from the inability to sublet floor space. Subleasing floorspace “is not necessarily a professional service,” and the underlying complaints do not allege that the association “exercised poor professional judgment when cancelling the conference in the face of the pandemic.” Consequently, Judge Gettleman concluded that the insurer “failed to carry its burden of establishing with absolute clarity that the professional services exclusion applies.”
In rejecting the insurer’s bid to dismiss the association’s counterclaims based on the Contract Exclusion, Judge Gettleman, noting first that even if the insurer’s position is correct, the Exclusion, by its own terms, does not negate the [insurer’s] duty to defend [the association] in the underlying cases.” Moreover, as Judge Gettleman noted “the underlying complaints sought more that contract damages, and the ultimate settlement agreement settled all of [the exhibitors’] claims against [the association], not just contract claims.”
Judge Gettlemen also rejected the insurer’s argument that the association’s counterclaims should be dismissed because the underlying lawsuits and settlements do not constitute covered loss. The insurer argued that the underlying lawsuits represented claims for the recovery of wrongfully retained amounts that were restitutionary in nature and therefore uninsurable by law. However, Judge Gettlemen noted that the authority on which the insurer relied had expressly noted that where judgment or settlement amounts involved a combination of restitution and damages, the insurer would be liable for the damages “in accordance with the allocation formula in the policy.” Judge Gettleman observed that the exhibitors had settled all claims against the association, not just the claim for the return of fees. Accordingly, Judge Gettleman noted that the underlying lawsuits and settlement constitute a loss under the policy.
However, Judge Gettleman granted the insurer’s motion to dismiss with respect to the association’s bad faith counterclaims, finding that the association’s allegations did not satisfy the standard for pleading a bad faith claim.
Discussion
It is probably important to note at the outset that this lawsuit emphatically does not represent a determination that there is first-party event cancellation coverage under a D&O Insurance policy. The court absolutely did not hold that there is coverage under the association for the association’s own costs incurred as a result of the cancellation of the 2020 tradeshow. Rather, the ruling in this insurance coverage litigation represents a determination only that there may be coverage under a D&O insurance policy for third-party liability claims relating to a cancellation by the insured association of a tradeshow event.
As the Hunton Insurance Recovery Blog noted in its post about this ruling, the underlying claim does provide “another example of different claims that can come out of the pandemic and other adverse events,” noting in particular that D&O policies “may be implicated for future pandemic-related losses for government investigation, insolvency-related claims by creditors, trustees, and other company stakeholders involved in bankruptcy, False Claims Act and qui tam claims, and other cyber-related claims from shareholders or customers.”
For me, the most important significance of the rulings in the case is the extent to which they suggest that there are limits to how far an insurer can push the preclusive effect of Professional Liability Exclusions and Contract Exclusions even if the exclusions have the broad preamble language. In that connection, I note that I have previously said that insurers’ expansive coverage positions with respect to these two exclusions are two things that D&O insurers “regularly get wrong.” I have long felt that insurers try to push the scope of these exclusions to the point that the insurers’ positions threaten to swallow up the coverage for which policyholders buy the policies in the first place.
Judge Gettleman’s holdings with respect to these two exclusions is particularly helpful in connection with the interpretation of these kinds of exclusions. He refused to enforce the exclusions so as to preclude coverage for the entirety of the association’s insurance coverage claims, notwithstanding the broad preamble language in both exclusions.
I particularly like Judge Gettleman’s formulation with respect to the Professional Services exclusion, denying the insurer’s motion to dismiss the association’s insurance coverage counterclaims because the insurer had failed to carry its burden of “establishing with absolute clarity that the professional services exclusion applies.” Judge Gettleman’s insistence on “absolute clarity” before enforcing the exclusion is the perfect antidote to insurers’ efforts to try to push the preclusive effect of exclusions far beyond their intended purpose or in such a way as to threaten the very coverage for which the policyholder purchased the policy. As the Hunton blog post puts it, Judge Gettleman’s analysis holds insurers to “a very exacting standard to deny coverage based on an exclusion, requiring absolute clarity on the face of the complaint.”
Judge Gettleman’s rejection of the insurer’s “no Loss” theory is also significant. His ruling emphasizes that insurer’s generalized assertions that the amounts sought in underlying claims represent restitution, disgorgement, or the return of profits are insufficient where the amounts for which recovery is sought is actually compensatory or where the underlying lawsuit seeks more than the return of wrongfully withhold funds.
One final note. The insurer’s attempt to entirely preclude coverage for the underlying claim in this insurance coverage dispute for me shows why the Professional Services Exclusion and Contract Exclusion should have the narrower “for” preamble, rather than the broader “based upon, arising out of” preamble, because in claims for coverage under policies with the broader exclusionary wording the insurers will seek to apply the exclusions so as to preclude coverage even for matters that properly should be covered under the policy. By and large many insurers refuse to grant this policy wording change, precisely because they want to preserve the ability to rely broadly on the exclusions in order to try to deny coverage for otherwise covered claims. These are issues, as I have said before, that insurers “regularly get wrong.”