One of the recurring D&O insurance coverage issues is the question of the extent of the preclusive effect of professional services exclusions. These issues can be particularly acute in connection with service businesses, as just about every activity of these businesses involves their performance of services in some way. In a recent Northern District of Ohio decision, the Court, applying Ohio law, rejected an insurer’s attempt to extend an exclusion to preclude coverage for all of the activities alleged in the underlying lawsuit, saying that such an interpretation is not only inconsistent with the underlying allegations but also would impermissibly render coverage under the policy illusory. A copy of the court’s June 24, 2025, opinion can be found here.

Background

Gospel Light Mennonite Church Medical Aid Plan, doing business as Liberty Healthshare, operates a faith-based healthcare sharing ministry. The firm is a medical cost-sharing organization under which members of the same religious faith pay a premium or contribution to the firm, which then redistributes the premiums to cover members’ medical costs.

In October 2021, Liberty and several of its past and present directors and officers were named as defendants in a class action lawsuit, in which the claimants alleged that the defendants misrepresented the medical cost payment plan as legitimate, when it was a “scheme” to “funnel money” collected as premiums to the defendants themselves. The funds, the underlying complaint alleged, were paid to for-profit entities affiliated with the individual defendants, to the defendants’ personal profit or gain.

The complaint in the underlying action alleged eight counts: (1) breach of contract and covenant of good faith and fair dealing; (2) money had and received; (3) unjust enrichment; (4) civil RICO violations; (5) conversion; (6) breach of fiduciary duty; (7) intentional, or alternatively, negligent misrepresentation; (8) accounting.

Liberty submitted the underlying claim to its D&O insurer. The insurer took the position that the policy’s Managed Care Activities Exclusion precluded coverage for the entire claim. Liberty filed a declaratory judgment action against the insurer. The parties filed cross-motions for partial summary judgment on the issue of whether or not the insurer had a duty to defend Liberty in the underlying proceeding.

Relevant Policy Language

The Managed Care Activities Exclusion provides in pertinent part that the Insurer shall not pay any Loss in connection with a Claim “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged: (A) act, error or omission in the performance of, or failure to perform, Managed Care Activities by any Insured.”

The term “Managed Care Activities” is defined in pertinent part to mean “any of the following services or activities …Provider Selection; Utilization Review; advertising, marketing, selling, or enrollment for health care, consumer directed health care, behavioral health …; Claims Services; establishing health care provider networks …; reviewing the quality of Medical Professional Services or providing quality assurance; design and/or implementation of financial incentive plans; …wellness or health promotions education; development or implementation of clinical guidelines; and services or activities performed in the administration or management of health care…”

The Court’s Opinion

On June 24, 2025, Northern District of Ohio Judge David Ruiz, applying Ohio law, granted Liberty’s motion for partial summary judgment on the issue of the insurer’s duty to defend, and denied the insurer’s cross motion. Because, the court concluded, the relevant D&O policy provides coverage for at least some of the claims in the underlying proceeding, notwithstanding the Managed Care Activities exclusion, the insurer’s duty to defend the underlying proceeding was triggered.

In ruling on the parties’ motions, Judge Ruiz first addressed the insurer’s argument that “all of the facts alleged in the Underlying Litigation fall with the Managed Care Activities Exclusion” based on the contention that “the underlying component of all of those allegations was the sale and marketing of the illegal health plan.”

Judge Ruiz said he “wholly disagrees with this characterization,” noting that the unjust enrichment claim, the civil RICO claim, the conversion claim, the breach of fiduciary duty claim, the accounting claim, and possibly even the violation of the duty of good faith and fair dealing claim “do not derive from the sale and marketing of illegal health plans.” Instead, he said, “they stem from voluminous allegations” that the defendants “engaged in malfeasance by siphoning funds away” from Liberty to third-party firms controlled by Liberty’s directors. The underlying litigation “does not solely involve allegations of illegal health insurance masquerading as a cost-sharing ministry,” but rather “it is replete with allegations that have nothing to with the nature of Plaintiff Liberty’s business – as allegations of serious breaches of fiduciary duty could apply to any business or charity.”

Judge Ruiz went on to say that the language of the Managed Care Activities Exclusion is not, as required by Ohio law, clear and exact but rather is written so broadly “that the Court cannot discern any reasonable boundary between the managed care activities and the duties of directors and officers in a business or charity whose sole focus is healthcare.”

Judge Ruiz noted that given the exclusion’s broad language “one could argue that any and all actions of Liberty and its directors involve, directly or indirectly, managed care activities.” Under such a reading, “the D&O Policy is rendered completely illusory.” Because under Ohio law “courts are to interpret an insurance contract so as to avoid rendering coverage under the contract illusory or unenforceable, this Court declines to adopt [the insurer’s] interpretation that would negate all conceivable coverage.”

Discussion

I want to start my discussion of the court’s decision by stating at the outset that the Managed Care Activities Exclusion at issue in this case is simply a specialized form of the professional services exclusion found in most private company D&O insurance policies – the Managed Care Activities Exclusion is just a professional services exclusion calculated to apply to specific kinds of professional services.

Long-time readers know that I have long contended that one issue insurers regularly get wrong is the way they try to apply the professional services exclusion. The whole point of the exclusion is to keep claims in their proper lanes; that is, the exclusion ensures that claims that relate to the insured entity’s errors or omission in its delivery of professional services are dealt with under the entity’s E&O insurance, and not the entity’s D&O insurance. The problems arise when D&O insurers apply their exclusion overly broadly to preclude coverage for claims – like for example, the breach of fiduciary duty claims and misrepresentation claims at issue here – that properly should be addressed under the D&O policy.

There are two ways insurers fall into interpreting their exclusion overly broadly. The first is particularly egregious with respect to professional services organizations like the one involved here. The fact is, as Judge Ruiz expressly noted, at some level everything a professional services firm does relates in some way to its professional services activities. If the exclusions really were this preclusive, there could never be coverage under the D&O insurance policy, rendering coverage illusory, as Judge Ruiz found here.

The other way that insurers set themselves up for this kind of error is with the egregiously excessive wording of the exclusion (as evidenced by the exclusion at issue here). If the exclusion’s preclusive effect applies to anything “based upon, arising out of, directly or indirectly resulting from, inconsequence of, or in any way involving” the excluded conduct, then the exclusion is going to sweep beyond anything that is necessary to keep E&O claims in their proper lane. In my humble opinion, the kind of broadly expansive preliminary wording has no business being tagged onto a professional services exclusion. In order to keep E&O claims in their proper lane, the exclusion should have the “for” preamble, and not the broad “based upon, arising out of” preamble. That way, the exclusion would only preclude claims for errors and omission in the performance of professional services.

I want to stress here that all of these problems are particularly acute in the context of professional services firms, since pretty much anything a professional services firm does relates in some way to its delivery of professional services. Insurers should be particularly attentive to the possibility of applying the professional services exclusion overly broadly in this context. Here, it does not seem that the insurer even considered the possibility that many (not just some, but many) of the allegations do not relate to the firm’s managed care activities. That not only led the insurer to an overly broad reading of the exclusion’s preclusive effect, but it put the insured entity in the position where it had to sue the insurer just to get the defense protection for which it had paid and to which it was entitled.

So here’s my message to insurers. If you are not going to word your professional services exclusion the way you should (that is, with the “for” preamble rather than the “based upon arising out of” preamble), at least have processes in place to check your application of the exclusion to professional services firms to make sure you are not applying the exclusion overly broadly or in a way that renders coverage illusory.

I will close by quoting myself on this whole issue of overly broad application of the professional services exclusion:

There is one more point I want to make on this issue. That is that the underwriters who are working on policies with the broadly worded professional services exclusion need to see how broadly their colleagues on the claims side are trying to apply this exclusion. The extent to which some claims adjusters stretch to try to apply this exclusion to preclude coverage is truly appalling; the underwriters need to see that their claims adjuster colleagues are applying the exclusion so broadly that there is literally nothing left of the policy’s purported coverage. If these claims adjusters’ position with the exclusion is correct, there is absolutely no reason why anybody would ever even think of buying the insurance. The underwriters need to reconsider their position on this issue and to allow the “for” wording on the professional services exclusion, so that that their policies are not irrelevant and pointless.

Special thanks to a loyal reader for providing me with a copy of the opinion.

Podcast Interview: One thing I did while I was in Australia earlier this fall was to record a podcast interview with Will Freitas of Confio Insurance. Among other things, Will and I discussed some of the key trends currently shaping the world of D&O insurance. We also discussed the background story of The D&O Diary and how it came to be. You can find the link to the podcast on Confio’s LinkedIn page, here. You can also find a video of the interview on YouTube, here. It was a lot of fun recording the interview with Will, which I think you will be able to tell from the recording.

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