Policy exclusions with the broad “based upon or arising out of” sometimes may be applied very broadly to sweep beyond the claims that the exclusion aimed to exclude. In a recent coverage dispute, a professional liability insurer sought to apply an exclusion with the broad preamble language and precluding coverage for ERISA and securities law claims in order to preclude coverage even the common law and bankruptcy law claims alleged against the insured. In a February 7, 2020 opinion (here), Eastern District of Michigan Judge Laurie J. Michelson, applying Michigan law, concluded that the exclusion’s preclusive effect did not apply to the common law claims, because the insurer failed to establish the exclusion’s required causal connection between the alleged statutory violations, on the one hand, and the common law and bankruptcy law claims, on the other hand. Judge Michelson’s opinion provides an interesting perspective on exclusions with the broad “based upon and arising out of” preamble language.
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D&O Insurance: Policy Wording Matters
Everyone involved in any way in D&O insurance transactions has seen an insurance buyer choose to buy a policy that while less expensive provides narrower coverage. Sometimes the price difference might be slight, sometimes the difference could be significant. But the fact is, the most expensive policy is the one that doesn’t provide coverage when it should, and in the event of a claim, narrower coverage can translate into a claims denial. Anyone who wants to see what this might look like in action will want to consider the recent ruling out of the Middle District of Florida, in which the court held that the securities exclusion in a private company D&O insurance policy precluded coverage for an underlying claim against the policyholder and certain of its directors and officer. The January 2, 2019 decision in the case can be found here. A January 25, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the decision can be found here.
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Second Circuit: Professional Services Exclusion Precludes D&O Coverage for NASDAQ’s Facebook IPO Claims
A recurring D&O insurance issue is the question of whether or not coverage for a particular claim is precluded under the relevant policy’s professional services exclusion. A recent decision by the Second Circuit addressed questions concerning the applicability of a professional services exclusion in a D&O insurance coverage dispute arising out of the mistake-plagued Facebook IPO. In a January 22, 2018 opinion (here), the appellate court affirmed the district court’s ruling that coverage for the settlement of Facebook IPO investors’ claims against NASDAQ was precluded by the NASDAQ’s D&O insurance policy’s professional services exclusion. The opinion includes some interesting discussion of considerations relevant to the exclusion’s applicability.
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Football Player’s Concussion Claims Test D&O Policy Exclusion
As I have previously noted (for example, here), several of the standard D&O policy exclusions are designed to keep claims in the their proper lanes – that is, to make sure that the D&O policy doesn’t wind up picking up losses more appropriately addressed by another policy in a policyholder’s insurance program. One of these standard exclusions is the bodily injury and property damage exclusion – or, as it is more commonly known, the BI/PD exclusion – which precludes coverage for claims of bodily injury or property damage that are more appropriately addressed by a CGL policy.
A recent federal court decision considered a D&O insurance policy’s BI/PD exclusion in the context of a kind of claim that is becoming increasingly common – a professional athlete’s liability claims for head injuries sustained in competition. In his November 17, 2016 opinion in the case, Eastern District of Louisiana Judge Eldon Fallon concluded that former Arena Football League’s D&O insurance policy’s BI/PD exclusion precluded coverage for Lorenzo Breland’s claims against the league related to head injuries he sustained as a player. However, the specifics of Breland’s claims raise some interesting issues that Judge Fallon’s opinion does not address. These issues in turn raise questions about the exclusion’s appropriate reach. A copy of Judge Fallon’s opinion can be found here.
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Professional Services Exclusion Not Triggered Where Allegations Did Not Involve Specialized Knowledge
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.
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Two Things D&O Insurers Regularly Get Wrong
Readers familiar with my background know that while I have spent the last ten years representing policyholders, I spent the first 25 years or so of my career on the insurer side of the aisle, first as a lawyer representing insurers and later as an insurer employee. Because of that long prior experience, I am generally able to see the insurer’s side of most issues, even when I am advocating on behalf of a policyholder. Though I generally can see where the insurer is coming from, there are two issues that I think the insurers regularly get wrong. Both of these issues arise in the context of private company D&O insurance. The first relates to the wording of the contractual liability exclusion. The second involves the wording of the professional liability exclusion. I discuss both of these issues below.
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D&O Insurance: Contractual Liability Exclusion Applied to Preclude Coverage for Negligence Claim
In an unpublished October 5, 2015 opinion (here), the Eleventh Circuit, applying Florida law, held that a D&O insurance policy’s contractual liability exclusion precluded coverage for negligence claims asserted against persons insured under the policy. The contract exclusion was written with a broad “based upon, arising out of” preamble wording. As discussed below, the decision highlights concerns about the use of the broad preamble in D&O insurance policies’ contractual liability exclusion. An October 28, 2015 post on the Wiley Rein law firm’s Executive Summary Blog about the Eleventh Circuit’s ruling can be found here.
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The Problem with a Broadly Worded Professional Service Exclusion in a Service Firm’s D&O Insurance Policy
In a recent post (here), I discussed a recent federal district court ruling in which the court broadly interpreted the professional services exclusion in a bank’s D&O insurance policy in order to preclude coverage under the policy for a claim that had been made against the bank and certain of its directors and officers in a case arising out of the long-running Rothstein Ponzi scheme scandal. Southern District of Florida Kathleen M. Williams’s May 2015 opinion in the case, which I discussed in that earlier post, can be found here. As I noted in my earlier post, the case presents an example of the problems that can arise when a professional services firm’s D&O insurance policy contains a professional services exclusion with the broad “arising out of, based upon, or attributable to” preamble language.
As discussed below, a recent law firm memo analyzing the court’s ruling called Judge Williams’s expansive reading of the language “troubling” and expressed the concern that the breadth of the court’s reading of the exclusion’s preclusive effect could render the D&O insurance policy’s coverage “largely illusory.”
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D&O Insurance: Professional Liability Exclusion Precludes Coverage for D&O Claims against Ponzi Schemer’s Bank
In a coverage dispute arising out of the long-running Rothstein Ponzi scheme scandal, a Southern District of Florida judge, applying Florida law, has held that the professional services exclusion in the Rothstein bank’s D&O insurance policy precluded coverage for claims brought against the bank and certain of its directors and officers by the Rothstein