Exclude me, I'm a Professional! Part 2 - Professional Exclusions - DAC Beachcroft

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Exclude me, I'm a Professional! Part 2 - Professional Exclusions

Published On: 23 June 2015

In the March edition of this newsletter we looked at the "expansive" definition of the term "professional service" referred to in Marx v Hartford Accident & Indemnity Company. We noted the conflict between the definition of "Wrongful Act" in a management liability policy, which generally includes acts, errors, misstatements, misleading statements, omissions and neglect or breach of duty, and the professional services exclusion ("PSE") which seeks to exclude claims arising out of the provision of professional services. In this part, we look at how that apparent conflict is being reconciled by the courts.

In Tagged Inc. v Scottsdale Insurance Co., the District Court for the Southern District of New York (applying California law) asserted that use of the term "professional services", without elaboration, in a PSE in a D&O policy, demonstrates an intention to invoke the "expansive" Marx definition. The decision in Tagged seems to have been based on a misunderstanding of Californian law, however. In Prosper Marketplace Inc. v Greenwich Insurance Co. the Californian Court of Appeal rejected an attempt to treat a policyholder's entire online lending business as a service and any flawed business decision as falling within a PSE in the D&O policy at issue in that case.

The trend in recent D&O case law, therefore, is to recognise that a PSE in a management liability policy must relate to a narrower band of activity than the activity that generally comprises the policyholder's business interests. This trend features prominently in Federal Insurance Company v Hawaiian Electric Industries, where the District Court for the District of Hawaii stated:

"When analyzed within the context of a D&O policy and taking into account the purpose behind such a policy, an exclusion from coverage in a D&O policy for claims based upon, arising from or in consequence of the rendering or failure, to render professional services is going to involve a slightly different interpretation than when analyzed within the context of a broader general liability policy. The definition of professional service...as 'one calling for specialized skill and knowledge in an occupation or vocation'...is not readily transferrable from the general liability policy context to the D&O policy context without modification.  Otherwise, claims arising from any services, or acts performed by officers or directors calling for specialized skill or knowledge in the performance of their duties as officers or directors, would be excluded from coverage. Such an expansive interpretation is not reasonable because it would have the effect of vitiating virtually all of the coverage provided by a D&O policy, the purpose of which is to cover any wrongful act committed by an officer or director in their capacity as an officer or director."

As the District Court for the Northern District of California has said in Ambrosio v Certain Underwriters at Lloyd's:

"...it does not necessarily follow that any activity that co-occurs with, or is remotely related to, the performance of professional services, is covered by an otherwise applicable exclusionary clause. Not all acts associated with a given profession are professional, within the meaning of the law; the errors of a professional who is not acting in her professional capacity presumably would not be covered by an ordinary professional services exclusion."

In David Lerner Associates v Philadelphia Indemnity Insurance Company, the District Court for the Eastern District of New York drew a clear distinction between activities which required specialised knowledge and training (which fell within the PSE under consideration) and a "rote activity performed by a professional" (which did not). In Rob Levine & Associates v Travelers Casualty & Surety, the District Court for the District of Rhode Island refused to accept that allegedly deceptive advertising by a law firm constituted the rendering of professional services: 

"If the Court were to adopt the expansive reading of the Legal Practices Exclusion advocated by Travelers, then any conduct by Levine & Associates would be excluded from coverage since Levine & Associates' business is 'related to the rendering of...professional services'. If this were the case, then the D&O policy would be meaningless and provide no coverage. The Court will not construe the contract to create such an absurd result."

What we can learn from these cases is that a PSE in a management liability policy has to be carefully circumscribed in its application. Before a PSE can operate, something akin to advice which involves the exercise of mental or intellectual skill needs to be present, not rote activities or flawed business decisions. If advice is absent, or the exercise of mental or intellectual skill in the provision of advice is absent, it is unlikely that a PSE in a management liability policy will operate successfully.