One of the most heavily-litigated exclusions in modern insurance coverage practice was the subject of a recent district court decision involving allegedly misleading marketing by for-profit colleges. Exclusions for claims or occurrences arising out of acts done in connection with the “rendering of, or actual or alleged failure to render, any professional services for others” – the so-called professional services exclusion – is the source of endless disputes between insurers and insureds. There are a number of reasons for this; the exclusion is somewhat vague and has been interpreted in varying ways across and even within different jurisdictions.
What has made the exclusion so troubling for policyholders is the fact that its scope and reach has been expanded so far beyond its initial underwriting purposes. The exclusion commonly appears in Commercial General Liability and D&O policies, and its intent is to exclude underlying claims that should be covered by Errors & Omissions policies. A CGL policy is not intended to cover claims for an attorney’s malpractice during litigation or an architect’s negligence in designing a building, and the professional services exclusion is included in those policies to make that clear.
Courts, however, have expanded the reach of the professional services exclusion so drastically that it often threatens to eviscerate coverage entirely. For example, in 2015 a court in Florida held that a professional services exclusion in a bank’s D&O policy barred coverage for claims that the bank had aided and abetted a ponzi scheme. The court rejected the policyholder’s argument that the underlying allegations involved internal bank management, holding that such activity was done in connection with rendering professional services to customers. As numerous commentators examining the case observed, the court’s reasoning, if applied broadly, would eliminate much of the coverage policyholders reasonably expect from their D&O policies. After all, anything that a service company does could be connected in some way to “professional services.”
Thankfully, the 2015 Florida case is somewhat of an outlier. The bulk of recent case law on the exclusion appears to recognize that the professional services exclusion needs reining in. One such case from Maryland is Education Affiliates Inc. v. Federal Insurance Company, which arose out of the recent spate of litigation involving allegedly misleading marketing by for-profit educational institutions. In response to criticism from federal and state governments of for-profit education institutions, in 2010, a number of students sued Education Affiliates and one of its subsidiaries, alleging that the companies’ recruiters made false statements regarding the quality of education, costs, and job prospects available on graduation.
Education Affiliates and its subsidiary sought a defense under a D&O policy issued by Federal Insurance. Citing the professional services exclusion, Federal Insurance denied coverage, apparently arguing that the insureds’ recruitment and marketing efforts related to professional services for others. The court flatly rejected that argument, holding that practices, such as marketing, that are “common to most businesses” and require no “specialized knowledge separate and apart from that required in any business” are not professional services. The court also held that, because the allegedly illegal marketing was for the insureds’ benefit, it did not qualify as “rendering” of services “for others” under the exclusion. Finally, the court emphasized that Federal Insurance’s interpretation of the exclusion would effectively “‘eviscerate’ the coverage that the policy affords.”
Courts’ increasing willingness to limit the professional services exclusion is a welcome trend but policyholders, particularly in the D&O sector, should expect continued insurer overreach in this area. The best way to deal with this issue is on the front end — companies should insist on narrower form professional services exclusions when possible. If and when a coverage dispute does arise, policyholders should not be afraid to push back on insurers that attempt to apply the professional services exclusion in ways that would undermine the coverage the policy is supposed to provide.
