New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private Investors


In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”. 

Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”).  The policy contained a “professional services” exclusion, however it did not define the words “professional services”.

The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares.  Shortly thereafter, three related class action lawsuits were brought against DLA.  DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.

Philadelphia denied coverage based on the “professional services” exclusion.  DLA sued for declaratory relief and breach of contract.

The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did.  In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.  

The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities. 

The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”. 

Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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