Definition, Or Lack Thereof, Could Have Claim Consequences

Definition, Or Lack Thereof, Could Have Claim Consequences

A January 2018 Federal Court decision out of the Second Circuit dealing with the definition of “professional services” under E&O and D&O policies reminded me that judicial opinions on the subject have resulted in a variety of results ranging from the lack of insurance altogether, to insurance available under only one policy type, or to at least the appearance of overlapping coverage leading to costly coverage disputes.  In the past, I wrote about a case where a broker-dealer’s activities were found to be precluded from coverage under a professional services exclusion of a D&O policy where the Court decision was silent on whether the insured had purchased E&O coverage and it is unknown whether the financial services company was left uninsured as a result (David Lerner Associates v. Philadelphia Indemnity Insurance Company).

More recently, in Beazley v. Ace American (Jan. 22, 2018), an E&O carrier paid out a $26.5 million settlement to plaintiff investors that commenced more than 40 lawsuits arising out of the Facebook IPO conducted by its insured (NASDAQ).  The E&O carrier took an assignment of the insured’s rights and commenced coverage litigation against NASDAQ’s D&O insurers.  The D&O carriers disclaimed defense and indemnity obligations based on the professional services exclusion that provided that they are “not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.”

The critical issue was whether the retail investors who brought the underlying securities claims were customers of the exchange to fall within the exclusionary language of the D&O policies.  The E&O carrier was successful in part in the Court below getting that Court to agree that the D&O carriers had a defense obligation but not on the issue of indemnity.  On appeal, the Second Circuit rejected the E&O carrier’s argument concluding that retail investors were customers of the exchange within the meaning of the exclusion based on “well-established federal securities law that unambiguously considers retail investors to be customers of the exchange,”  and concluded the D&O carriers had no indemnity obligation as it was undisputed that the negligence claims arose out of the exchange’s alleged failure to properly render professional services (such as promoting its trading platform).

I bring this case and reference the David Lerner decision to illustrate and act as a reminder that the lack of a definition of a key exclusionary term could create unintended results, and taking a look at policy form(s) as part of policy negotiation and placement is paramount.   Equally important, insureds (and their insurance intermediaries if requested to do so) should look at “Other Insurance” clauses to see, in these cases involving professional services companies, how D&O and E&O polices would apply if coverage was invoked under both policies.