In Begun v. Scottsdale Insurance Company, No. 13-16211, 2015 WL 4910137 (9th Cir. Aug. 18, 2015), a three-judge panel of the US Court of Appeals for the Ninth Circuit, applying California law, affirmed the trial court holding that an insurer did not have a duty to defend the former directors and officers of a now-defunct policyholder based on the policy’s professional services exclusion. 

The insurer issued a Business Management Indemnity Insurance Policy to Clickbooks.com, Inc. (Clickbooks).  Begun,2015 WL 4910137 at *1.  The policy stated that the insurer had a duty to defend even if the allegations against the insured were “groundless, false or fraudulent.”  Begun v. Scottsdale Insurance Company, No. 3:12-cv-03649-EDL, slip op. at 2 (N.D. Cal. May 16, 2013), ECF No. 51.  It also obligated the insurer, subject to certain reporting requirements, to pay the loss of directors and officers for which they were not indemnified by Clickbooks.  Id.  However, the policy also contained a professional services exclusion, which stated:  “Insurer shall not be liable for Loss . . . on account of any claim alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering or failing to render professional services . . . .”  Id. at 3. 

The underlying litigation was based on a failure to provide payroll services to a client of Clickbooks.  Id.  The underlying plaintiff alleged that Clickbooks and its directors and officers failed to deposit his payroll tax withholding funds into accounts with the appropriate state and federal agencies and then fled with the funds.  Id.  The directors and officers tendered the claim to the insurer, which denied coverage on the basis of the professional services exclusion.  Id. at 3-4.

After the close of the underlying trial, the directors and officers again tendered the claim, this time arguing that evidence obtained in discovery, trial testimony, and the decision in the underlying action showed that the claims against the directors and officers arose solely out of their roles as directors of Clickbooks, not out of the provision of professional services.  Id. at 4-5.  The carrier again denied coverage.  Begun, 2015 WL 4910137 at *1.  In the ensuing coverage litigation, the trial court granted the carrier’s motion for summary judgment.  Id. 

The Ninth Circuit affirmed.  Id. at *2.  It held that the carrier had no duty to defend the directors and officers at the time of the initial tender due to the professional services exclusion.  Id. at *1. The court held it irrelevant whether the appellants personally rendered the services because the underlying action alleged deficiencies “arising out of” the failure to provide professional services, thus falling within the broad wording of the professional services exclusion.  Id.  The Ninth Circuit also found that the appellants’ post-lawsuit tender did not change the result.  See id.  The court noted that, although the plaintiff in the underlying action made statements about the appellants’ failures as officers, he did so to substantiate his alter ego theory, not to hold them liable in their roles as officers.  Id.  Moreover, the court held that “when an insured waits to present evidence that may give rise to a duty to defend until after the conclusion of the underlying action, an insurer is not required to consider the evidence.”  Id.  Rather, it may deny the re-tender “based solely on the evidence available to it during the pendency of the underlying action.”  Id. (citing Monticello Ins. Co. v. Essex Ins. Co., 162 Cal. App. 4th 1376, 1388-89 (Ct. App. 2008)). 

The Begun decision demonstrates that even though, under California law, a court may consider facts outside of the complaint in assessing whether an insurer has a duty to defend, such evidence must be presented to the insurer at a point in time when the insurer still has an opportunity to participate in the defense.  In addition, unambiguous exclusions must be enforced as written, and where, as here, a broadly-worded exclusion covers the conduct alleged in the underlying complaint, and no evidence giving rise to a duty to defend is presented to the insurer prior to the end of the trial, the insurer has no duty to defend.