Why it matters: Finding a connection between allegedly wrongful conduct by a policyholder and the policyholder’s professional services to be too tenuous, the Ninth Circuit Court of Appeals ruled that an insurer owed coverage for an action pending before the Financial Industry Regulatory Authority (FINRA). In this case, a group of investors filed arbitration proceedings with FINRA, alleging that after they invested funds in a real estate venture with ePlanning, the company encumbered the properties with an additional mortgage without their authorization. Insurer Brit UW Limited refused to provide coverage for the proceedings, taking the position that a “professional services” exclusion applied. A federal court judge in California agreed, holding that the allegations in the proceedings were “in connection with” the professional services of ePlanning. A panel of the Ninth Circuit reversed, writing in an unpublished opinion that, because the “alleged wrongful act is so tenuously connected to the rendering of professional services,” the professional services exclusion did not operate to bar the possibility of coverage.

Detailed discussion: A group of investors initiated arbitration proceedings with FINRA against ePlanning, which sold them investment interests in certain real properties. Among the investors’ allegations was that, after they had already invested their funds through ePlanning in certain real estate, ePlanning encumbered the real estate with an additional mortgage without the investors’ consent.

ePlanning’s insurer, Brit UW Limited, declined to provide a defense to the proceedings, relying on a Partial Professional Services Exclusion in ePlanning’s policy. The exclusion provided that Brit was not liable for any claim under the policy “for any act, error or omission in connection with the performance of any professional services by or on behalf of [ePlanning] for the benefit of any other entity or person.”

ePlanning assigned its rights against Brit to the investors. They filed suit against Brit, alleging that Brit breached the terms of its policy, as well as its duty of good faith and fair dealing, by refusing to defend ePlanning.

A federal district court sided with Brit and dismissed the investors’ complaint. The investors appealed. On appeal, Brit argued that the post-sale misconduct alleged by the investors was “in connection with” the performance of ePlanning’s professional services, specifically, the sale of securities. Brit emphasized the connection between the two actions: ePlanning sold interests in properties and then proceeded to encumber them, so the post-sale misconduct was not unrelated to the professional services ePlanning provided.

In an unpublished opinion, the Ninth Circuit Court of Appeals disagreed with Brit and reversed. According to the appellate panel, Brit’s reading of the professional services exclusion was a stretch.

“Brit’s broad construction is not consistent with ‘the requirement that the court construe policy exclusions narrowly,’ ” the court opined, and cited two decisions from the California Court of Appeal demonstrating that California state courts take a more narrow interpretation of the “in connection with” language in the context of a professional services policy exclusion. The state courts have found that the “existence of some connection” is insufficient to establish that a claim is excluded, the panel concluded.

Brit also contended that, because the investors brought their claims in a FINRA arbitration proceeding, they effectively had admitted that their claims were in connection with ePlanning’s professional services. The appellate panel also rejected this contention. “First, the FINRA rule and the professional services exclusion are worded differently,” the panel wrote. “Second, we decline to attribute a concession regarding the question before this court to the investors’ decision to include the encumbrance issue in the FINRA proceedings.”

Finding “[n]o convincing indication” that the state’s highest court would rule differently, “we conclude the California Supreme Court would refuse to apply this professional services exclusion where the subsequent alleged wrongful conduct is so tenuously connected to the rendering of professional services as is the post-sale encumbrance here,” the Ninth Circuit opined. “As some of the investors’ allegations were not barred by the professional services exclusion, the exclusion did not bar the possibility of coverage.”

To read the decision in Ambrosio v. Brit UW Limited, click here.