Most significant insureds that provide services purchase both directors and officers liability insurance (“D&O”) and errors and omissions insurance (“E&O”). When the services provided are that of a stock exchange, claims by investors against the exchange for wrongful acts concerning the listing of a security may implicate both types of coverage. In a recent case, a court construed the interplay between these coverages and the application of the professional services exclusion typically found in D&O policies.

In Beazley Ins. Co. v. Ace Am. Ins. Co., No. 15-cv-5119 (JSR), 2016 U.S. Dist. LEXIS 90332 (S.D.N.Y. Jul. 12, 2016), a coverage dispute arose between the insured’s E&O carriers and its D&O carriers over who should contribute to the settlement of an investor class action over the initial public offering of Facebook on the NASDAQ. The E&O insurers advanced defense costs for the underlying various class actions and ultimately settled with the class action plaintiffs on the underlying allegations. The D&O insurers, however, disclaimed coverage based on the D&O policy’s professional services exclusion.

In the coverage/contribution litigation between the E&O and D&O carriers, the court, in an earlier decision, granted the E&O carriers partial summary judgment against the primary D&O carrier on the issue of defense costs. The issue in this decision concerned the applicability of the professional services exclusion in the D&O policy to the claims made in the underlying class action.

The exclusion provided that “[t]he Insurer shall not be liable for that portion of 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.” As the court pointed out, neither customer or client nor professional services is defined.

In finding in favor of the applicability of the exclusion, the court held that the underlying plaintiffs, retail investors in Facebook, were unambiguously customers or clients of the exchange. The court reached its conclusion by construing federal securities case law and the custom and usage of these terms in that context. The court also found that industry usage also reinforced and confirmed its conclusion. Thus, the court concluded that a reasonably intelligent person who is cognizant of the customs, practices, usages and terminology as generally understood in the industry would understand customers as that term is used in the professional services exclusion to unambiguously encompass retail investors. Finding no ambiguity, the court did not need to resort to extrinsic evidence.

The court then went on to conclude that the underlying claims were alleging, based upon, arising out of, or were attributable to the rendering or failure to render professional services as a matter of law. The court used a “but for” analysis to reach this conclusion. But for the excluded conduct, could the claim otherwise succeed. The court found that “the federal securities claims would have failed but for NASDAQ’s allegedly botched rending of professional services.” The court concluded that because the professional services exclusion unambiguously applied, the court did not have to resort to construing the contract against the drafter and held that the D&O carriers had no duty to indemnify NASDAQ.

Notably, however, the court did not relieve the primary D&O carrier of its responsibility for advancing defense costs based on the earlier holding and the broader duty to defend.