The professional services exclusion is included in a range of policies, from liability policies to umbrella policies and D&O policies. Its purpose is logical but its application flawed. Its intent is to shift professional liability related exposures to an appropriate professional liability policy. Understandable enough. The problems that many professional liability experts and often the courts themselves cite are - it is often overly broad in its definition, over-reaching, can be ambiguous, and potentially even crippling to the point of deeming coverage illusory altogether. While it's critical to address the professional services exclusion within any CGL policy (discussed here) - for the purposes of this article we will be approaching it from its context within D&O policies.
The main issue/concern with the exclusion is its broad lead in language. A standard professional services exclusion will typically exclude coverage for any claims
“based upon, arising from, in consequence of, or in any way directly or indirectly related to the rendering or failure to render professional services”
Consider a law firm, staffing agency, advertising agency, tech company, publisher or healthcare institution – the majority (if not all) of their activities are arguably “related to” their professional services in one way or another. Thus the problem – a blanket exclusion that has the potential of nullifying coverage. So what can be done:
- Narrow the lead-in language as much as possible
- Obtain policies with narrow definitions of professional services on D&O policies
- Maintain severability when able
- Place an appropriate E&O policy with a broad definition of professional services
- Ensure D&O policies are written on a duty to defend basis with 100% defense allocation
NARROW THE LEAD-IN LANGUAGE
To demonstrate the problematic nature of broad lead-in language well use the case of Hotchalk Vs Scottsdale. Hotchalk is an education technology platform that was deemed to be improperly compensating employees for services that they provided to universities (in this case student recruitment). These employees were compensated with commissions/fees, a compensation structure that was ultimately in violation of title IV, resulting in former employees filing an FCA action against the company. Hotchalk submitted the claim to their D&O insurer who declined both defense and indemnification by asserting the policy’s broad professional services exclusion which precluded coverage for claims “alleging, based upon, arising out of, attributable to, directly or indirectly arising from, in consequence of, or in any way involving the rendering or failing to render professional services”. That’s one long lead-in clause! While this claim was not asserting errors or failures in their actual rendering of services, the court determined that the claim did in fact “arise from” said services.
The case of Tagged Vs Scottsdale. (discussed in greater depth below) is yet another example of the problematic nature of broad lead-in language combined with broad definitions. The D&O insuring agreement of their policy also contained broad lead-in language with an open ended, undefined term of professional services which was ultimately relied on when declining coverage.
While not always possible to negotiate, often the most effective solution to this common problem, is to obtain a policy with narrow lead-in language. A more appropriately worded exclusion should exclude coverage only for “claims FOR the rendering or failure to render professional services”. Amending the verbiage from “arising from, in consequence of, or in any way related to” to simply “for”, may seem may seem somewhat insignificant but has a great impact. Terms such as “directly or indirectly involving”, “in any way related to”, or “in connection with” are common modifiers that, when included in the professional services exclusion, effectively narrow coverage significantly, and should thus be avoided when possible.
GROOM BOTH THE D&O AND E&O DEFINITIONS
When purchasing D&O and E&O coverage, the goal should be a narrow exclusion with a narrow definition of services on the D&O policy and conversely, a broad definition of services on the E&O policy. No case highlights this better than the case of Tagged Inc Vs Scottsdale which could be viewed as providing exactly the opposite.
Tagged Inc is a social media platform marketed to teenagers. In connection with the services provided, Tagged advertised a safe environment that would shield its users from inappropriate content. However when the company failed to filter and remove inappropriate content, litigation and an investigation ensued. With a policy that included both Tech E&O and D&O insuring clauses, Tagged tendered the claim to their insurer. The insurer however ultimately declined coverage under both insuring agreements. Most policyholders would have assumed such a uniform approach would have resulted in more effective coverage, so what went wrong? In short, the policy narrowly defined professional services on the E&O form (which was limited to providing of advertising services) and left the same services exceedingly broad under the D&O exclusion by leaving the term undefined and open to interpretation. The lawsuit alleged deceptive business practices and false advertising arising from the company’s false claims that it protected its users from inappropriate content. However the courts ruled that there was no coverage under the E&O insuring agreement due to the fact that they were not related to the actual providing of professional services as defined in the E&O agreement (advertising services). Further the courts determined that there was no coverage under the D&O insuring agreement because these claims did arise from (were connected to) Taggeds providing of professional services as (undefined) in the D&O exclusion. As we already noted above, companies can avoid a similar fate by obtaining an E&O policy with a broad definition of professional services, and a D&O policy with a narrowly defined exclusion.
Lastly it’s important to understand what professional services are, and are not. Generally speaking, the courts have defined a professional service to be a service that requires specialized skill or knowledge. It’s important not to confuse this definition with skills that require specialized licensing, such as an auditor or lawyer – while those would be inclusive of such services, professional services are not solely limited to such profession based services. Based on prior rulings, here are some services that the courts have ruled are not professional services due to lacking specialized knowledge:
- Unsolicited calls resulting in violations of the TCPA
- Marketing related claims & Allegations of False or Deceptive Advertising
- Improper Billing Practices Or Fee Setting
- Administrative and routine tasks
In addition to ensuring that D&O policies contain both “application severability” and “exclusion severability” clauses, a second degree of severability may also be maintained through the specifics of the policy wording. When precluding coverage, the terms “any insured”, “an insured” and “the insured” may be interpreted differently - Ravel Law has some case notes from Premier Vs Adams that effectively review prior cases which have litigated such policy wording. While court rulings on these topics have been somewhat unpredictable, exclusions that preclude coverage for claims against “the insured” should be favored over those that preclude coverage for claims against “any insured”. Policies that preclude coverage for claims against “any insured” may be interpreted as applying to (unintended) parties removed from the services being performed. This was recently evidenced by a recent case we discussed here.
DUTY TO DEFEND WITH GUARANTEED ALLOCATION
When claims asserted against a company and its directors contain a blend of both covered and uncovered claims, policies that are written on a duty to defend basis (providing 100% defense allocation) must defend any and all allegations against the policyholder, even those potentially uncovered. So in situations where coverage related to professional service failures would otherwise be excluded under a D&O policy, if that same claim is asserted alongside other claims that are covered, the company would be afforded defense costs for the service related claim as well. As an example, let’s assume a hypothetical D&O policy which contained a broad contractual exclusion, broad professional services exclusion, but no false advertising exclusion. If a claim were to arise only alleging breach of contract and failures related to professional services, there would likely be no coverage. However, if in addition, there was a claim of false advertising in the same lawsuit, the carrier would be responsible to defend all of the claims (covered and uncovered). Luckily almost all private company D&O insurance policies are written on a duty to defend basis with full defense allocation - it should not however be assumed, as we have come across some private D&O forms that lacked such coverage.