Negotiating The Professional Services Exclusion In Your D&O Policy
One of the often discussed, standard exclusions in a D&O policy, is the “Professional Services” exclusion. Insurers include this exclusion with the intent of carving out coverage for claims that are professional in nature and should instead by covered under an appropriate professional liability (E&O) policy. Their intentions are understandable, the issue however is the manner in which is the exclusion is worded and its potential broad reach when applied.
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”. Many management liability professionals argue that this version of the exclusion is excessively broad and over-reaching. While it would obviously accomplish the carrier’s objective of excluding any claims that are more appropriately covered under an E&O policy, it can exclude much more. Consider that many companies provide some level of professional services - others such as the financial industry and professional service firms exclusively provide professional services. For businesses such as law firms or consulting companies, it could be argued that any and all claims that might arise will, in one way or another, be “related to” the services they provide - thus allowing the carrier to rely on the professional services exclusion, effectively rendering the policy unresponsive. It would be understandable to say that courts would not allow such a broad interpretation due to the fact that it could be deemed as rendering coverage illusory, however there is a fair share of case law surrounding broader interpretations of the “professional services exclusion”.
To demonstrate the problematic nature of this broadly worded exclusion, consider a hypothetical scenario of a Fintech company that provides financial advising and payroll services to real estate brokers. The software utilized to process the payrolls performs incorrect calculations resulting in numerous errors. Upon discovering the errors, a number of clients file a collective suit against the Fintech firm accusing them of withholding funds for personal profit. When tendered to the D&O carrier, the claim would ultimately be denied due to the “professional services exclusion”. Now consider that this same claim results in a significant loss in clientele for the Fintech firm which triggers a sharp decrease in share value. There is an argument to made, that any subsequent claims brought by investors, shareholders and/or creditors would also be excluded, due to being “related to” the firm’s professional services.
The simplest and most effective solution to this common problem, is to either: 1) negotiate with the carrier to narrow the exclusion to more favorable wording (outlined below), or 2) seek a carrier with a more narrow exclusion. Almost every carrier, at least initially, will apply the broadly worded version of this exclusion so there will almost always be some level of negotiating involved. In seeking more favorable wording, a more appropriately worded exclusion should exclude coverage only for “claims FOR the rendering or failure to render professional services”. Amending the verbiage; “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. For insureds in that are unable to achieve a favorable result through either negotiations or marketing, there is another solution in the form of an additional D&O policy. A DIC (Differences In Condition) D&O policy is an excess layer of “side A” coverage with considerably fewer exclusions. These policies generally do not contain any professional services exclusion, and, in addition to acting as an excess layer of liability above the underlying D&O, will also drop down to provide “primary coverage” in claim situations that are otherwise excluded by the underlying D&O carrier.
When coordinating coverage for professional services, it is also important that the carrier define exactly what those services are. Policies that either do not provide a definition or contain an overly broad definition should be avoided. Using the same Fintech company from earlier, the insurer for this particular company may apply (for example) a professional services exclusion to their D&O policy, excluding claims “…for the failure to render professional services in connection with the insured’s services as a financial advisor”. Had the Fintech company’s D&O policy contained such an exclusion, the earlier claims would have likely been deemed as covered, as the definition of professional services makes no mention of “providing payroll services”, and the claims in question did not arise from any such financial advising.
Being that the intent of this exclusion is to carve out coverage that is more appropriately covered elsewhere by an E&O policy, it is equally important that the E&O policy also be reviewed, to ensure that its definition of “professional services” is completely inclusive of all of the services being provided by the policyholder. Generally speaking, the policyholders’ E&O policy should have a broad, all-inclusive definition of “professional services” while the D&O exclusion should define those services as narrowly as possible. For law firms, this means performing a coverage review to ensure “professional services” includes bill collection services, fee setting and any potential consulting or “moonlighting” services. Accounting firms should ensure that the definition in their policies include financial planning, and acting as a trustee and/or receiver (among others). For maximum protection, insureds may also want to consider placing both the E&O and D&O with the same carrier. This approach will help eliminate any potential “finger pointing” in the event of a claim which may fall in any potentially “grey areas”.
Companies seeking more information on D&O insurance should visit our D&O insurance guide.