Professional Services Exclusion

02/22/2018

The Professional Services Exclusion: A Cautionary Tale for D&O Insureds

Professional services exclusion is found in most private company D&O policies, as well as in D&O policies issued to publicly traded companies that provide professional services including banks, financial advisory companies, technology service firms and more.  This is a very critical coverage issue to watch, as we have seen numerous claim denials based upon this exclusion. In some cases, the denials appear as though the professional exclusion could be used for any situation involving the primary operations of the insured. 

The following hypothetical scenario illustrates some of the circumstances under which the professional services exclusion may result in a coverage determination contrary to the expectations of an insured:

ScripCorp is a wholesale pharmacy that dispenses prescriptions for nursing and rehabilitation facilities.  Among its customers is KomfortKare, Inc., which owns and operates a chain of orthopedic rehabilitation facilities.   A former customer relationship manager at ScripCorp commences a whistleblower lawsuit alleging that ScripCorp secretly pays incentives to its nursing home customers based on the volume of prescriptions filled, which is in violation of state and federal laws and regulations.  Shortly thereafter, state and federal law enforcement authorities commence an investigation of KomfortKare and Huxtable Medical, the medical group contracted to provide medical services at KomfortKare facilities.  The goal of the investigation is to determine whether the prescription insurance billing and reimbursement practices of KomfortKare and Huxtable are fraudulent.  Neither the whistleblower suit nor the investigation contain allegations that improper or inappropriate medications were prescribed or dispensed, only that improper benefits were paid or received.

ScripCorp, KomfortKare, and Huxtable provide notice of the claims and investigations to their respective D&O insurers.  ScripCorp’s D&O insurer denies coverage relying on the professional services exclusion.  The D&O insurers for KomfortKare and Huxtable both reserve their rights, identifying the professional services exclusion as one of the bases for reservation.  Out of an abundance of caution, each insured also provides notice to its Professional Liability insurer.  In each instance, the Professional Liability insurer denies coverage, taking the position that the alleged conduct is not included within the scope of professional services.  


Coverage Determinations

Why the different initial coverage determinations?  The D&O insurance policies issued to the three insureds each contain different versions of the professional services exclusion. 

The exclusion contained in ScripCorp’s D&O policy states that:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured alleging, based upon, attributable to, directly or indirectly arising out of, in consequence of, or in any way involving the performance of or failure to perform professional services.

The corresponding exclusion in KomfortKare’s D&O policy provides that:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured for the performance of or failure to perform professional services.

The professional services exclusion in Huxtable’s D&O policy provides that:

The Insurer shall not be liable to make any payment for Loss for any Claims made against an Insured alleging, based upon, or involving the performance of or failure to perform professional services for others.

Many, if not most, insurance professionals instinctively recognize the difference between the wrongful acts covered by a D&O policy and the breaches of a professional standard of care covered by a professional liability policy.  But what happens if policy language allows for a coverage determination contrary to the expectations of the insured, or the relevant policy language lends itself to an overly broad application?

This is the situation experienced by the insureds – and ScripCorp, in particular – in our hypothetical scenario.  Each insured provides professional services, or services that presuppose some level of professional expertise.  But the claims against each of the insureds do not allege that the insured committed some breach of a duty of care in the course of providing professional services or services requiring a special level of expertise.  The claims against each insured allege that the insured entity wrongfully provided or received improper benefits or submitted fraudulent billing statements. 

The professional services exclusion in the D&O policy issued to ScripCorp illustrates the hazards posed for policyholders. For a business providing professional services, there is a risk that an insurer could determine that virtually any activity conducted by that business can be characterized as “based upon, attributable to, directly or indirectly arising out of, in consequence of, or in any way involving” professional services. Compounding the hazards for an insured, there is a risk that its insurers will argue that a particular claim falls into a gap in coverage -- excluded by the D&O policy’s professional services exclusion but not falling within the scope of a professional liability insurance policy. 


How to Protect Your Insureds

What can an insured’s advisors and counsellors do to protect against the dilemma in which ScripCorp finds itself in our hypothetical? 

  • If you see a professional services exclusion in the policy or endorsements, read it carefully.If the insured’s primary operation is providing a service, they are susceptible to problems with these exclusions.
  • If the insured performs services, try to avoid policy forms that contain the broad “based upon, attributable to, directly or indirectly arising out of, in consequence of, or in any way involving” language in the preamble of the exclusion.Using “for” wording is more advantageous.
  • Even if the broadly worded exclusions are unavoidable, other policy amendments can be sought in an effort to mitigate the potential consequences of the preamble language.Language that limits the exclusion to services provided “for others” may be a means to prevent the application of the exclusion to ordinary tasks that are performed in the course of any business such as billing.
  • In any event, it may be necessary to dispute a coverage determination based on an overly broad application of the professional services exclusion.Certainly, D&O policies should not be construed so broadly that they cover professional errors and omissions. By the same token, the professional liability exclusion should not be applied so widely that it apples to virtually any claim brought against a business that provides services requiring some level of professional expertise.Construing the professional services exclusion so broadly that it could apply to virtually any claim for a wrongful act would render the coverage of a D&O policy largely illusory.


Conclusion

Seemingly minor differences in the wording of insurance policy terms, such as the professional services exclusion, can have significant consequences.  It is important for the insured and its advisors to be attentive to and aware of the consequences of those policy terms before being caught by surprise by an insurer’s denial based on an expansive reading of an exclusion.  


There are other potential remedies that can be negotiated by sophisticated insurance brokers.  Please contact a broker from the AmWINS Professional Lines Practice to assist with the placement of Directors & Officers liability, especially when a professional services exclusion may be applied.


ABOUT THE AUTHOR
This article was authored by Daniel Struck, Esq., from Culhane Meadows, PLLC, who frequently represents clients on management liability insurance issues and David Lewison, AmWINS National Professional Lines Practice leader. 

Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

State of the Market - Q2 2020

06/15/20

Our Q2 2020 State of the Market report provides a holistic view of highly impacted industry segments as well as overall market trends. This report is designed to help our retailers gain the knowledge they need to retain accounts, write new business, overcome challenges and capitalize on opportunities that do exist.

On-Demand Webinar: COVID-19 Economic Impact and Future Outlook

05/15/20

As a result of the COVID-19 crisis, our industry is facing a broad array of challenges that impact insureds of every size and in every industry. In the first of a series of webinars, we hear from an economist on the financial impacts of COVID-19 and what we can expect in the future. This webinar is intended to complement your conversations with clients about how to plan for the next 12 to 24 months.

Insurance Impacts of COVID-19 on the Healthcare and Senior Living Industry

03/30/20

As the healthcare industry remains on the front lines of battling the COVID-19 pandemic, staying abreast of the changing landscape and how the insurance market is adapting is critical to ensure new exposures are covered and renewals are successfully placed. In this article, our specialists share what they are seeing in the Healthcare and Senior Care markets, tips for risk control and mitigation, and how to get the best results for insureds.

COVID-19 – Are Your Clients Covered?

03/19/20

The disruption to business and everyday life caused by the coronavirus (COVID-19) pandemic is resulting in an economic impact for insureds. Much of this disruption is likely not covered by insurance. We have consulted with several AmWINS insurance specialists across the Property, Casualty and Professional Lines sectors and offer a COVID-19 update.

How Parametric Products Benefit Catastrophe-Driven Risk Transfer

03/19/20

Parametric insurance is an innovative product that functions differently than traditional insurance by covering the impacts of an event and not just losses sustained to an asset. Proceeds of the policy are paid quickly and can be used flexibly to cover any expense associated with the triggering event. Coverages can be designed to capture the impacts of natural perils and other forms of non-damage business interruptions such as future epidemics. Learn how the parametric landscape has and will continue to play a major role in improving coverage and the recovery experience.

From Seed to Sale: The Top 5 Issues Impacting the Cannabis Insurance Industry

09/19/19

​Over the last few years, the legal cannabis industry has seen rapid growth and had a significant impact on the U.S. economy. With states continuing to legalize its use, insurance needs for cannabis-related businesses are becoming a popular topic of discussion. This article examines the evolving cannabis industry by exploring five key issues impacting coverage.

Four Key Additional Insured Endorsements for Contractors

Construction contract negotiations, which determine the kind and amount of insurance required for a construction project, can be time-consuming, complicated and frustrating. Project owners require contractors on a project to name the project owner as an additional insured on the contractor’s casualty insurance program. It's important that both project owners and contractors understand the coverage provided by these additional insured endorsements. This article discusses four common ISO additional insured endorsements related to commercial general liability policies purchased by contractors, including their limitations, conditions and exclusions.

Understanding Property Theories of Recovery and Ensuing Loss Clauses

​The theories of recovery, as well as the ensuing loss provisions, contained in property insurance policies are often complex and, at times, seemingly in conflict. Although a policy may not directly address these theories, their application by courts plays a significant role in the coverage determination process after the claim. It is essential that brokers understand the primary theories of recovery – Efficient Proximate Cause, the Concurrent Causation Doctrine, and the Anti-Concurrent Causation Doctrine – in order to navigate the challenging post-claim process and effectively serve their clients.

Sign Up For Our Monthly Newsletter

Sign Up