PROFESSIONAL LIABILITY INSURANCE COVERAGE: A PRIMER

                                                                 By

                                                       Sarah E. Morris[1]

Professional liability insurance policies are often termed “errors and omissions” policies.   They are designed to protect members of a professional group from liability for negligence, omissions, mistakes and errors inherent in working in the profession.  St. Paul Fire & Marine Ins. Co. v. Nat’l Real Estate Clearinghouse, Inc., 957 F.Supp. 187, 189 (D. Minn. 1997) (citation omitted).

The coverage granted by professional liability insurance policies dovetails with the exclusion in other policies for the rendering or failure to render professional services.   See, e.g., Kirkham, Michael & Assoc. v. Travelers Indem. Co., 493 F.2d 475 (8^th Cir. 1974) (addressing exclusion in architectural firm’s CGL policy for “professional liability arising from defects in plans, designs or specifications”); Piper Jaffray Cos. v. Nat’l Union Fire Ins. Co., 38 F. Supp. 2d 771 (D. Minn. 1999) (addressing professional services exclusion in D&O policy); Cunningham v. Middle Ga. Mut. Ins. Co., 601 S.E.2d 382 (Ga. Ct. App. 2004)  (construing professional services exclusion in homeowner’s policy); Mork Clinic v. Fireman’s Fund Ins. Co., 575 N.W.2d 598, 603 (Minn. Ct. App. 1998) (applying exclusion for injuries arising out of the rendering of medical services in CGL policy).

I.        LOSS MUST ARISE FROM INSURED’S PROFESSIONAL SERVICES.

A.        Some policies define “professional services.”

See, e.g., Pacific Ins. Co. v. Burnet Title, Inc., 380 F.3d 1061 (8^th Cir. 2004) (“professional services” definition in title company’s errors and omissions policy stated that the term meant “services performed and advice given in the Insured’s capacity as Title Agent, Title Abstractor and Escrow Agent”); Wittmack v. Fed. Ins. Co., No. D044764, 2005 WL 2633071 (Cal. App. Ct. 2005) (interior designer’s policy defined “professional services” as “the preparation and/or execution of:  plans, maps, drawings, analyses, reports or surveys; orders, change orders, designs or specifications; or other customary interior design services”); Terramatrix, Inc. v. U.S. Fire Ins. Co., 939 P.2d 483, 490 (Col. Ct. App. 1997) (environmental consultant’s policy defined “professional services” as the performance of “site assessment; remedial investigations; feasibility studies; environmental impact assessment; hydrogeological and geotechnical investigations”).

B.         Where the phrase is undefined, many courts consider whether there  was a causal relationship between the act at issue and the insured’sprofessional services.

• Veterinarian’s decision to sell unapproved antibiotic in violation of court order was not directly connected to his professional responsibilities as a veterinarian.Rossoff v. Cincinnati Ins. Co., 26 F.Supp.2d 1095 (C.D. Ill. 1998) (“Plaintiff must pay” for his “shocking” conduct).
• Alleged unfair competition of real estate firm was ancillary to the performance of real estate services.  St. Paul Fire & Marine Ins. Co. v. Nat’l Real Estate Clearinghouse, Inc., 957 F. Supp. 187, 189-90 (D. Minn. 1997).   Accord, Crum & Forster Managers Corp v. Resolution Trust Corp., 620 N.E.2d 1073, 1079 (Ill. 1993).

• Attorneys that advised sale of allegedly worthless lease interests were covered by insuring agreement where the claims against the insured arose from its legal representation of a client in a bankruptcy proceeding.Sibley v. Nat’l Union Fire Ins. Co., 921 F. Supp. 1526 (E.D. Tex. 1996).

• Mortgage insurance provider that allegedly engaged in kickback scheme with lenders was not engaged in merely administrative behavior; the claim against it “implicates the way in which it finds and services its customers” – the “heart” of its business.Therefore, it was engaged in professional services.PMI Mortgage Ins. Co. v. Am. Internat’l Specialty Lines Ins. Co, 394 F.3d 761, 768 (9^th Cir. 2005).

C.        Other courts consider whether the challenged conduct was in furtherance of the services to be rendered by the insured.

• Attorney hired to consult on labor relations and negotiate with unions was not rendering professional services.Ellenstein v. Herman Body Company, 129 A.2d 268, 272-73 (N.J. 1957) (“controlling circumstance is whether the attorney was in fact engaged for the purpose of obtaining his legal services”).

• Attorney who procured expert witness testimony in client’s lawsuit was acting in furtherance of the client’s cause, requiring his malpractice carrier to defend him in a collection action by the witness after the lawyer failed to pay the witness’s fee. See Transamerica Ins. Co. v. Rutkin, 218 So.2d 509 (Fla. Ct. App. 1969).

• Surveying firm was not rendering professional services when it prepared to bid on a project; it was acting for its own benefit in seeking to obtain work.R.L. Schafter & Assoc. v. Certain Underwriters at Lloyds of London, No. F048216, 2006 WL 1553601 (Cal. Super. Ct. June 8, 2006) (unpublished).

D.         Others focus on whether the acts or omissions at issue involved the professional’s expertise. 

“[I]t must be necessary for the professional to use his specialized knowledge or training.”   Atlantic Lloyd’s Ins. Co. v. Susman Godfrey, L.L.P., 982 S.W.2d 472 (Tx. Ct. App. 1998).

“The term ‘professional’. . . means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities.   A ‘professional’ act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual . . . In determining whether a particular act is of a professional nature or a ‘professional service’ we must look not to the title or character of the party performing the act, but to the act itself.”  Marx v. Hartford Acc. & Indem. Co., 157 N.W.2d 870, 872 (Neb. 1968), quoted in Med. Records Assoc. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 515 (1^st Cir. 1998).

             Conduct Representing Professional Services

• Title company that purportedly failed to disclose the actual cost of courier charges on settlement statements was performing professional, rather than ministerial services.See Pacific Ins. Co. v. Burnet Title, Inc., 380 F.3d 1061, 1064 (8^th Cir. 2004) (rejecting argument that the nondisclosure did not involve the specialized knowledge or skill of title professional).

• Attorney’s dispute with former partners over amount attorney charged client for services arose from rendering of professional services in his capacity as a lawyer; professional liability carrier required to pay arbitration award against attorney.   Lyons v. Am. Home Assur. Co., 354 N.W.2d 892 (Minn. Ct. App. 1985). 

• Market-timing claim against investment advising firm fell within insuring agreement for “wrongful acts while performing investment adviser services” because the complaint alleged the firm failed to advise its members properly.   Rightime Econometrics, Inc. v. Fed. Ins. Co., No. 05-1880, 2006 WL 560145 (E. D. Pa. 2006).

• Lawyer that issued a check on clients’ escrow account to assist in transfer of client’s funds for real estate purchase was engaged in the performance of professional services.The execution of instruments required to close a real estate transaction calls for legal skill, knowledge and professional judgment.Regas v. Continental Cas. Co., 487 N.E.2d 105 (Ill. Ct. App. 1985).

• Physician’s agreement to prepare a report and testify regarding patient’s medical condition represented professional services because the report and testimony had value only because of the physician’s professional status, medical knowledge and doctor-patient relationship with patient.His professional liability insurer was thus required to defend him in lawsuit by patient’s attorney asserting that physician breached agreement.Danyo v. Argonaut Ins. Cos., 464 A.2d 501 (Pa. Super. Ct. 1983).

• Lawyers were rendering professional services when they allegedly acted fraudulently in filing pleadings, negotiating settlements and advising clients.Admiral Ins. Co. v. Weitz & Luxenberg, P.C., No. 022195, 2002WL 31409450 (S.D.N.Y. 2002) (fraud ancillary to professional services does not remove services from scope of insuring agreement).

Conduct Outside Scope of Professional Services

• Home health care provider was not using “any specialized skills, knowledge, learning or attainments” when it allegedly paid salaries of hospital discharge planners in order to monopolize market in violation of antitrust laws.   Visiting Nurse Assoc. v. St. Paul Fire & Marine Ins. Co., 65 F.3d 1097, 1102 (3d Cir. 1995)

• Attorney’s solicitation letter to physician’s former patient did not represent rendering of professional services because solicitation of clients does not require specialized skills particular to legal profession.Atlantic Lloyd’s Ins. Co. of Texas v. Susman Godfrey, L.L.P., 982 S.W.2d 472, 478 (Tex. Ct. App. 1998) (construing professional service exclusion in CGL policy).

• Attorney who invested plaintiff’s money after approaching plaintiff and suggesting the idea was not acting in any legal capacity.Investment transaction did not require legal skill or training.Smith v. Travelers Indem. Co., 343 F. Supp. 605, 609 (M.D. N.C. 1972) (noting forum state’s statutory definition of practice of law).

E.            Generic business practices do not reflect the rendition of professional services.

• “[I]f a lawyer is sued because a guest in the lawyer’s office is injured tripping over the lawyer’s briefcase, the lawyer’s liability would not derive from the rendering of a professional service but from the operation of a business.”Visiting Nurse Assoc., 65 F.3d at 1101 (citation omitted).But see Am. Cas. Co. v. Hartford Ins. Co., 479 So.2d 577 (La. Ct. App. 1985) (fall from EKG table in physicians’ office covered under professional liability policy; reasoning that fall resulted from failure to properly furnish medical services).

• Veterinarian’s employee’s claim against veterinarian arising from cat bite was outside scope of veterinarian’s professional liability policy; policy did not cover negligent act committed in operating his office.Block v. Fireman’s Fund Ins. Co., 609 So.2d 763 (Fla. Ct. App. 1992).

• Life insurance agents were not practicing their profession when they executed contract with employee and thus not entitled to professional liability coverage for employee’s breach of contract claim.Richards v. Fireman’s Fund Ins. Co., 417 N.W.2d 663, 668 (Minn. Ct. App. 1988).

• Hiring and firing of insurance agent by life underwriter were “nonprofessional business activities which set the stage for performance but which did not involve professional services to clients and were not themselves acts inherent in the practice of the particular profession.”Propis v. Fireman’s Fund Ins. Co., 489 N.E.2d 250 (N.Y. Ct. App. 1985).

• Health insurer’s claim against psychiatric practices for reimbursement of fees that defendants allegedly overcharged it did not fall within insuring agreement; insureds’ billing practices did not constitute professional services; no claim that patient was injured as a result of receiving psychiatric care.Hampton Med. Group v. Princeton Ins. Co., 840 A.2d 915, 924-25 (N.J. Super. Ct. 2004).

• Interior designer who passed on overhead charges to client, contrary to their contract, was performing an administrative task not requiring design expertise.Wittmach v. Fed. Ins. Co., No. D044764, 2005 WL 263307 (Cal. Ct. App. 2005).

• Medical records processing company that allegedly overbilled clients for copies was not engaged in providing professional services; setting price for photocopies was generic business practice.Med. Records Assoc. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 515 (1^st Cir. 1998).

The professional services limitation cuts off coverage for many claims involving intentional misconduct:

• Misappropriation of funds by insurance agency officer did not arise out of the conduct of the business of the insured as an insurance agency.See, e.g., Employers Reinsurance Corp. v. Caswell, 490 N.W.2d 145, 148 (Minn. Ct. App. 1992).

• Physicians’ sexual abuse of patients did not result from “providing or withholding of professional services” as defined in professional liability policy.Mork Clinic v. Fireman’s Fund Ins. Co., 575 N.W.2d 598, 604(Minn. Ct. App. 1998); St. Paul Fire & Marine Insurance Co. v. Mori, 486 N.W.2d 803, 808 (Minn. Ct. App. 1992).But see St. Paul Fire & Marine Ins. Co. v. Love, 459 N.W.2d 698 (Minn. 1990) (therapist’s sexual relations with patient represented the providing of professional services where “transference” phenomenon occurred).

• Allegation in qui tam action that physician knowingly submitted false claims to the Healthcare Finance Administration did not result from “providing or withholding of professional services.”Jenkins v. St. Paul Fire & Marine Ins. Co., 8 Fed. Appx. 573, 2001 Wl 360437 (8^th Cir. 2001)

• Sexual harassment complaint did not allege injuries arising out of the performance of professional services.Agricultural Ins. Co. v. Focus Homes, Inc., 212 F.3d 407, 412-13 (8th Cir. 2000) (applying Minnesota law).

Note that a severability clause may result in coverage for the “innocent” insured but not the “bad actor.”   E.g. Capitol Indem. Corp. v. Especially For Children, Inc., No. 01-2425, 2002 WL 31002849 (D. Minn. 2002) (although professional services endorsement to CGL policy did not cover day care worker who abused child, because his acts did not constitute professional services, endorsement covered center, which provided professional child care services)

F.         Courts will also give weight to the professional’s characterization of the transaction.

• Attorney who contracted with corporation to act as its labor consultant, and who represented corporation in negotiations with its union, was not rendering professional services within the meaning of his professional liability policy.   Ellenstein, 129 A.2d at 272-73.

G.             Professional services the insured renders on his or her own behalf are not covered. 

Mendelsohn v. CNA Ins. Co., 451 N.E.2d 919 (Ill. Ct. App. 1983) (attorney was not rendering professional services when he represented himself in divorce proceedings; noting state code of responsibility contemplated that legal practice involves service to another).

H.            Coverage exists for suits by third parties.

• Fact that third party rather than client sued insured was immaterial where the claims against the insured arose from its legal representation of a client in a bankruptcy proceeding.   Sibley v. Nat’l Union Fire Ins. Co., 921 F. Supp. 1526 (E.D. Tex. 1996).

• Medical malpractice policy covered negligence claims by nurse against physician who allegedly assaulted her after she ordered transfer of his patient.   Records v. Aetna Life & Cas. Ins., 683 A.2d 834 (N.J. Super. Ct. 1996) (reasoning that reaction to nursing staff decision had substantial nexus with the rendering of professional services).

II.          SCOPE OF COVERAGE

Professional liability policies cover “wrongful acts.”   Jeanne Unger, Errors and Omissions Insurance:  Coverage for the Inevitable, For The   Defense (May 2006).  The definition of the term governs the scope of coverage.

A.        “Negligent act, error or omission of the Insured”

• This policy language has been held to provide coverage for negligence claims only.

See Employers Reins. Corp. v. Mut. Med. Plans, Inc., 504 N.W.2d 885, 888 (Iowa 1993) (insuring agreement did not provide coverage to insurance agent for claims of intentional interference with contract and prospective economic advantage); Gordon-Gallup Realtors, Inc. v. Cincinnati Ins. Co., 265 S.E.2d 38, 40 (S.C. 1980) (insuring agreement encompassed negligent misrepresentation allegations against real estate agency); De Santis Enterprises Inc. v. Am. And Foreign Ins. Co., 661 N.Y.S.2d 92, 94 (N.Y. Sup. Ct. 1997) (employer’s termination of retirement plan was intentional act and thus outside scope of employee benefits errors and omissions endorsement); see also Richards v. Fireman’s Fund Ins. Co., 417 N.W.2d 663, 667 (Minn. Ct. App. 1988) (finding no coverage for breach of contract claim by former employee of insured life insurance agency); R.L. Schafter & Assoc. v. Certain Underwriters at Lloyds of London, No. F048216, 2006 WL 1553601 (Cal. Super. Ct. June 8, 2006) (unpublished) (surveyors’ professional liability carrier not obligated to defend insured on counterclaim for fees owed; liability arose from contract, not negligence).

• Minority viewfinds this insuring agreement ambiguous as to whether negligent also modifies “error” and “omission.”See USM Corp. v. First St. Ins. Co., 652 N.E.2d 6134 (Mass. 1995) (finding coverage for breach of warranty judgment against computer consultants; citing cases).

B.         “Error or omission, negligence, breach of duty or misstatement or misleading statement.”

• The Minnesota Supreme Court held this grant of coverage in a school administration liability policy encompassed claims of intentional age discrimination.Indep. Sch. Dist. No. 697 v. St. Paul Fire & Marine Ins. Co., 515 N.W.2d 576, 579 (Minn. 1994).The Court reasoned that intentional discrimination was a wrongful act based on a breach of duty.Id. at 579.It noted that the terms “wrongful act” and “breach of duty” are “ordinarily understood to encompass intentional as well as negligent misconduct.”Id.; see also Continental Cas. Co. v. Cole,   809 F.2d 891 (D.C. Cir. 1987) (attorneys’ professional liability policy covering “error, negligent omission or negligent act” extended to claims for breach of contract); Admiral Ins. Co. v. Weitz & Luxenberg, P.C., No. 022195, 2002 WL 31409450 (S.D.N.Y. 2002) (unpublished); but see St. Paul Fire & Marine Ins. Co. v. Nat’l Real Estate Clearinghouse, Inc., 957 F. Supp. 187, 191 (D. Minn. 1997) (auctioneering firm not entitled to coverage for intentional interference claims under policy insuring “errors, omissions and negligent acts”); Benilde St. Margaret’s H.S. v. St. Paul Mercury Ins. Co., 575 N.W.2d 127 (Minn. Ct. App. 1998) (employee benefit insurance company policy covered negligence of school in failing to investigate payroll vendor that misappropriated employee payroll tax contributions). 

C.        D&O Policies insure “against loss . . . arising from any claim or claims which are first made against the Insureds . . . during the policy period by reason of any Wrongful Act .  . in their respective capacities as Directors or Officers.”

• D&O coverage has two parts.Coverage A provides coverage for claims for which the corporation is legally or financially unable to indemnify its officers or directors.Coverage B insures the corporation from losses incurred as a result of indemnifying its directors and officers.A third form of coverage, “entity” coverage, protects the corporations for claims outside the scope of coverages A and B.Plitt and Maldonado, General D&O Policy Architecture, For The Defense (May 2006), at 18-20.

• D&O policies are liability rather than indemnity policies and require the insurer to pay defense costs when they are incurred.Combs v. Internat’l Ins. Co., 354 F.3d 568, 598 (6^th Cir. 2004).

“Loss” is commonly defined as “any amount which the insureds are legally obligated to pay for a claim or claims . . . and shall include damages, judgments, settlements, costs, charges, and expenses (excluding salaries . . . ) incurred in the defense of actions, suits or proceedings.”   See Helfand v. Nat’l Union Fire Ins. Co., 10 Cal. App. 4^th 869, 880 (Cal. Ct. App. 1992).

• The policies only cover claims against the insured because of his or her officer or director status and discharge of officer or director duties.

Coverage is provided for a “Wrongful Act”  “by an Insured Person . . . in the discharge of his duties to the Insured Organization in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity.”  Olson v. Fed. Ins. Co., 219 Cal. App. 3d 252 (Cal. Ct. App. 1990) (suit against director involved his capacity as part owner of another business and thus was not covered); but see Ratcliffe v. Internat’l Surplus Lines Ins. Co., 550 N.E.2d 1052 (Ill. Ct. App. 1990) (construing policy as permitting coverage for officers who were acting in their capacities as trustees, which were inseparable from their duties as officers); Continental Copper & Steel Indus. v. Johnson, 641 F.2d 59, 60 (2d Cir. 1981) (where directors of corporation were allegedly looting it for the benefit of the insured corporation, of which they were also directors, they were acting in their capacities for the insured and were entitled to coverage).

III.            COVERAGE IS LIMITED TO CLAIMS FOR DAMAGES.

A.         A criminal action does not seek damages. 

See Stein v. Internat’l Ins. Co., 217 Cal. App. 3d 609, 614 (Cal. Ct. App. 1990).   However, some policies expressly cover the cost of defending a regulatory action.    See Bodell v. Walbrook Ins. Co., 119 F.3d 1411 (9^th Cir. 1997) (policy requiring insurer to “defend any proceeding or suit brought by any governmental regulatory agency seeking nonpecuniary relief” obligated it to pay fees and costs incurred in federal investigation of attorney that culminated in criminal charge).  See also Bornstein v. Nat’l Union Fire Ins. Co., 828 F.2d 242, 245 (4^th Cir. 1987) (this language obligated insurer to defend attorney in grand jury investigation and post indictment proceedings); Gen. Accident Ins. Co. v. Hyatt Legal Serv., 516 N.Y.S.2d 560, 561 (N.Y. Sup. Ct. 1987) (insurer required to defend law firm against disciplinary proceeding).

B.        Court-imposed sanctions typically are not covered.

California Cas. Man. Co. v. Martocchio, 15 Cal. Rptr. 2d 277 (Cal. Ct. App. 1992) (bad faith conduct is willful and thus uninsurable).      But see Figari & Davenport, L.L.P. v. Continental Cas. Co., 846 F.Supp 513, 522 (N.D. Tex. 1994) (sanctioned conduct was not intentional and thus covered); O’Connell v. Home Ins. Co., No. 88-3523, 1990 WL 137386 (D.D.C. 1990) (unpublished) (not all Rule 11 sanctions punitive; purpose of sanctions was to compensate defendant for having to defend meritless lawsuit, so award represented “damages.”)

C.        Rulings are inconsistent on attorneys’ fees.

Some courts find legal fee awards to be outside the scope of “damages.”   See Jaffe v. Cranford Ins. Co., 214 Cal. Rptr. 567 (Cal. Ct. App. 1985) (award against medical provider to recover overpaid fees was restitutionary in nature).   Other courts have reached the opposite result.  See Pacific Ins. Co. v. Burnet Title, Inc., 380 F.3d 1061, 1064 (8^th Cir. 2004) (fees awarded against insured under Real Estate Settlement Practices Act represented “damages,” because statute distinguished between attorney fees and costs); Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209, 215-16 (Minn. 1984) (fee forfeiture awarded for lawyer’s breach of fiduciary duty represented “damages;” policy did not specify that actual harm required; coverage applied only to law firm – coverage for lawyer deemed contrary to public policy); Lyons v. Am. Home Assur. Co., 354 N.W.2d 892 (Minn. Ct. App. 1985) (policy covered fee award against attorney in dispute with former partners). 

Some policies make this point with an exclusion.   See Roberts v. Florida Lawyers Mut. Ins. Co., 839 So.2d 843, 846 (Fla. Ct. App. 2003) (exclusion for “any matter pertaining to an insured lawyer’s charges” barred coverage for claim by former law partner for share of fees received in a personal injury settlement); Norman Shabel, P.C. v. Nat’l Union Fire Ins. Co., 923 F. Supp. 681 (D. N.J. 1996) (provision that policy did not apply to suits seeking “the return of or reimbursement for legal fees” barred coverage for malpractice claim that sought only the recoupment of excessive attorneys’ fees); but see McCostis v. Home Ins. Co., 31 F.3d 110, 112 (2d Cir. 1994) (holding same exclusion ambiguous in context of third party lawsuit by firm against lawyer who engaged in billing fraud for reimbursement of wrongfully charged fees that firm had to repay client); Weisberger v. Home Ins. Cos., 601 N.E.2d 660, 663 (Ohio Ct. App. 1991) (asserting exclusion did not apply to lawsuit by attorney against former co-counsel for fees received in joint representation ).

V.            EXCLUSIONS

Common exclusions prevent coverage for:

• Claims arising out of bodily injury.

Landlord’s professional liability policy did not cover tenant’s injury when she fell on apartment stairs.   See Shelley v. Moir, 405 N.W.2d 737, 739-40 (Wis. Ct. App. 1987).

• Intentional acts.

See Town Crier, Inc. v. Hume, 721 F. Supp. 99 (E.D. Va. 1989) (exclusion for intentional acts barred coverage for real estate brokerage sued for conspiracy and fraud).

• Violation of any law, statute, ordinance or regulation.

See Town Crier, Inc., 721 F. Supp. at 104 (this exclusion prevented coverage for claims of statutory unfair competition and unconscionability).

• Claims arising out of any criminal, dishonest, malicious or fraudulent act, error, or omission.

See Bonin v. Westport Ins. Corp., 930 So.2d 906, 912-13 (La. 2006) (exclusion precluded coverage for negligence claim against secretary who falsely signed settlement agreement as a witness; claim arose from fraudulent act of her employer, an attorney who forged signatures and misappropriated settlement funds).   Under Minnesota law, an insurer need not show that an insured accused of fraud intended to cause specific injury in order to apply a fraud exclusion, because the fraud tort does not require such proof.  See Nat’l Union Fire Ins. Co. v. Evenson, 439 N.W.2d 394, 398 (Minn. Ct. App. 1989) (exclusion barred coverage for insurance agent who fabricated certificate of insurance).

• Claims “arising out of . . . any insured having gained in fact any personal profit or advantage to which he or she was not legally entitled.” 

See Brown & LaCounte v. Westport Ins. Corp., 307 F.3d 660 (7^th Cir. 2002) (exclusion applied to claim by former client that law firm had improperly received and retained payments under a void contract).

• “Claim made in connection with any business enterprise, not named in the declarations, which is . . .   owned by the insured . . . or which is directly or indirectly controlled, operated or managed by any Insured.”

See Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15 (1^st Cir. 1997) (exclusion precluded coverage for misappropriation claims against insureds who were officers, shareholders, directors, trustees or partners in limited partnerships created to buy real estate, although claims asserted against insureds as lawyers);  Senger v. Minnesota Lawyers Mut. Ins. Co., 415 N.W.2d 364, 369 (Minn. Ct. App. 1988) (when insured admitted that malpractice claim against him arose from his non-law related business, insurer properly invoked exclusion to deny coverage).

• Claims by “a present, former or prospective partner.” 

See Roberts v. Florida Lawyers Mut. Ins. Co., 839 So.2d 843, 846 (Fla. Ct. App. 2003) (exclusion barred coverage for lawyer sued by former partner for share of fees received in personal injury settlement)

• Any matter pertaining to an insured’s charge for services or expenses.

See Roberts, 839 So.2d at 846 (exclusion precluded coverage for lawsuit by former partner over division of fees and expenses in a personal injury action); see also Section IVC, supra.

• Exclusions for actions for libel, slander, invasion of privacy, assault or battery or conversion or punitive damages claims. 

See W. World Ins. Co. v. Anothen, Inc., 391 N.W.2d 70, 73 (Minn. 1986) (fact issues existed as to whether action against insured predicated on invasion of privacy right).

• Sexual conduct. 

See Redeemer Covenant Church v. Church Mut. Ins. Co., 567 N.W.2d 71 (Minn. Ct. App. 1997) (exclusion for “licentious, immoral or sexual behavior . . . culminating in any sexual act” barred coverage for sex abuse claims brought by 15 claimants); Tower Ins. Co. v. Good News Church, Inc., No. C0-92-2191, 1993 WL 205207 (Minn. Ct. App. June 15, 1993) (unpublished) (directing lower court to consider whether exclusion for “immoral conduct of a sexual nature” in clergymen’s professional liability policy applied to claims arising from youth pastor’s sexual abuse of minors)

• “Fines and statutory penalties.” 

Compare Wellcome v. Home Ins. Co., 849 P.2d 190, 193 (Mont. 1993) (this exclusion barred coverage for sanctions trial court imposed against attorney for disregarding court orders during trial; exclusionary language clear and unambiguous; fine is a pecuniary punishment) with Figari & Davenport, L.L.P v. Continental Cas. Co., 846 F. Supp 513, 520-21 (N.D. Tex. 1994) (coverage for sanction turned on relief sought; where sanction was requested to reimburse opponent for fees incurred defending insured’s frivolous action, exclusion was ambiguous as to whether it covered sanction award).

• Claims arising from insolvency or liquidation

Often found in D&O policies.   See Lexington Ins. Co. v. Am. Healthcare Providers, 621 N.E.2d 332, 336-37 (Ind. Ct. App. 1993) (exclusion prevented coverage for directors of HMO under D&O policy for suits filed by HMO’s liquidator).

• Insured v. Insured claims

Typical D&O exclusion.   This exclusion bars coverage for claims brought by the company’s directors and officers.  The purpose of the exclusion is to preclude coverage for collusive suits in which directors and officers sue the corporation to recover for the results of their financial mistakes.   See Powersports, Inc. v. Royal & Sunalliance Ins. Co., 307 F. Supp.2d 1355, 1360 (S.D. Fla. 2004) (insured v. insured exclusion barred coverage for corporation when insured former directors sued corporation for failing to close a stock purchase agreement); Harris v. Gulf Ins. Co., 297 F.Supp.2d 1220 (N.D. Cal. 2003) (action against insured former officers satisfied policy’s requirement that it be maintained by parties acting without assistance of insured’s officers even though underlying plaintiffs had interviewed two officers of the insured).

• Regulatory exclusion

The insurance industry developed this exclusion to D&O policies after incurring huge losses in the initial part of the savings and loan crisis of the 1980’s.   The exclusion is designed to deny coverage for losses resulting from suits brought by government agencies.  See, e.g., St. Paul Fire & Marine Ins. Co. v. Fed. Deposit Ins. Corp., 968 F.2d 695, 701 (8^th Cir. 1992) (exclusion prevented coverage for FDIC litigation against bank and its officers). 

• Industry-specific exclusions

For example, an insurance agency’s errors and omissions policy excluded “claims resulting from the inability of an insurance company to pay its debts,” barring coverage for a claim asserting that the insured negligently recommended an insurer that became insolvent.   St. Paul Fire & Marine Ins. Co. v. Cohen-Walker, Inc., 320 S.E.2d 385, 388 (Ga. Ct. App. 1984).  See also Hawes v. Gen. Star Mgt. Co., 21 Fed. Appx. 733 (9^th Cir. 2001) (unpublished) (exclusion for claims arising out of insurer’s insolvency barred negligent placement claim against insurance agent).

If the exclusion does not use “arising out of” or similar language, there may be coverage for innocent insureds.   Compare Redeemer, 567 N.W.2d at 777 (exclusion for “sexual behavior” in pastoral professional liability policy did not bar coverage for claims of negligent retention and supervision against church) with Houg v. State Farm Fire & Cas. Co., 509 N.W.2d 590 (Minn. Ct. App. 1993) (exclusion for “liability resulting from . . . conduct of sexual nature” precluded coverage for claims against employer of pastor who engaged in sex with parishioner). 

VI.            DURATION OF COVERAGE:  CLAIMS-MADE POLICIES.

A.            Professional liability insurance is typically written on a claims-made basis.

In a claims-made policy, the insured has coverage for claims made against the insured during the policy period.   See McFarland v. Sauvinet, 525 So.2d 686, 688 (La. Ct. App. 1988) (no coverage for real estate broker and agent for claims asserted in lawsuit where plaintiff failed to serve process on the insureds until after policy expired, even though suit was filed during policy period).  Some jurisdictions require the insurer to show prejudice due to late notice provided by the insured under this type of policy.  See Winthrop & Weinstine, P.A. v. Travelers Cas. & Sur. Co., 187 F.3d 871, 874 (8^th Cir. 1999) (under Minnesota law, insured’s failure to give notice of employee’s embezzlement until 13 months after it was discovered prejudiced insurer; statute of limitations against insured’s bank and broad release supplied other insurer barred its subrogation rights); Reliance Ins. Co. v. St. Paul Ins. Cos., 239 N.W.2d 922, 925 (Minn. 1976) (18 month delay in notice did not result in prejudice).   

In a claims-made policy, the damage need not occur during the policy period.   St. Paul Fire & Marine Ins. Co. v. Nat’l Chiropractic Mut. Ins. Co., 496 N.W.2d 411, 416 (Minn. Ct. App. 1993) (finding coverage under professional liability policy covering claims based on events occurring during policy period). 

B.             “Claims Made And Reported Policies” require that the claim be made and reported during the policy period. 

The most common claims-made policies today also require that the insured report the claim during the policy period.   See Esmailzadeh v. Johnson and Speakman, 869 F.2d 422 (8^th Cir. 1989) (under “claims made and reported policy,” although claim was made during policy period, insured’s failure to give notice during the policy period precluded coverage). Failure to notify the insurer of a claim during the policy period is not excusable on the ground that the insurer was not prejudiced, because the requirement that the insurer receive notice of the claim during the policy period is a condition of coverage.  Esmailzadeh, 869 F.2d at 425; accord Maynard v. Westport Ins. Corp., 208 F. Supp. 2d 568, 575 (D. Md. 2002); Bianco Prof. Assoc. v. Home Ins. Co., 740 A.2d 1061 (N.H. 1999)   (insurer properly denied untimely claim without showing prejudice).   

These policies exclude coverage for claims arising out of professional services that happened prior to the “prior acts” or “retroactive” date.    See O’Donnell v. Twin City Fire Ins. Co., 40 F.Supp.2d 68, 73 (D. R.I. 1999) (no coverage for claim that attorneys failed to sue case out because statute of limitations on underlying claim ran before effective date of policy); St. Paul Fire & Marine Ins. Co. v. Metpath, Inc., 38 F.Supp.2d 1087 (D. Minn. 1999) (holding exclusion for known prior acts was ambiguous with regard to the definition of “effective date” and “this agreement”); Cavett v. Dakota Clinic, Ltd., No. C2-92-794, 1994 WL 323394 (Minn. Ct. App. 1994) (unpublished) (rejecting argument that policy’s use of terms “prior acts date” and “retroactive date” to refer to start of coverage period was ambiguous).

Typically, renewal policies will provide that the retroactive date is the first day of the initial policy, thus providing retroactive coverage.   See N.K.K. v. St. Paul Fire & Marine Ins. Co., 555 N.W.2d 21, 25 (Minn. Ct. App. 1996).

1.          Most policies specify that the insured must notify the insurer of “an act or omission that reasonably might be expected to be the basis of a claim or suit.”

• This typically denotes an objective standard.

See Nat’l Union Ins. Co v. Homes & Graven, 23 F.Supp. 1057, 1066 (D. Minn. 1998) (law firm should have reasonably foreseen malpractice claim for negligent drafting based on critical comments of judge in underlying action and notified carrier when it applied for coverage; “the inevitability of the [malpractice] claim can be likened to a loose button—the wearer knows the button will drop, but not just when”); U.S. Liab. Ins. Co. v. Johnson & Lindberg, 617 F.Supp. 968, 973 (D. Minn. 1985) (law firm could not reasonably expect direct claim against them for fraud based simply on rumor that party to prior adjudication sought to reopen case); (Oregon Aut. Ins. Co. v. Fitzwater, 531 P.2d 894 (Or. 1975) (attorney sued in capacity as corporate director could not reasonably expect that he would subsequently be sued for malpractice in same transaction in his legal capacity).

2.          Some jurisdictions use a mixed subjective/objective standard.  

• In this test, the court analyzes whether the insured had subjective knowledge and next assesses the objective understanding of a reasonable attorney with the same knowledge.

See Coregis Ins. Co. v. Baratta & Fenerty, Ltd., 264 F.3d 302 (3d Cir. 2001) (applying Pennsylvania law) (insured’s belief that limitations period on clients’ malpractice action against him had expired did not prevent application of prior knowledge exclusion precluding coverage where the insured could have reasonably foreseen that an act prior to the policy’s effective date might be expected to be the basis of a claim).

B.            Discovery Clause.

• Claims-made policies may contain a discovery clause, covering an occurrence within the policy period, which may not lead to a claim until after the expiration of the policy.Mallen & Smith, Legal Malpractice, § 34.16 (Thomson West 2006 ed.).This coverage is contingent upon the insured supplying written notice of the occurrence before the policy period ends.Id.

Compliance with deadlines on the purchase of the endorsement is strictly enforced.   U.S. Liab. Ins. Co. v. Johnson & Lindberg, P.A., 617 F.Supp. 968 (D. Minn. 1985) (rejecting argument that coverage could still be purchased because insured not prejudiced).  

See Bianco Prof. Assoc. v. Home Ins. Co., 740 A.2d 1061 (N.H. 1999); Jobe v. Internat’l Ins. Co., 933 F.Supp. 844 (D. Ariz. 1995).

C.             Extended Reporting Endorsement.

Typically, if a policy is not renewed, the insurer will offer an extended reporting endorsement for the insured to purchase.   This endorsement provides coverage for claims made after the expiration of the policy, based on acts, errors or omissions that occurred during the policy period.   Mallen & Smith, supra § 34.17. 

The new insurer may also offer coverage for loss sustained during a prior policy from another insurer. 

VIII.            PRIORITY OF COVERAGES

A professional liability policy is generally primary to a CGL policy for the conduct that represents rendering of professional services.

As between two professional liability policies on a risk, a policy with an “other insurance” clause providing that coverage is excess over other valid insurance as to acts or omissions occurring prior to policy’s inception date is primary.   In Re Popkin & Stern, 340 F.3d 709 (8^th Cir. 2003).