D&O Coverage for Professional-Liability Claims?
by Brit Weimer
Whether directors and officers (D&O) insurance covers claims involving professional services often turns on the scope and application of the policy’s professional-services exclusion. Although D&O policies broadly cover “wrongful acts” such as errors, omissions, and breaches of duty, they are generally not intended to function as substitutes for errors and omissions (E&O) coverage. Courts therefore seek to distinguish between liability arising from corporate governance and liability arising from the rendering of specialized services. The difficulty lies in cases where the same conduct can be characterized as both managerial oversight and professional performance.
Courts addressing D&O professional-services exclusions focus first on the nature of the conduct giving rise to the claim, but just as importantly on the specific wording of the policy. In Western Heritage Bank v. Federal Insurance Co., 557 F. App’x 807 (10th Cir. 2014), the Tenth Circuit held that a D&O policy’s professional-services exclusion barred coverage for claims arising out of lending activities, emphasizing that the alleged misconduct stemmed from the bank’s provision of specialized financial services. The court underscored that the analysis was driven by the policy’s definitions, explaining that it was necessary to consider not only the exclusion itself but also how the policy defined “Professional Services” and related terms. As the court put it, “we must also consider the definition of Professional Services” in determining the exclusion’s scope. It further noted that the policy’s structure, including carve-backs and embedded definitions, could have altered the outcome, highlighting that coverage turned on the “policy’s plain language” and how its provisions fit together.
The breadth of the exclusion’s causal language also plays a decisive role. In Navigators Specialty Insurance Co. v. Beltman, 2012 U.S. Dist. LEXIS 156666 (D. Colo. 2012), the court applied a professional-services exclusion to bar coverage for claims arising from consulting and litigation-related services, relying on language excluding claims “based upon, arising from, or in any way related to” the rendering of professional services. The court concluded that the alleged injuries flowed directly from the insured’s provision of those services, reinforcing that expansive “arising out of” language can sweep broadly and capture claims even when they are framed as broader misconduct. Together with Western Heritage, the case illustrates that the reach of the exclusion is not fixed, but instead depends heavily on how broadly the policy defines both the excluded conduct and the causal connection to it.
At the same time, courts are usually careful not to extend professional-services exclusions so far that they eliminate core D&O protections. Where claims are framed as failures of oversight, conflicts of interest, or breaches of fiduciary duty, courts may distinguish those allegations from the underlying professional services themselves. See e.g. Medical Records Associates, Inc. v. American Empire Surplus Lines Insurance Co., 142 F.3d 512 (1st Cir. 1998) (tasks performed by a professional are not “professional” for insurance purposes “if they are ‘ordinary’ activities achievable by those lacking the relevant professional training and expertise”). This reflects a functional inquiry: if the alleged misconduct could exist independent of the professional service (for example, a board’s failure to supervise or disclose risks) coverage may be found. But where liability would not exist “but for” the rendering of professional services, courts are more likely to enforce the exclusion.
In short, the scope of professional liability exclusions is both fact-dependent and policy-specific. Differences in defined terms, structural carve-backs, and the breadth of phrases such as “arising out of” can materially affect the outcome. For associations, the lesson is clear: the scope of a D&O professional-services exclusion cannot be assessed in the abstract, but must be evaluated in light of the specific policy language.
If you would like help evaluating the pros and cons of submitting a D&O or CGL insurance claim on behalf of the association, the experienced lawyers at Moeller Graf are available to assist. This information should be viewed as informational and not direct legal advice.