Agents and brokers should not get too comfortable with policy exclusions, at least not without scrutinizing language very carefully. There could be hidden dangers in the wording of certain exclusions.

PROFESSIONAL LIABILITY EXCLUSIONS CAN BE AN ABSOLUTE NIGHTMARE

Producers must scrutinize wording of exclusions to fully understand their implications

By Joseph S. Harrington, CPCU

As an independent agent or broker, you know not to expect to find coverage for auto or pollution liability in your errors and omissions (E&O) policy. Since your first day on the job, you’ve learned the logic of having individual policies cover specific types of liability and explicitly exclude other types of liability.

Therefore, you’re not uncomfortable seeing a “standard” series of exclusions in your E&O policy, and you probably counsel your commercial insureds not to be surprised to see a comparable list of exclusions in the professional liability (PL) policies you sell them.

But don’t get too comfortable, says Fred Fisher, at least not without scrutinizing the language of PL exclusions very carefully.

When it comes to potentially huge, complicated, and open-ended claims for exposures such as pollution or securities valuation, it’s understandable that some insurers may not want any part of them in any way, shape, or form.

Fisher, an independent consultant for providers and buyers of specialty insurance, was a founding member of the Professional Liability Underwriting Society (PLUS) and served as its president in 1997-98. For about 20 years, he has been a man on a mission to alert agents and brokers to dangers in the wording of professional liability exclusions.

Whose activity?

Insurance producers and their PL clients understand and accept that E&O policy exclusions preclude coverage for their own direct liability for excluded occurrences (auto accidents, pollution spills, employee injuries, etc.).

According to Fisher, however, professionals in insurance and other fields are encountering cases where PL carriers invoke “absolute” language in their PL exclusions to deny defense and indemnity coverage for alleged wrongful acts related in any way to an excluded occurrence, regardless of who committed the wrongful act.

In other words, an absolute pollution exclusion in an agency E&O policy might be cited to deny coverage for an E&O claim where a client alleges that an insurance producer failed to recommend or place appropriate environmental coverage.

To illustrate, consider a 2008 case involving a suit against a site assessor for negligent representations of a property found to be contaminated with pollutants.[1] Initially, a federal district court ruled that it would be “unconscionable at best” to interpret the pollution exclusion in the assessor’s PL policy to exclude coverage for “any form of pollution, regardless of causation.”

That ruling was overturned, however. Among other things, the appeals court held that the common phrase “arising out of” should be interpreted broadly, thus allowing the exclusion to be applied to any type of claim related to pollution.

Within the realm of insurance E&O, a federal appeals court in 2015 upheld a denial of E&O coverage for a claim against an insurance carrier after it had denied coverage under a pollution policy.[2] In that case, the E&O pollution exclusion had been explicitly extended to preclude coverage for “any dispute over the existence or absence of, or particular terms, conditions or amount of, insurance coverage” for pollutants.

Directly or indirectly

The problem also appears in directors and officers (D&O) insurance, Fisher finds.

In 2018, a federal district court in Texas found that allegations against individuals sued over the sale of a company included wrongful acts as defined and covered under the defendants’ D&O policy.[3] Nonetheless, the court held that coverage could be denied on the basis of an exclusion for any claim “based upon, arising out of or in any way involving” sales of debt or equity securities.

Citing the phrase “arising out of,” the court reasoned that a claim “need only bear an incidental relationship to the described conduct for the exclusion to apply.”

About a year later, a federal district court in Florida upheld a denial of coverage under a D&O policy on the basis of an exclusion that precluded coverage for any claim “arising out of or in any way involving” the sale of securities.[4] In its reasoning, the court cited a ruling of the Florida Supreme Court which held that “arising out of” essentially means “having a connection with.”

There are plenty of other phrases—“based upon,” “attributable to,” “in any way related to”—that can also be invoked to expand the application of exclusions and deny coverage for acts or omissions that an insured might normally expect to be covered under a professional or management liability policy.

To the extent that happens, it is not an abuse on the part of professional and management liability carriers. From their perspective, we can see why you would not want E&O and D&O limits to be a back door to coverage for claimants who failed to insure for activities they took on and the corresponding exposures they assumed.

What to watch for

When it comes to potentially huge, complicated, and open-ended claims for exposures such as pollution or securities valuation, it’s understandable that some insurers may not want any part of them in any way, shape, or form.

In light of that, it is critical for insurance producers to scrutinize the wording of professional and management liability exclusions—both for themselves and their clients—and to understand the implications of those provisions.

Fred Fisher says there are generally three approaches to look for in liability exclusions:

The most preferable is phrasing that explicitly limits application of an exclusion to acts or omissions of an insured as defined under the policy.

A second approach is to use “absolute” exclusionary language, but with the addition of a “carve back” provision indicating that an exclusion does not apply where an insured is providing a professional service or managerial role covered under the policy.

The worst position for an insured is to have potentially absolute exclusions with no reference to the insured or carve-back for insured services or roles. That’s how a professional or a manager can find himself or herself without coverage, even though someone else committed the wrongful act at issue.

[1] James River Insurance Company v. Ground Down Engineering, Inc., 540 F.3d 1270 (11th Cir. 2008); accessed at https://caselaw.findlaw.com/us-11th-circuit/1177959.html

[2] United National Ins. Co., et al. v. Indian Harbor Ins. Co., 160 F. Supp. 3d 828 (E.D. Pa. 2016); accessed at https://casetext.com/case/united-natl-ins-co-v-indian-harbor-ins-co-4

[3] Gleason v. Markel Am. Ins. Co., 2018 WL 538324 (E.D. Tex. Jan. 24, 2018); accessed at https://casetext.com/case/gleason-v-markel-am-ins-co-2

[4] Colo. Boxed Beef Co. v. Evanston Ins. Co., Case No. 8:18-cv-01237-T-02JSS (M.D. Fla. Oct. 26, 2018); accessed at https://casetext.com/case/colo-boxed-beef-co-v-evanston-ins-co

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.