Ninth Circuit Holds Professional Services Exclusion Ambiguous

In an unpublished decision applying California law, the United States Court of Appeals for the Ninth Circuit has held that a professional services exclusion contained in a D&O liability policy was ambiguous and did not operate to preclude coverage for claims alleging misrepresentations in the insured’s brokering business.  Corky McMillin Construction Services v. U.S. Spec. Ins. Co., No. 12-56787, 2015 WL 195432 (9th Cir. Jan. 15, 2015).

The insurer issued a D&O liability policy to the insured, a construction company that also engaged in marketing and brokering newly constructed homes.  The policy provided coverage for claims alleging that the insured engaged in “wrongful acts,” including any “actual or alleged act, error, misstatement, misleading statement, omission or breach of duty.”  The policy included an “Errors and Omissions Exclusion” that precluded coverage for claims “arising out of, based upon or attributable to the rendering of or failure to render services for others, including without limitation services performed for or on behalf of customers or clients.”  The insured sought coverage for a class action lawsuit alleging, in part, various misstatements and misrepresentations by the insured as a broker for the newly constructed homes.  The insured tendered the lawsuit for coverage under the policy, and the insurer denied coverage pursuant to the terms of the E&O exclusion.  The federal district court held that the exclusion was ambiguous.

The Ninth Circuit affirmed, concluding that the exclusion was ambiguous and did not operate to preclude coverage for the action.  According to the appellate court, the underlying complaint alleged various breaches of duty and misstatements in connection with “sales” of homes, but did not allege any actions that were clearly “services,” which was undefined in the policy.  Accordingly, the appellate court concluded that the underlying complaint did not “clearly allege[] that [the insured] provided ‘services,’” and thus “the Insureds had a reasonable expectation that the misstatements and breaches of duty alleged in the underlying complaint were ‘wrongful acts’ covered by the policy.”  As such, the court held that the exclusion was ambiguous and did not operate to preclude coverage for the action.