Borrowing Funds from Client Does Not Constitute Professional Services and Profit Exclusion Bars Coverage for Accountant’s Failure to Repay Client

Applying Oregon law, the United States District Court for the District of Oregon has held that an insurer had no duty to defend or indemnify an accountant for a lawsuit alleging breach of contract and breach of fiduciary duty for the accountant’s failure to repay funds to a client owed under promissory notes because the accountant’s acts and omissions at issue did not constitute professional services.  Navigators Ins. Co. v. Hamlin, No. 6:14-cv-196 (D. Or. Mar. 10, 2015).  The court also held that the profit exclusion barred coverage because the client sought the return of funds from the accountant, to which the accountant was not legally entitled.  Wiley Rein represented the insurer. 

A client retained the insured accountant to assist with valuation issues in her divorce.  Through that work, the insured and the client became friends, and the insured later borrowed $660,000 from the client and agreed to repay the funds plus interest as set forth in various promissory notes.  The insured failed to pay amounts owed on the notes and, as a result, the client filed suit against the insured for breach of contract and breach of fiduciary duty.  The insurer defended the insured under a reservation of rights and filed a declaratory judgment action seeking a determination that it had no duty to defend or indemnify the insured.

The court agreed with the insurer, concluding that the insurer had no duty to defend or indemnify the insured in connection with the client’s suit.  First, the court held that the suit did not allege an act or omission in the performance of “professional services.”  The policy defined “professional services” as services as an “accountant or accounting consultant [or] [I]investment [A]dviser.”   Investment Adviser means “any insured who provides financial, economic or investment advice, including personal financial planning and investment management services, provided that the Investment Adviser does not include any Insured while involved in the bartering, purchase or sale of securities, insurance products or other investment products.”  The court held that the insured was not acting as an accountant when he entered into the transactions with the client and that the insured was not acting as an “investment adviser” because he was involved in the sale of investment products—the promissory notes—to the client.

Second, the court held that the profit exclusion barred coverage for the suit.  The profit exclusion bars coverage for any claim “based on or arising out of the insured gaining, in fact, any personal profit or advantage to which the Insured is not legally entitled.”  The court rejected the argument that “not legally entitled” is synonymous with illegal and held that, when the insured failed to repay amounts under the promissory notes, he was “not legally entitled” to those amounts.  Although the client attempted to avoid the exclusion by couching the insured’s conduct as a breach of fiduciary duty, the court reasoned that the profit exclusion was triggered regardless, because the breach of fiduciary duty claim was based on the same underlying fact of the insured’s failure to repay amounts due under the promissory notes.  Finally, the court noted that its interpretation was consistent with the purpose of an accountant’s professional liability policy, which “does not provide coverage for [the insured’s] personal debts.”