Professional Services Exclusion in D&O Policy Bars Coverage for Claim Arising from Provision of Payroll Services

Applying California law, the United States Court of Appeals for the Ninth Circuit has held that a professional services exclusion bars coverage for a suit against the directors and officers of a payroll services company because the suit arose from their failure to provide payroll services. Begun v. Scottsdale Ins. Co., 2015 WL 4910137 (9th Cir. Aug. 18, 2015).

The directors and officers of the insured payroll services company sought coverage from their D&O insurer for a suit alleging the failure to render payroll services. The insurer denied coverage for the suit based on the D&O policy’s professional services exclusion, and the insureds sued the insurer for purported breach of the duty to defend the suit.

The court held that the insurer had no duty to defend the insureds in the lawsuit pursuant to the plain terms of the professional services exclusion contained in the D&O policy. The court reasoned that the professional services exclusion applied to preclude coverage because the suit “centered” on the insureds’ personal failure to render payroll services, which qualifies as a “professional service” under California law. In addition, the court rejected the insureds’ argument that extrinsic evidence developed during discovery established a duty to defend. First, the court stated that “when an insured waits to present evidence that may give rise to a duty to defend until after the conclusion of the underlying action, an insurer is not required to consider the evidence.” Moreover, even if the extrinsic evidence were considered, the court concluded that the professional services exclusion still operated to preclude coverage because the evidence presented by the claimant was only offered “to substantiate his alter ego theory, not to hold [the insureds] liable” in their roles as insured persons.