Professional Services Exclusion Bars Coverage for False Claims Act Suit Against Online Education Servicer

The United States District Court for the Northern District of California, applying California law, has held that a professional services exclusion bars coverage under a directors and officers liability policy for an online education program servicer against an action under the False Claims Act, holding that the False Claims Act allegations at issue arose out of the professional services provided by the insured.  HotChalk, Inc. v. Scottsdale Ins. Co., 2016 WL 6818760 (N.D. Cal. Nov. 15, 2016).

The insured education servicer assists universities creating or expanding online degree programs.  A set of plaintiffs filed a qui tam action against the insured under the federal False Claims Act, alleging violations of Title IV of the Higher Education Act, which prohibits institutions receiving education grants from providing commissions or bonuses to admissions or financial aid employees for generating additional enrollments or student loans.  The court noted in its opinion that the Act’s legislative history shows Congress desired to regulate the services provided by third parties like the insured to protect student borrowers and the government’s financial interests.  The qui tam plaintiffs alleged that the insured provided illegal compensation to student recruiters while it falsely certified compliance with Title IV.  The insured settled the qui tam suit with the plaintiffs and United States government and then sought coverage from its D&O insurer, which filed a motion for judgment on the pleadings that the professional services exclusion in the policy barred coverage for the underlying qui tam action.

The court granted the insurer’s motion, holding that the policy’s professional services exclusion, which bars coverage for any claim “arising out of . . . the rendering or failing to render professional services,” applied.  The court noted that the policy did not define the term professional services, but the insured conceded that providing support for universities seeking to add or grow online education programs constituted professional services.  The insured argued, however, that the Title IV dispute “related strictly to its employee compensation system” and the exclusion thus did not apply.  The court disagreed, finding that the underlying suit could only be maintained because the insured provided professional education services that made the Title IV requirements applicable at the outset.  Furthermore, the court reaffirmed that the phrase “arising out of” as used in a policy exclusion is broad and requires only a minimal factual relationship “between the excluded activity and the action underlying the lawsuit.”  In light of this, the court held that no coverage exists where, as here, the causal connection is “tight,” concluding that absent those professional services, the insured would not have been subject to the underlying suit in the first instance.