Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe

Vol. 7, Iss. 5
June 6, 2018


It Looks, Walks And Quacks Professional -- But It’s Not A “Professional Service”

Whether conduct by an insured qualifies as a “professional service” can have a far-reaching impact in insurance coverage. First, it is the touchstone of the entire body of professional liability claims -- regardless of the nature of the profession being insured. The meaning of the term also arises with frequency in the context of determining whether a certain act of the insured is excluded from coverage by a “professional services” exclusion in a commercial general liability policy. For these reasons, the number of decisions addressing the issue are numerous. They can also be all or nothing when it comes to the availability of coverage.

Figuring out if an insured’s conduct was “professional” or “non-professional” can be no easy task. Disputes in this area are frequently fact intensive and often involve conduct undertaken by the insured, in one way or another, in the course of his or her profession. In other words, any insurer attempting to prove that certain conduct of a doctor was non-professional will likely have to overcome the fact that the insured was wearing a white jacket when it was committed.

Moreover, some courts also conclude that, notwithstanding that the insured was performing an activity that required specialized knowledge or training -- the earmark of a professional service -- the act in question nonetheless did not qualify as a “professional service,” because it involved the commercial, and not the professional, aspect of the insured’s business.

In Lindsey Financial v. American Automobile Insurance Co., No. E067037 (Cal. Ct. App. May 8, 2018), the California Court of Appeal recently addressed whether the acts of a financial planner qualified as a professional service for purposes of an Errors and Omissions Policy. The case demonstrates how complex the issue can be and that an insured can clearly be performing a service as a professional, but not performing a covered “professional service.”

The Walkers paid Lindsey Financial $115,000 for financial planning advice. However, the financial plan that Linsey put together – some sort of complex LLC arrangement that’s hard to understand – was known by Lindsey to have been deemed a “tax avoidance scheme” by the Internal Revenue Service.

The Walkers sued Lindsey. Lindsey sought coverage under its Life Insurance Agents Errors and Omissions Policy issued by American Automobile Insurance Co. AAIC denied coverage for a defense and any liability for the reason that the Walkers’ suit did not allege the potential for liability based on the rendering or failure to render “professional services” concerning a “covered product,” as defined under the policy. Coverage litigation ensued. The trial court held that no coverage was owed on the basis that “the alleged wrongful acts within the Walker complaint relate to improper tax advice, with no indication such tax advice involved the tax consequences or benefits in obtaining life insurance or other insurance.”

Lindsey appealed. The appellate court did a nice job of simplifying the definitions of “professional services” and “covered product,” which are rather lengthy in their full versions: “The AAIC policy defines ‘Professional Services,’ in pertinent part, as ‘[p]roviding advice or consulting solely related to a Covered Product, including financial planning or consulting solely related to a Covered Product . . . .’ ‘Covered Product’ means certain products offered by a ‘Product Provider,’ and includes ‘[l]ife [i]nsurance products’ but not variable life insurance products.”

The appeals court affirmed: “The Walker complaint did not assert any claims based on or arising out of Lindsey’s ‘financial planning or consulting solely related to a Covered Product.’ Instead, it asserted fraud and other tort claims based on Lindsey’s financial planning and consulting services in connection with the so-called ‘tax avoidance scheme’—using the LLC and the tax exempt entity to reduce the Walkers’ tax liabilities. As alleged in the Walker complaint, Lindsey’s financial planning and consulting services were not ‘solely related to’ any ‘Covered Product.’ Indeed, Lindsey’s complained-of financial planning and consulting services to the Walkers had nothing to do with any ‘Covered Product.’”

Further, the appeals court observed that, not only were the claims not covered, but they were also excluded under the policy, based on an exclusion for tax advice or financial planning services that were not directly related to a Covered Product.

But, as Lindsey saw it, it wasn’t as simple as this. In support of coverage, Lindsey pointed to its Financial Planning Agreements with the Walkers, which provided that “Lindsey would ‘review and analyze,’ among other things, the Walkers’ ‘life and disability insurance,’ ‘estate and tax planning,’ ‘fee planning needs,’ and ‘money management and investment portfolio,’ all as part of a ‘substantive and comprehensive discussion integrating relevant options and possible solutions in regards to [the Walkers’] Financial Status, which shall include the following financial aspects as they relate to [the Walkers’] needs: i) Insurance; . . . v) Retirement planning.”

But while Lindsey’s pointed out that its Financial Planning Agreements with the Walkers discussed insurance, that was not the test for coverage as the court saw it: “This argument is unavailing, because the Walker complaint did not allege a claim arising out of a ‘Wrongful Act’ by Lindsey in connection with Lindsey’s solicitation for sale, recommendation, negotiation, or other act in connection with any covered product, including any insurance or individual retirement annuities. Instead, the Walker complaint alleged claims based solely on Lindsey’s tax advice and financial planning services rendered in connection with the ‘tax avoidance scheme’ involving the Walkers’ use of the LLC and tax exempt entity to reduce their tax liabilities. The AAIC policy both did not cover and expressly excluded coverage for these claims.”

The services performed by some professionals can be varied and seemingly far afield from their core profession. But insureds can likely explain why they are still related to what they do as professionals. The moral of the story for insurers that issue professional liability policies is clear – defining “professional services” in specific terms [as opposed to generally, or, worse, not at all] will enable them to limit their exposure to intended professional services. Just because an insured is performing a service as a professional may not make it a covered “professional service.”

Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved