Insurance Law

Professional Services Exclusion in a D&O Policy Barred Coverage for Underlying Claims for Failure to Render Payroll Services

In Begun v. Scottsdale Ins. Co., the Ninth Circuit affirmed the district court’s determination that a professional service exclusion in a D&O policy precluded coverage for former directors of a payroll services company that allegedly stole a client’s funds.

The directors first tendered their defense while the underlying action was ongoing. The Ninth Circuit found that the district court properly found that the insurer had no duty to defend at the time of that tender because the claims in the underlying action centered on the former directors’ personal failure or their failure as the alter egos of the company to render payroll services, which qualified as professional services under California law.

The former directors also tendered the defense to the insurer one month after the conclusion of the underlying action. They argued extrinsic evidence obtained during discovery in the underlying action showed that the claims against them arose from their actions as directors and officers, not for a failure to render professional services. The Ninth Circuit disagreed and held that, although the plaintiff in the underlying action made statements about defendants’ failures as officers, the plaintiff did so to substantiate his alter ego theory, not to hold them liable in these roles. The Ninth Circuit also held – citing Monticello Insurance Company v. Essex Insurance Company, 162 Cal. App. 4th 1376 (2008) – that even if the extrinsic evidence would otherwise have triggered the insurer’s duty to defend, the insurer’s denial was proper because it was not alerted to that evidence until after the conclusion of the lawsuit.

Begun v. Scottsdale Ins. Co., 2015 U.S. App. LEXIS 14495 (9th Cir. Cal. Aug. 18, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].

Originally published in California Insurance Law Review - 2015

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