In an important decision in the world of professional liability (including D&O and E&O policies), the Seventh Circuit recently held that a “contractual liability” exclusion—i.e., an exclusion for claims “based upon or arising out of … breach of contract”—when inserted in a professional liability policy, that is, a policy intended to insure professionals for services they perform under contract, renders the coverage “illusory.” Accordingly, the appeals court held that the policy must be “reformed” to meet the policyholder’s “reasonable expectations” that coverage would be afforded for claims by clients for errors and omissions in the performance of professional services under contract, and remanded the case to the district court to apply those reasonable expectations in the pending dispute. (See Crum & Forster Specialty Insur. Co. v. DVO, Inc., No. 18-2571 (7th Cir., Sept. 23, 2019), opinion here.)
The decision highlights the danger of allowing a policy to include the “based upon or arising out of” wording as an introduction to contractual liability exclusions, instead of what is generally recognized as the narrower “for” version of such exclusions (i.e., “for a breach of contract”). In fact, the court concluded that the exclusion as written eliminated all coverage under this professional liability policy for the very kinds of claims the policyholder sought to insure—on its face, not just as applied to the particular claim. In this respect, the decision could likewise apply to the “professional service” exclusion found in some D&O policies, including in policies issued to companies engaged in providing professional services (as that term is defined in the policies).
For this reason, we generally advise clients to replace the “based upon or arising out of” language in such exclusions with the “for” wording—or to demand the elimination of the contractual liability and professional services exclusions entirely.
An excellent and passionate discussion of this case and its implications for policyholders appears in Kevin Lacroix’s superb The D&O Diary blog. (This link is provided with the author’s consent, and we acknowledge and appreciate his insights and gracious invitation to link to his piece.)