Applying California law, the United States Court of Appeals for the Ninth Circuit has held that a professional services exclusion did not preclude a duty to defend because some of the allegations in the underlying proceedings were tenuously connected to the performance of professional services. Ambrosio v. Brit UW Limited, 2015 WL 1566793 (9th Cir. Apr. 8, 2015).

Several investors of the insured filed arbitration proceedings with the Financial Industry Regulatory Authority (FINRA) related to the insured’s sale of real estate investments, which the insured allegedly later encumbered with an additional mortgage. The insurer denied coverage for the FINRA arbitrations based on the policy’s professional services exclusion, which barred coverage “for any act, error or omission in connection with the performance of any professional services by or on behalf of [the insured] for the benefit of any other entity or person.” The district court held that the professional services exclusion precluded the insurer’s duty to defend and indemnify the insured in the FINRA arbitration proceedings because all the acts or omissions alleged were “in connection with” the insured’s sale of securities, and the investors, as assignees of the insured, appealed.

The Ninth Circuit held that the professional services exclusion did not preclude the insurer’s duty to defend the FINRA arbitrations because there was a possibility of coverage for the insured’s post-sale conduct of encumbering properties with mortgages. The court reasoned that “the California Supreme Court would refuse to apply this professional services exclusion where the subsequent alleged wrongful act is so tenuously connected to the rendering of professional services [i.e., the sale of securities] as is the post-sale encumbrance here.”  In doing so, it rejected the insurer’s contention that the alleged wrongful acts were connected to professional services because the claims were brought in a FINRA arbitration. The court reasoned that the rules for FINRA arbitration and the wording of the professional services exclusion are different and that the decision to pursue FINRA arbitration should not be considered a concession of no coverage.