Applying New York law, the United States District Court for the Southern District of New York has held that a D&O insurer was not obligated to indemnify the insured or the insured’s E&O carrier because the D&O policy’s professional services exclusion applied. Beazley Ins. Co., Inc. v. ACE American Ins. Co., No. 15-cv-5119 (S.D.N.Y. Jul. 12, 2016). But the court nevertheless held that the D&O insurer had a duty to advance defense costs because a “legal uncertainty” about the application of the exclusion existed until the court issued its coverage decision.

Investors filed a class action against the insured stock exchange alleging that the exchange had mishandled an initial public offering. The investors asserted that technical issues on the day of the IPO caused trading delays and therefore artificially decreased the price of the stock. The exchange tendered the matter to both its E&O and D&O insurers. The E&O insurer accepted coverage subject to a reservation of rights; the D&O insurer disclaimed coverage based on a professional services exclusion. The exclusion barred coverage for “Loss on account of any claim . . . by or on behalf of a customer or client of the [insured], alleging, based upon, arising out of, or attributable to the rendering of or failure to render professional services.”

Under an assignment of rights from the exchange, the E&O insurer sued the D&O insurer to recover defense and settlement amounts for the class action. The court held that the professional services exclusion applied, and therefore the D&O insurer had no duty to indemnify. Looking to case law, custom and usage in the insured’s industry, and the allegations in the investors’ complaint, the court held that retail investors in a company listed on a stock exchange are “customer[s] or client[s]” of the exchange. The court also rejected the E&O insurer’s argument that the securities law claims in the underlying lawsuit fell outside the scope of the exclusion because misrepresentations are not professional services. The court reasoned that none of the underlying claims would exist “but for” the insured’s allegedly botched rendering of professional services.

The court, however, denied summary judgment regarding the D&O insurer’s duty to advance defense costs. The court opined that an insurer’s duty to advance defense costs is broad, and a “legal uncertainty” regarding application of the exclusion existed until the court issued its opinion. The court concluded that the exchange and its E&O insurer therefore were entitled to pursue at trial any defense costs that remained unreimbursed and that exceeded the applicable retention on the D&O policy.