Court Holds Insurance Exclusion Bars Coverage for Lawsuit Arising Out Of Lapse in Client’s Insurance Policy

The United States District Court for the District of New Jersey has held that an exclusion in a professional liability policy applicable to claims arising out of the failure to effect or maintain any insurance precludes coverage for defense costs incurred in an action against an insured on the basis that the action arose out of the insured’s management role in the maintenance of a client’s “key person” life insurance policies.  Princeton Inv. Partners, Ltd. v. RLI Ins. Co., 2018 WL 846917 (D.N.J. Feb. 9, 2018).

The insured provided management services to a company.  Upon the passing of the company’s former chief executive officer, the company learned that the “key person” life insurance policies covering the chief executive officer had lapsed due to the non-payment of premiums.  The company sued its insurance broker, who in turn sued the insured, alleging the failure to ensure that the client paid the life insurance premiums.  The action settled, and the insured sought coverage for defense costs incurred in the action under a professional liability policy.

In resulting coverage litigation, the professional liability insurer argued that the underlying action failed to allege a wrongful act in the provision of professional services as defined in the management consulting services section of the policy.  The insurer also argued that, in any event, coverage was barred by an exclusion applicable to any claim arising out of “any actual or alleged failure to effect or maintain any insurance or bond.”

The district court held that the complaint did allege wrongful acts in the provision of professional services, finding that the “general gist” of the complaint alleged “a professional failure: inadequate consulting and guidance, particularly in the area of helping [the client] create a system to keep track of its insurance bills and pay them on time.”

The court, however, found that coverage was precluded by the insurance exclusion.  The court determined that “there is nothing in the exclusion suggesting that it applies only to [the insured’s] failure to maintain insurance for itself” and that “the language comfortably accommodates the situation in which the [insured] failed in its duty to ensure that one of its clients had insurance.”

The court also rejected the insured’s argument that its management services were only incidentally or fortuitously related to the provision of insurance, holding instead that the insured “had a much more specific managerial role in [the client’s] procurement and maintenance of its life insurance policies.”


Wiley Executive Summary

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