D&O Policy’s “Third-Party Services” Exclusion Bars Coverage for Claim Brought by Insured’s Client

A New Jersey federal district court has ruled that a broad exclusion in a D&O Policy for claims arising out of services provided to third parties barred coverage for a claim arising out of an insured’s provision of services to its client, and the inclusion in the policy of narrower exclusions (for professional services and insurance company services) did not create any ambiguity.  Benecard Servs., Inc. v. Allied World Specialty Ins. Co., 2020 WL 2842570 (D.N.J. May 31, 2020).

The insured company provided certain services to its client, an insurance company that served as a Medicare Part D plan sponsor, including the management of the client’s Medicare Part D Prescription Drug plans.  Following an audit of the relevant plans, the Center for Medicare and Medicaid Services sanctioned the insured’s client for alleged misconduct involving the plans.  The client subsequently sued the insured, alleging that it breached the parties’ contract by failing to properly manage the plans.  The insured sought coverage for the lawsuit under its private company D&O policy, but the insurer denied coverage.

In the ensuing coverage litigation, the insurer relied on a “third-party services” exclusion, which barred coverage for any claim “arising out of … or in any way involving any actual or alleged act, error, omission, misstatement, misleading statement[,] or breach of duty in connection with the rendering of, or failure to render, services to a third party.”  The insurer maintained that, because the client’s lawsuit against the insured was based on the insured’s provision of services to a third party, the exclusion applied.  The court agreed, finding that the exclusion unambiguously barred coverage.

The court rejected the insured’s argument that the inclusion in the policy of narrower exclusions for “professional services” and insurance company services conflicted with the broader exclusion, rendering it ambiguous.  The court determined that the exclusions, “although overlapping, are targeted at different risks.”  One was “aimed at insurance related services, another at professional services broadly, and the third at any rendering of services to a third party.”  Despite any overlap among the exclusions, the court ruled that the “third-party services” exclusion was clear and thus precluded coverage.

The court also rejected the insured’s argument that the policy should have been read in accord with its “reasonable expectations.”  The court observed that “a lack of coverage under a D&O policy for claims arising out of an agreement to provide services appears consistent with the general purpose and distinction between D&O and E&O coverage.”