No Coverage for Accountant’s Solicitation of Investment in Entity He Partially Owned

In a win for Wiley Rein’s client, the United States Court of Appeals for the Ninth Circuit, applying Arizona law, has held no indemnity coverage was available under an accountants E&O policy because the insured was not providing “professional services” when soliciting an investment in an entity in which the accountant held a personal stake. Continental Cas. Co. v. Evans, 2017 WL 1457031 (9th Cir. Apr. 25, 2017).

A former client of an insured accountant filed suit against the accountant for alleged misrepresentations made to induce the former client to make a $250,000 investment in a business entity that was partly owned by the accountant.  The former client agreed to invest $250,000 in the business entity, which was planning to purchase an airplane charter company.  The former client alleged that the insured promised to return the investment if the airplane charter company was not purchased.  When the airplane charter company was not purchased, the former client filed suit against the accountant for making misrepresentations to induce the investment.  The accountant tendered the lawsuit to his insurer, and the insurer defended under a reservation of rights.  After a jury returned a verdict in favor of the former client, the insurer filed suit seeking a determination that it had no duty to indemnify the insured for the judgment.  The district court held that no indemnity coverage was available under the policy for the judgment against the insured.  A summary of the district court’s decision can be found here.

The Ninth Circuit affirmed the district court’s decision.  It held that the insurer had no duty to indemnify the insured because the actions giving rise to the insured’s liability did not constitute “professional services.”  The policy defined “professional services” as “those services performed in the practice of public accountancy by you or others for remuneration that inures to the benefit of [the named insured] or pro bono services.”  The court held that there was no evidence that remuneration inured to the benefit of the named insured accounting firm.  It also held that the accountant’s solicitation of an investment in a company in which he held a financial stake was not “pro bono” investment advice.