Professional Services Exclusion Does Not Bar Coverage for Lawsuit Alleging “Business Decisions” of Healthcare Facility

The United States District Court for the Southern District of Florida, applying Maryland law, has held that the professional services and managed care activity exclusions in a D&O policy did not bar coverage for a lawsuit against the insured healthcare facility where the underlying complaint included allegations concerning the insured’s business decisions.  Atlantic Healthcare v. Argonaut Ins. Co., 2021 WL 266281 (S.D. Fla. Jan. 27, 2021).  The court also held the prior acts exclusion inapplicable because some of the underlying claims were not premised on any alleged wrongful act that took place before the exclusion’s cut-off date.

The estate of a patient at the insured healthcare facility filed an action against the facility and its owner.  The estate alleged that the defendants breached their duties when they operated the facility in a manner that would “generate as much profits as possible” from its patients by understaffing nurses and paying higher-than-market rates, among others.  The facility tendered the claim to its D&O insurer, and the insurer declined coverage.  The facility filed a complaint against the insurer, arguing that the insurer had a duty to defend it in the underlying lawsuit.  The insurer argued that coverage was barred by the policy’s professional services, managed care activity, and prior acts exclusions.

The court disagreed with the insurer.  First, the court determined that the professional services exclusion did not bar coverage because multiple allegations in the underlying complaint regarding staffing, compensation, and others did not constitute “professional services,” but concerned business decisions by the facility and its owner.  Second, the court opined that the managed care activities exclusion did not bar coverage because the facility’s alleged “exploit[ation] [of] vulnerable adults by taking their assets” did not “aris[e] out of” any “managed care activity” as defined in the policy.  Third, the prior acts exclusion also did not bar coverage.  The court rejected the insurer’s argument that the facility engaged in an ongoing fraudulent scheme that began on the date the patient moved into the facility, which preceded the prior acts date.  The court concluded that, although the underlying complaint included alleged wrongful acts that occurred before the cut-off date, some of the underlying claims did not incorporate those allegations and thus were not based on any prior acts.