Tax Advice Was Not “Professional Services” Under Life Insurance Agents E&O Policy

A California intermediate court of appeals, applying California law, has held that a life insurance agents E&O policy did not cover a suit by a financial advisor’s clients regarding advice provided to the clients to limit their tax liability.  Lindsey Fin., Inc. v. Am. Auto. Ins. Co., 2018 WL 2111979 (Cal. Ct. App. May 8, 2018).

Clients of a financial advisor filed suit against it after learning that the device recommended to them to limit their tax liability had been designated by the Internal Revenue Service as a tax avoidance scheme.  The advisor sought coverage under his life insurance agents E&O policy, and the insurer denied coverage.  The trial court concluded that the insurer did not have a duty either to indemnify or defend the insured because the undisputed evidence showed there was no coverage or potential coverage under the policy.

The intermediate court of appeals affirmed, holding that the suit did not allege a Wrongful Act in the rendering of or failure to render “Professional Services in connection with a Covered Product.”  The definition of “Professional Services” included “financial planning or consulting” but solely related to a “Covered Product,” which included certain life insurance products.  The court found that the claims asserted were not based on or arising out of financial planning or consulting solely related to a Covered Product.  Instead, the claimants asserted fraud and other tort claims based on financial planning and consulting services in connection with the tax avoidance scheme.

The court rejected the insured’s argument that he did perform consulting and analysis related to life insurance products for the clients because the complained-of financial planning and consulting services had nothing to do with any “Covered Product.”  The court also rejected the insured’s argument that coverage was triggered because he had solicited the clients to purchase a Covered Product.  Additionally, the court held that an exclusion for claims involving services performed as an accountant, tax preparer or advisor (except for tax advice directly concerning a Covered Product) precluded coverage.


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