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Who is a professional?  Historically this person was defined as someone engaged in the “learned professions” of medicine, law, and clergy.  The definition of a “profession” used for malpractice purposes is “an occupation generally associated with long-term educational requirements leading to an advanced degree, licensure evidencing qualifications met prior to engaging in the occupation, and control of the occupation by adherence to the standards of conduct, ethics and malpractice liability.”  Those fields have been traditionally limited to such professions of law, accounting, architecture, engineering and medicine.  It is axiomatic that a professional would engage in professional services, right?  If you are talking about “professional services” in the context of the Professional Services Exclusion to your insurance policy, you may be surprised to learn the answer.

If you have been following national news, you have probably read articles relating to Apple REIT (Real Estate Investment Trust) and their security claims issues.  If you have not been following the news, then the basic summary is that numerous regulatory claims and class action suits have been brought against David Lerner Associates, Inc. (“DLA”), a privately held securities broker-dealer, for selling over $442 million worth of Apple REIT shares by misrepresenting the value of those shares and failing to perform adequate due diligence.  DLA is alleged to have targeted senior citizens and unsophisticated investors.

After being the subject of numerous lawsuits, DLA looked to Philadelphia Indemnity Insurance Company (“Philadelphia Indemnity”), who issued a Private Company Protection Plus Insurance Policy, which included coverage for directors and officers.  The policy contained an endorsement, to include a “Professional Services Exclusion” stating, coverage is excluded “based upon, arising out of, directly or indirectly relating from or in consequence of, or in any way involving the Insured’s performance of or failure to perform professional services for others.”  Philadelphia Indemnity, in turn, denied coverage based on the Professional Services Exclusion, and DLA brought suit asserting the services rendered by DLA did not constitute “professional services” under the policy.      

DLA took the position that the phrase “professional services” was undefined by contract or law and, therefore, was ambiguous.  Such a finding by the court would force Philadelphia Indemnity to provide coverage.  Philadelphia Indemnity argued that due diligence and the sale of securities fell squarely within the professional services exemption, as DLA had a duty to perform reasonable due diligence “in order to understand the potential risks and rewards associated with a security it recommends to customers.”  Additionally, Philadelphia Indemnity asserted that DLA was required to exercise care and skill in the preparation of information regarding securities and its presentation of that information to its customers in the course of providing investment advices.

On March 29, 2013, the U.S. District Court for the Eastern District of New York in David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Co., 2013 WL 1277882 (E.D.N.Y. 2013) handed down a ruling confirming that the work conducted by DLA was, in fact, professional services.  The Court first noted that the “common sense understanding” of the term “professional services” makes clear that DLA’s conduct unambiguously falls within the meaning of the term and, thus, the exclusion from coverage applies.  The Court further noted that “professional services” – which is neither defined by the policy or by New York law – must be read “in light of common speech and the reasonable expectations of a businessperson.”  In order to determine whether one is engaged in professional services depends on whether those individuals “acted with special acumen and training of professionals when they engaged in acts . . .” The Court specifically found that “in the instant case, it is clear that the only reasonable interpretation of ‘professional services’ is that individuals engaged in the due diligence and sale of financial products are engaged in professional services.” 

Additionally, the Court expanded the understanding of professional services, stating that an act is not a professional service merely because it is performed by a professional.  Instead, to qualify as a professional service, the act must be necessary for the professional to use his knowledge and training.  Therefore, ministerial acts engaged in by persons traditionally considered “professionals” are not necessarily “professional services.”

Based on this ruling, Courts are continuing to expand the scope of the term “professional services” and, by virtue thereof, expanding the Professional Services Exclusion to insurance policies.  Courts are not constrained by labels and traditions to determine the scope of this exclusion.  Instead, and based upon this most recent ruling, Courts will take a “common sense approach” and determine whether the individual was acting with the special acumen and training of the profession when the basis of the claim arose.

Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team.  He handles a variety of commercial business disputes, including insurance recovery and policyholder claims.  Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims.  For more information, contact Frank at 804.771.9515 or

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