Court Deems "Services" Ambiguous in E&O Endorsement


The U.S. District Court for the Southern District of California denied the defendant U.S. Specialty Insurance Company’s motion to dismiss in a claim over an errors and omissions exclusion (E&O endorsement) in a directors, officers, and organization liability insurance policy.

Pursuant to the policy, the defendant agreed to pay for losses arising from claims premised upon “wrongful acts.” The E&O endorsement in the policy provided that the defendant will not be liable for any claims against the plaintiffs “arising out of, based upon, or attributable to the rendering of or failure to render services for others, including without limitation services performed for or on behalf of customers or clients” of the plaintiff.

During the policy period, a class action complaint was filed against the plaintiffs based on alleged misrepresentations and omissions that the plaintiffs made to home buyers regarding the nature, value, and desirability of certain residential communities. The plaintiffs tendered the case to the defendant for coverage under the policy, but the defendant denied the claim citing the E&O endorsement.

The plaintiffs argued that the E&O endorsement was ambiguous, in part, because the policy did not define “services.” Thus, the defendant asserted that it must be construed in its ordinary and popular sense as helping or doing work for someone.

The court agreed that the term was not defined and that it would apply the ordinary and popular meaning of the term. The court further stated that although the ordinary meaning of services encompasses a wide array of activities, broad meanings do not necessarily create ambiguity.

However, the court agreed with the plaintiffs that there was an ambiguity when viewed in the context of the policy as a whole. The court found that while the coverage provision provided that wrongful acts are defined to include “any other actual or alleged act, error, misstatement, misleading statement, omission or breach of duty,” it was unclear whether the term “services,” was meant to include the “wrongful acts” such as “misstatement, misleading statement, and omission.”

The court noted that this uncertainty is even more pronounced when one considers that exclusionary clauses are to be interpreted narrowly against the insurer.

Impact: While the court did agree that a term such a “services” is not inherently ambiguous simply because it may encompass a wide variety of actions, in the end, the court held the exclusion at issue was ambiguous. It appears unclear whether the conduct was indeed a “service.” Regardless, the policyholder was successful in arguing the existence of an ambiguity.