Professional Services Exclusion Did Not Preclude Coverage for Misrepresentation Claim Against Insured

Originally published in California Insurance Law Quarterly - Spring 2015 Newsletter


Corky McMillin Constr. Servs. v. U.S. Specialty Ins. Co., 597 Fed. Appx. 925 (9th Cir. 2015)

In Corky McMillin, the Ninth Circuit, applying California law, affirmed the Southern District of California’s ruling that a professional services exclusion did not bar coverage for a claim based on alleged misrepresentations in marketing materials.

The underlying action filed against the insured was based on alleged misrepresentations and omissions that the insured made to home buyers regarding the nature, value and desirability of certain residential communities in San Diego. These representations included, but were not limited to, misstatements in marketing materials, sales brochures, maps, models and other forms of advertising media. The insured tendered the lawsuit to its Directors and Officers carrier, which denied coverage based on the “Errors & Omissions Exclusion” in its policy. That exclusion eliminated coverage for claims “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.” The insured sued and moved for summary judgment based on the position that the exclusion was ambiguous in connection with the claim at issue, and the Southern District of California granted the motion. The carrier appealed, and the Ninth Circuit affirmed.

The Ninth Circuit first noted that the policy provided coverage for wrongful acts, which were defined as any “actual or alleged act, error, misstatement, misleading statement, omission or breach of duty.” The Court then analyzed the term “services” as used in the “Errors & Omissions Exclusion.” The court held that the plain meaning of “services” is “helping or doing work for someone,” and found that, under that definition, the alleged misstatements in marketing materials and other advertisements did not constitute “services.” Because the court found that “it [was] ambiguous whether the policy’s exclusion for claims in connection with ‘services’ applies,” the court construed the exclusion narrowly and found that the misstatements and breaches of duties alleged in the underlying complaint were “wrongful acts” covered by the policy.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.