Professional Services Exclusion Applies

When You Sleep With Dogs You Will Get Fleas

Scott Rothstein created a Ponzi Scheme through his law firm. He used the services of Gibraltar Private Bank and Trust Company to fund the scheme. When the Ponzi Scheme was discovered multiple criminal and civil actions ensued. Gibraltar, as part of a settlement, assigned its rights to sue its insurers to bankruptcy trustees. Apparently, before suing the insurers, the trustees did not seek the advice of an insurance coverage expert.

For many years I have advised against taking such an assignment until the proposed assignees determine from an expert that the assignment is one of a viable case and determine the assets of the assignor who could pay the damages claimed without seeking insurance money. If it was a good case against the insurers one would expect the insured, the bank, to bring the suit on their own.

In Herbert Stettin, Trustee, Robert C. Furr, Trustee, Michael I. Goldberg, not individually, but as Chapter 11 Trustee of the estate of the debtor, Rothstein Rosenfeldt Alder, P.a., Bayon Income Fund, LP., et al., v. National Union Fire Insurance Company of Pittsburgh, Pa, Twin City Fire Insurance Company, Aon Risk Services Inc. of Massachusetts, et al., No. 15-14716, United States Court of Appeals for the Eleventh Circuit, (July 5, 2017) the Eleventh Circuit  dealt with a demand the bank and its officers made for defense and indemnity to the suits brought by victims of the Ponzi Scheme.

FACTS

This appeal arose is another remnant of the Ponzi scheme orchestrated by Scott Rothstein through his law firm, Rothstein Rosenfeldt Adler. See, e.g., S.E.C. v. Levin, 849 F.3d 995 (11th Cir. 2017); Coquina Invs. v. TD Bank, N.A., 760 F.3d 1300 (11th Cir. 2014); In re Rothstein, Rosenfeldt, Adler, P.A., 717 F.3d 1205 (11th Cir. 2013).

The appeal arises out of litigation based on the alleged conduct of certain executives of Gibraltar Private Bank and Trust Company, at which RRA maintained accounts. Gibraltar and some of its executives were named as defendants in numerous suits seeking to recover for losses caused by Mr. Rothstein’s scheme. The bank and its officers requested that their insurance carriers, National Union Fire Insurance Company of Pittsburgh and Twin City Fire Insurance Company, extend coverage under Gibraltar’s executive and organization liability insurance policies towards a joint settlement of the claims.

When National Union and Twin City denied coverage, Gibraltar and its executives began settlement discussions without the insurance companies. The parties eventually reached a settlement, which included Gibraltar and the executives assigning their policy rights to the bankruptcy trustees of RRA and of other entities that lost money in the Ponzi scheme.

After the assignment, the trustees again unsuccessfully demanded coverage. The trustees then filed suit, asserting breach of contract and bad faith claims. National Union and Twin City moved to dismiss the action, arguing that coverage was barred by a “professional services exclusion” found in each of the policies. The district court agreed, and granted the insurers’ motions. The trustees now appeal.

THE POLICY

The National Union policy is the primary policy, while the Twin City policy is an excess policy that follows the primary policy’s relevant provisions. The terms of the policies are relatively straightforward. The policies provide for coverage for “the Loss of any Insured Person arising from a Claim made against such Insured Person for any Wrongful Act of such Insured Person, except when and to the extent the Organization has indemnified such an Insured Person.”

The policies also exempt “professional services” from coverage. The professional services exclusion reads as follows: “The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured alleging, arising out of, based upon, or attributable to the Organization’s or any Insured’s performance of or failure to perform professional services for others, or any act(s), error(s) or omission(s) relating thereto.”

TRIAL COURT DECISION

The district court reasoned that the plain language of the exclusion barred coverage because some of the insured executives at Gibraltar provided professional banking services directly to RRA. A plain reading of the Professional Services Exclusion demonstrates that it bars coverage for any Claim made against any Insured arising out of any Insured’s performance or failure to perform professional services for others.

The trustees asked the Eleventh Circuit to reverse the trial court. They contended that the exclusion should be read severally, and therefore barring coverage only as to the claims against those insured executives who directly provided professional services to RRA. Under their reading, the district court erred because claims against executives who were merely responsible for internal managerial banking functions, like complying with federal reporting regulations, are not exempt from coverage.

ANALYSIS

The Eleventh Circuit concluded that the district court properly observed that the phrase any insured unambiguously expresses a contractual intent to create joint obligations. The phrase “any insured,” generally makes the obligations under an insurance provision “jointly rather than severally held” and unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured.

Understanding that the phrase “any insured” must be read in context, the Eleventh Circuit concluded that the district court correctly interpreted the exclusionary language. Here the professional services exclusion twice uses the phrase “any insured,” once in referring to the claim made and once in referring to the professional services rendered. And that evinces an intent to create joint obligations.

The insurance policies issued by National Union and Twin City do not contain a severability clause. That difference in policy language is fatal to the trustees’ argument and the trial court decision was affirmed.

ZALMA OPINION

The bankers laid down with Scott Rothstein and participated in his fraudulent scheme. They were sued and, recognizing their potential liability to the victims of Rothstein’s criminal scheme, settled with the trustees of the victims and, as consideration for the settlement, gave the Trustees an assignment that was unenforceable. The bank made a great deal and instead of money received a benefit by giving the trustees a worthless assignment of a claim against insurers.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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