HOTCHALK, INC. Plaintiff - Appellant, vs. SCOTTSDALE INSURANCE COMPANY. Defendant - Appellee.

Transcription

1 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 1 of 27 (7 of 33) CASE NO HOTCHALK, INC. Plaintiff - Appellant, vs. SCOTTSDALE INSURANCE COMPANY Defendant - Appellee. Appeal From The United States District Court, Northern District of California, Case No. 16-cv CW, Hon. Claudia Wilken BRIEF FOR UNITED POLICYHOLDERS AS AMICUS CURIAE SUPPORTING APPELLANT S REQUEST FOR REVERSAL Amy R. Bach, Esq. Daniel R. Wade, Esq. UNITED POLICYHOLDERS 381 Bush Street, 8th Floor San Francisco, CA (415) Telephone (415) Facsimile Attorneys for Amicus Curiae Tyler C. Gerking, Esq. Deborah K. Barron, Esq. FARELLA BRAUN + MARTEL LLP 235 Montgomery Street, 17th Floor San Francisco, California (415) Telephone (415) Facsimile Attorneys for Amicus Curiae 34091\

2 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 2 of 27 (8 of 33) CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, Amicus Curiae, United Policyholders, states that it is a non-profit 501(c)(3) consumer organization, that it does not have a parent corporation, and that no publicly-traded corporation owns 10% or more of the stock of United Policyholders. Dated: March 30, 2017 Respectfully submitted, FARELLA BRAUN + MARTEL LLP By: /s/ Tyler C. Gerking Tyler C. Gerking Attorneys for Amicus Curiae 34091\

3 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 3 of 27 (9 of 33) TABLE OF CONTENTS Page I. STATEMENT OF INTEREST OF THE AMICUS CURIAE... 1 II. STATEMENT OF AMICUS CURIAE... 2 III. ARGUMENT... 2 A. The District Court Erred In Its Overly Broad Construction Of The Professional Services Exclusion B. The District Court Failed To Follow California Law Requiring Exclusions To Be Construed Narrowly In Consideration Of The Insurance Policy As A Whole C. The District Court s Holding Threatens To Render D&O Insurance Issued To Privately Held Service Providers Illusory The Purpose Of The Professional Services Exclusion Is To Exclude Claims Based On A Company s Error Or Omission In The Provision Of Professional Services To Its Clients A String Of Court Decisions Nationwide Evidences A Trend Of Insurers Stretching The Professional Services Exclusion Beyond Its Intended Scope D. The District Court s Decision Should Be Reversed Because It Improperly Follows A Line Of Cases That Encourages Insurance Companies To Sell Illusory D&O Insurance To Private Companies E. This Court Should Follow GeoStar And Similar Decisions To Hold That Professional Services Exclusion (1) Must Be Interpreted Narrowly In A Private Company D&O Policy And (2) Applies Solely To Claims Based On Errors Or Omissions In The Provision Of Services To Clients IV. CONCLUSION \ i

4 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 4 of 27 (10 of 33) TABLE OF AUTHORITIES Federal Court Cases Page Begun v. Scottsdale Ins. Co., Inc., No. 3:12-cv-03649EDL, 2013 WL (N.D. Cal. May 16, 2013)... 11, 12, 13, 14, 15 Chapman v. Mut. Sov. Cas. Ins. Co., 35 F. Supp. 2d 693 (1994)... 9 Educ. Affiliates Inc. v. Fed. Ins. Co., No. Civ. No.-JFM , 2016 WL (D. Md. July 28, 2016).. 8, 9, 15 Fed. Ins. Co. v. Hawaiian Elec. Indus., Inc., No HG, 1997 U.S. Dist. Lexis (D. Haw. Dec. 23, 1997). 10, 15 Great Am. Ins. Co. v. GeoStar Corp. Nos BC, BC, BC., 2010 WL (E.D. Mich. Mar. 5, 2010)... 7, 10, 16, 17 Lifespan Corp. v. Nat l Union Fire Ins. Co. of Pittsburgh, Pa., 59 F. Supp. 3d 427 (D.R.I. 2014)... 9 Miller-Wohl Co. v. Comm r of Labor & Indus., 694 F.2d 203 (9th Cir. 1982)... 1 Philadelphia Indem. Ins. Co. v. First Multiple Listing Servs., Inc., 173 F. Supp. 3d 1314 (N.D. Ga. 2016)...9, 15 Prosper Marketplace, Inc. v. Greenwich Ins. Co., No. A132967, 2012 WL (Cal. Ct. App. July 16, 2012)... 9 Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am., 994 F. Supp. 2d 228 (D.R.I. 2014)... 10, 11, 15 Tagged, Inc. v. Scottsdale Ins. Co., No. JFM , 2011 WL (S.D.N.Y. May 27, 2011)... passim The Point/Arc of N. Ky., Inc. v. Philadelphia Indem. Ins. Co., 154 F. Supp. 3d 503 (E.D. Ky. 2015) \ ii

5 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 5 of 27 (11 of 33) W. Heritage Bank v. Fed. Ins. Co., 557 F. App x 807 (10th Cir. 2014)... 9, 10, 15 State Court Cases AIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807 (1990)... 4 Arenson v. Nat l Auto. & Cas. Ins. Co., 45 Cal. 2d 81 (1955)... 3 Food Pro Int l., Inc., v. Farmers Ins. Exch., 169 Cal. App. 4th 976 (2008)... 3 Gray v. Zurich Inc. Co., 65 Cal. 2d 263 (1966)... 3 Medill v. Westport Inc. Corp., 143 Cal. App. 4th 819 (2006)...13 Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995)... 4 Reliance Ins. Co. v. Nat l Union Fire Ins. Co. of Pittsburg, Pa., 262 A.D. 2d 64 (1999)... 9 Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758 (2001)... 4 State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94 (1973)... 3 Federal Rules and Regulations Fed. R. App. P. 29(c)(5)... 2 Treatises 16 Richard A. Lord, Williston on Contracts 49:15 (4th Ed. 2014)... 4 Samuel Williston, A Treatise on the Law of Contracts 900 (3d ed. 1963) \ iii

6 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 6 of 27 (12 of 33) Other Authorities Kevin M. LaCroix, D&O Insurance: More About the Professional Services Exclusion Problem, The D&O Diary (Aug. 1, 2016) 8, \ iv

7 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 7 of 27 (13 of 33) I. STATEMENT OF INTEREST OF THE AMICUS CURIAE United Policyholders ( UP ) is a non-profit 501(c) (3) organization whose mission is to be a trustworthy and useful information resource and an effective voice for consumers of all types of insurance in all 50 states. UP speaks for a diverse range of policyholders and has filed more than 400 friend of the court briefs in state and federal cases and in the U.S. Supreme Court. UP seeks to fulfill the classic role of amicus curiae by assisting in a case of general public interest, supplementing the efforts of counsel, and drawing the court s attention to law that escaped consideration. Miller-Wohl Co. v. Comm r of Labor & Indus., 694 F.2d 203, 204 (9th Cir. 1982). UP s interest in this case is to provide the Court with information and a national context to assist in evaluating the exclusion interpretation issues in this case. Scottsdale is attempting to defeat coverage by applying an overly broad reading to the professional services exclusion that it wrote into the Directors and Officers ( D&O ) policy it sold to the policyholder. Scottsdale s position here exemplifies an unfortunate national trend that needs to be corrected. The policyholder here is a privately held, not a publicly traded, company. Scottsdale s interpretation of the subject exclusion renders paid-for coverage illusory \

8 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 8 of 27 (14 of 33) II. STATEMENT OF AMICUS CURIAE Pursuant to Rule 29(c)(5) of the Federal Rules of Appellate Procedure, the undersigned counsel hereby certifies that no party s counsel or other person authored the brief in whole or in part or contributed money intended to fund preparing or submitting the brief. III. ARGUMENT A. The District Court Erred In Its Overly Broad Construction Of The Professional Services Exclusion. The District Court erred in holding that Scottsdale Insurance Company ( Scottsdale ) had no duty to defend HotChalk, Inc. ( HotChalk ), a privately held service provider, under a D&O Policy against a claim alleging that HotChalk made wrongful management level decisions about employee compensation. ER13. At the heart of the District Court s decision is the erroneous determination that HotChalk s management level decisions about its internal compensation program are tied closely enough to the client services it provides its core business function to trigger the professional services exclusion. Specifically, the District Court reasoned that the D&O Policy s professional services exclusion conclusively eliminated any potential for coverage because, absent HotChalk s professional services, HotChalk would not have been subject to the law that it was alleged to have violated in the underlying [] lawsuit. ER13; 12: This test unsupported by the exclusion s actual language, the D&O 34091\

9 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 9 of 27 (15 of 33) Policy s overarching coverage scheme and relevant case law led the court to find that HotChalk could not have been liable had it not provided professional services, and thus decisions about employee compensation qualified as professional services. Id. This interpretation of the professional services exclusion is so broad as to effectively eliminate D&O coverage for allegedly wrongful management decisions made by entities in the business of providing services, and is inconsistent with California law and the weight of national precedent. B. The District Court Failed To Follow California Law Requiring Exclusions To Be Construed Narrowly In Consideration Of The Insurance Policy As A Whole. The rules that govern the interpretation of exclusions in California, such as the professional services exclusion, are well established and favor a finding of coverage and a duty to defend. State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, 101 (1973) (While coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured, exclusions are construed narrowly and against the insurer.); see also Arenson v. Nat l Auto. & Cas. Ins. Co., 45 Cal. 2d 81, 83 (1955); Food Pro Int l., Inc., v. Farmers Ins. Exch., 169 Cal. App. 4th 976, (2008) (same). Exclusions must be conspicuous, plain and clear, Gray v. Zurich Inc. Co., 65 Cal. 2d 263, 271 (1966) (emphasis added). If provisions in an insurance policy are ambiguous, the ambiguity must be resolved by interpreting the ambiguous 34091\

10 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 10 of 27 (16 of 33) provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 667 (1995) ( Montrose II ). If these rules fail to resolve the ambiguity, then the policy provision must be construed against the insurer that drafted the policy and in favor of coverage. AIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807, 822 (1990). 1 Most importantly, courts will not construe exclusions broadly in a way that makes coverage illusory. See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 765 (2001) (refusing to construe exclusion in a way that would render coverage illusory: Safeco s homeowners policy promised coverage for liability resulting from the insured s negligent acts. That promise would be rendered illusory if... we were to construe the phrase illegal act, as contained in the policy s exclusionary clause, to mean violation of any law, whether criminal or civil. ). Here, the District Court failed to properly apply the requirement in California law that exclusions be construed narrowly and against the drafter, and it ignored the weight of decisions from California and other jurisdictions that have followed that guidance to reach the conclusion that professional services 1 See also16 Richard A. Lord, Williston on Contracts 49:15 (4th Ed. 2014) (... insurance policies, while contractual in nature, are certainly not ordinary contracts, and should not be interpreted or construed as individually bargained for, fully negotiated agreements, but should be treated as contracts of adhesion between unequal parties. ) 34091\

11 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 11 of 27 (17 of 33) exclusions in private company D&O policies must be construed narrowly to avoid vitiating reasonably expected coverage. C. The District Court s Holding Threatens To Render D&O Insurance Issued To Privately Held Service Providers Illusory. In order to understand the implications of the District Court s improperly broad interpretation of the professional services exclusion, it is necessary to understand (1) the purpose of the professional services exclusion within the private company D&O policy s overarching coverage scheme, and (2) the national trend of insurance companies improperly denying D&O coverage to policyholders in the business of providing services, rending their policies effectively illusory in contravention of law and public policy governing the industry. 1. The Purpose Of The Professional Services Exclusion Is To Exclude Claims Based On A Company s Error Or Omission In The Provision Of Professional Services To Its Clients. Private company D&O insurance protects the policyholder company against a far broader array of claims than does a D&O Policy issued to a publicly traded company. While public company D&O insurance often only covers the company against securities claims, private companies to a large extent enjoy the same broad breadth of D&O coverage as do individual policyholders. Typical of private D&O insurance, the policy here imposed on Scottsdale a duty to defend HotChalk against Claims alleging any actual or alleged error, omission... breach of duty or act allegedly committed or attempted by 34091\

12 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 12 of 27 (18 of 33) HotChalk s management. ER 36 (emphasis added). The key point is that the D&O Policy s insuring agreement expressly states that it covers the privately held company s liability for errors and omissions. A standard D&O Policy s insuring agreement is usually limited by certain enumerated exclusions. The exclusions are designed to eliminate coverage for claims that typically are (or can be) covered by other types of insurance. For example, standard exclusions in D&O Policies bar coverage for things such as ERISA claims (covered under a fiduciary liability policy), bodily injury claims (covered under a Commercial General Liability ( CGL ) policy), and property damage claims (also covered under a CGL policy). A professional services exclusion is also typically included in private company D&O Policies. The policy at issue here included one purporting to eliminate coverage for Claims: ER 61. alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering or failing to render professional services, provided, however, this exclusion shall not apply to any Claim(s) brought by a securities holder of the Company in their capacity as such. Professional services exclusions, such as the one here, are intended to draw a line between the coverage provided by a D&O Policy and coverage provided under a separate professional liability policy, which typically covers a company for its 34091\

13 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 13 of 27 (19 of 33) professionals errors or omissions in the performance of services to its customers. A reasonable policyholder purchasing D&O coverage would thus understand that, while errors made by employees in rendering services to the company s customers would be excluded from the D&O Policy, all other acts and decisions related to governance and management of the company itself would be covered by the D&O Policy. See, e.g., Great Am. Ins. Co. v. Geostar, Corp, Nos BC, BC, BC., 2010 WL , at *12 (E.D. Mich. Mar. 5, 2010) (private company D&O policies are designed specifically to protect the company and its directors and officers from liability arising from negligence or misconduct in managing a business ). In short, a privately held company purchases D&O coverage to protect itself against the exact kind of claim at issue here (i.e., allegations that the company s management made a wrongful decision when structuring its employee compensation). A policy s insuring agreement that purports to protect the company against liability arising out of its errors and omissions, as the D&O Policy does here, is thus understood to cover errors and omissions made by directors and officers when making decisions about company governance and management. ER 36 (the D&O Policy defines Wrongful Act, with respect to the company, as any actual or alleged error, omission, misleading statement.) 34091\

14 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 14 of 27 (20 of 33) 2. A String Of Court Decisions Nationwide Evidences A Trend Of Insurers Stretching The Professional Services Exclusion Beyond Its Intended Scope. The customary usage and intent of the professional services exclusion is to carve out the coverage under an E&O policy. However, the present case is representative of a trend among private company D&O insurers who seek to use courts to expand the professional services exclusion far beyond its proper scope as to essentially render the policy meaningless, especially for companies such as HotChalk who are in the business of providing services to clients. Indeed, D&O insurers attempts to stretch the exclusion has become so commonplace that is a common topic in insurance industry blogs, prompting one prominent insurance commentator to take to referring to the practice as the professional services exclusion problem. 2 The growing body of case law nationwide reflects courts ongoing struggle to address insurers aggressive application of the professional services exclusion. 3 2 D&O Insurance: More About the Professional Services Exclusion Problem, Aug. 1, 2016, The D&O Diary, A Periodic Journal Containing Items of Interest From the World of Directors and Officers Liability, With Occasional Commentary, is published by Kevin M. LaCroix and followed widely in the industry. Mr. LaCroix addressed the D&O Exclusion Problem in the following link: 3 See, e.g., Educ. Affiliates Inc. v. Fed. Ins. Co., Civ. No.-JFM , 2016 WL , at *2 (D. Md. July 28, 2016) (refusing to endorse an insurer s proposed interpretation of the professional services exclusion on the grounds that it would 34091\

15 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 15 of 27 (21 of 33) There is no published decision of a California Court of Appeal case directly on point. 4 However, most federal courts around the country that have considered this issue have correctly held that the exclusion must be considered in the context of the policy s intended coverage scheme and, as a result, limited the effect of the effectively eviscerat[e] coverage); Philadelphia Indem. Ins. Co. v. First Multiple Listing Servs., Inc., 173 F. Supp. 3d 1314, 1320 (N.D. Ga. 2016) (finding the professional services exclusion in a D&O policy inapplicable to claims based on ordinary task[s] ); The Point/Arc of N. Ky., Inc. v. Philadelphia Indem. Ins. Co., 154 F. Supp. 3d 503, 512 (E.D. Ky. 2015) (finding that a negligent supervision carve-out in a professional services exclusion permitted coverage under a D&O policy); Lifespan Corp. v. Nat l Union Fire Ins. Co. of Pittsburgh, Pa., 59 F. Supp. 3d 427, 458 (D.R.I. 2014) (reading a professional services exclusion in context and concluding that it was intended to apply only to professional services involved in the providing of healthcare to others); W. Heritage Bank v. Fed. Ins. Co., 557 F. App x 807, 813 (10th Cir. 2014) (rejecting insurer s argument that professional services exclusion must be interpreted broadly, and concluding that the plain language of the policy removed certain types of actions from the otherwise broad definition of professional services ); Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am., 994 F. Supp. 2d 228, 233 (D.R.I. 2014) (rejecting an insurer s broad reading of a professional liability exclusion, despite the presence of broad arising out of language); Reliance Ins. Co. v. Nat l Union Fire Ins. Co. of Pittsburg, Pa., 262 A.D.2d 64, 65 (1999) (declining to adopt insurer s construction of a professional liability exclusion that would have the exclusion swallow the policy ); Chapman v. Mut. Sov. Cas. Ins. Co., 35 F. Supp. 2d 693, 698 (1994) (declining to adopt insurer s construction of the professional services exclusion where it could preclude virtually all coverage under this policy ). 4 The necessity of reading the professional services exclusion narrowly, however, is squarely addressed in the unpublished opinion Prosper Marketplace, Inc. v. Greenwich Ins. Co., No. A132967, 2012 WL , at *8 (Cal. Ct. App. July 16, 2012). There, the court refused to deny coverage under a professional services exclusion because doing so would treat[] Prosper s entire online lending business as a service and any flawed business decision covered by the D & O Part as within the E & O exclusion and holding that [s]uch an overly broad interpretation is unreasonable \

16 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 16 of 27 (22 of 33) exclusion to only those claims alleging an error or omission in the rendering of services to the company s customer. See Great Am. Ins. Co. v. GeoStar Corp., 2010 WL , at *12 ( [P]rofessional E&O exclusions in general liability policies are often interpreted more broadly than E&O exclusions in D&O policies ; because D&O policies are more narrowly drafted and designed specifically to protect directors and officers from liability arising from negligence or misconduct in managing a business... professional E&O exclusions in D&O policies must be interpreted more narrowly to avoid negating the entire coverage scheme through the operation of an overly broad exclusion. ); Fed. Ins. Co. v. Hawaiian Elec. Indus., Inc., 1997 U.S. Dist. Lexis 24129, at *32-36 (D. Haw. Dec. 23, 1997) (services exclusion in a D&O liability policy construed more narrowly than similar exclusion in a CGL policy because policies cover different risks); W. Heritage Bank v. Fed. Ins. Co., 557 F. App x 807, (10th Cir. 2014) (rejecting insurer s argument that professional services exclusion must be interpreted broadly, and concluding that the plain language of the policy removed certain types of actions from the otherwise broad definition of professional services ); Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am., 994 F. Supp. 2d 228, 233 (D.R.I. 2014) (rejecting an insurer s broad reading of a professional liability exclusion, despite the presence of broad arising out of 34091\

17 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 17 of 27 (23 of 33) language). The import of the District Court s decision here must thus be understood in this broader context. D. The District Court s Decision Should Be Reversed Because It Improperly Follows A Line Of Cases That Encourage Insurance Companies To Sell Illusory D&O Insurance To Private Companies. The District Court here, apparently unwittingly, aligned itself with the minority of courts that have accepted insurers overly broad application of the professional services exclusion. It did not discuss let alone analyze this growing body of case law. As a result, it adopted a construction of the exclusion that renders coverage illusory under private company D&O insurance, particularly for service providers. If allowed to stand as precedent, the decision threatens to contravene public policy and tip California law in the direction of sanctioning the sale of illusory D&O coverage to privately held companies. The court discussed only two non-binding decisions, Begun v. Scottsdale Ins. Co., Inc., No. 3:12-cv-03649EDL, 2013 WL (N.D. Cal. May 16, 2013) and Tagged, Inc. v. Scottsdale Ins. Co., No. JFM , 2011 WL (S.D.N.Y. May 27, 2011). Both are distinguishable and rely on flawed analysis. First, in contrast to HotChalk, both cases involved facts that arguably supported the professional services exclusion s application. In Begun, the policyholder company provided payroll services to clients, and it was the company s failure to provide those exact services (i.e., the failure to deposit 34091\

18 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 18 of 27 (24 of 33) withheld amounts with the Internal Revenue Service and embezzlement of payroll funds by its directors) that gave rise to the underlying lawsuit. Begun, 2013 WL , at *11. That is not the case here, where the claim at issue arises out of HotChalk s compensation of its employees, which is not related to the provision of online university courses, the core service the company provides. In Tagged, 2011 WL , at *5-6, an internet company operated a social networking website targeting minors and their parents. The company represented that it provided customers with safety features to identify and remove illegal and inappropriate content. Id. at *1. The company, however, allegedly failed to do so even when notified. Id. The court found that the regulation and selection of website content was at the heart of the professional services the company provided to its users and thus the claim fell within the professional services exclusion. Id. at *6 (the activity [alleged to create liability] is not merely incidental to the site s everyday operations ). In contrast to Tagged, the payment of HotChalk s employees does not directly relate to its core service, the provision of online university degree programs. Second, and more significantly, the District Court followed Begun and Tagged without thoroughly considering how the professional services exclusion should work in the broader context of the private company D&O Policy s coverage scheme, which the Begun and Tagged courts at least acknowledged was a 34091\

19 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 19 of 27 (25 of 33) requirement. See, e.g., Tagged, 2011 WL , at *5 ( the type of insurance policy may be relevant to the contours of its professional services exclusion and the broader public policy that insurance exclusions cannot be read so broadly as to vitiate the coverage offered by the D&O policy (citation omitted)); Begun, 2013 WL , at *5 ( The nature and kinds of risks covered by the policy define its scope. ). Both Begun and Tagged, however, incorrectly imported an overly broad construction of the phrases arising from and arising out of from other contexts that do not work when applied to a professional services exclusion in a private company D&O policy. Begun applied the holding of Medill v. Westport Ins. Corp., 143 Cal. App. 4th 819 (2006), which did not involve a professional services exclusion. The Medill court interpreted a contractual liability exclusion and concluded, in reference to California case law addressing CGL policies, that the phrases arising from and arising out of broadly link[] a factual situation with the event creating liability, and connote[] only a minimal causal connection or incidental relationship. Id. at 830 (citation omitted). The Begun court accepted Medill s approach without discussing its impact on the D&O policy s overall coverage scheme. Begun, 2013 WL , at *12. While Tagged referred to the overarching coverage scheme, it incorrectly accepted the insurer s position that its broad interpretation did not render coverage illusory because the exclusion 34091\

20 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 20 of 27 (26 of 33) contained an exception that allowed coverage for claims brought by security holders. Tagged, 2011 WL , at *5. This was error because the exclusion s exception would preserve just a sliver of coverage that the private company D&O Policy expressly states that it covers (i.e., errors and omissions ) and that policyholders reasonably expect. Surprisingly, the District Court s decision here, went even further than Begun and Tagged. It stated that the exclusion applies unless the policyholder would have had liability absent its professional services. ER 20. A company that provides services as its core business function exists by virtue of, and in order to further, those services. Under this decision, it may well be impossible for services companies to determine what liability they would have in the absence of their services. Everything they do and every decision their management makes relate in some way to their services. The result, if the District Court s decision is allowed to stand, is that most, if not all, claims will fall within the professional services exclusion, rendering D&O coverage essentially illusory. E. This Court Should Follow GeoStar And Similar Decisions To Hold That Professional Services Exclusions (1) Must Be Interpreted Narrowly In A Private Company D&O Policy And (2) Applies Solely To Claims Based On Errors Or Omissions In The Provision Of Services To Clients. As discussed above, courts and commentators have recognized the problem caused by the broad interpretation of the professional services exclusion, such as in 34091\

21 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 21 of 27 (27 of 33) the Begun and Tagged cases. 5 The consensus is that, to preserve the private company D&O policy s coverage scheme, it is necessary to interpret the exclusion more narrowly so that it applies only if the underlying claim alleges errors or omissions in the policyholder s provision of professional services. 6 5 Kevin M. LaCroix, D&O Insurance: More About the Professional Services Exclusion Problem, The D&O Diary (Aug. 1, 2016), A period Journal Containing Items of Interest From the World of Directors and Officers Liability, With Occasional Commentary, 6 See Philadelphia Indem. Ins. Co. v. First Multiple Listing Servs., Inc., 173 F.Supp.3d 1314, (N.D. Ga. 2016) (professional services exclusion did not bar coverage for claim complaining about hidden settlement fees paid upon the final sale of properties listed on FMLS electronic database because [t]he manner in which FMLS structures and remits its fees is nothing more than an ordinary task associated with the business aspects of FMLS and has nothing to do with FMLS professional services (which involve the maintenance of an electronic real estate listing database) (emphasis added)); Educ. Affiliates, Inc. v. Fed. Ins. Co., 2016 WL *2 (D. Md. July 28, 2016) (professional services exclusion did not bar coverage for claim alleging wrongful marketing of professional services because, if such routine services were deemed to be excluded professional services, the result would be that coverage under the policies would be practically eviscerated ) (emphasis added)); Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am., 994 F. Supp. 2d 228, 233 (D.R.I. 2014) (rejecting an insurer s broad reading of a professional liability exclusion, despite the presence of broad arising out of language); Fed. Ins. Co. v. Hawaiian Elec. Indus., Inc., 1997 U.S. Dist. Lexis 24129, at *32-36 (D. Haw. Dec. 23, 1997) (services exclusion in a D&O liability policy construed more narrowly than similar exclusion in a CGL policy because policies cover different risks); W. Heritage Bank v. Fed. Ins. Co., 557 F. App x 807, 813 (10th Cir. 2014) (rejecting insurer s argument that professional services exclusion must be interpreted broadly, and concluding that the plain language of the policy removed certain types of actions from the otherwise broad definition of professional services ) \

22 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 22 of 27 (28 of 33) The most thorough analysis is found in Great America Insurance Company v. GeoStar Corporation, where the court considered whether a D&O liability policy s services exclusion barred coverage for claims based on failed investments that the insured entity s subsidiary sold to the non-shareholder plaintiffs WL , at * Despite the fact that the complaint included allegations relating to services supposedly performed by the policyholder entity and its directors and officers, the court held that the exclusion did not apply and the insurer was required to defend the lawsuit. Id. GeoStar, a privately held energy company, formed a subsidiary to run a mare-lease program to raise capital for its energy business. Id. at *1-3. The subsidiary leased horses to program clients, who expected to obtain income and tax advantages from their rights to the horses. Id. at *2. The program clients sued GeoStar for security fraud, alleging that GeoStar had fewer horses than it purportedly leased, diverted the cash flow, and provided flawed advice regarding the purported tax advantages of the program. Id. at *2. GeoStar sought a defense from their private D&O liability insurers, which was denied on the ground that the policy s professional services exclusion applied. Id. at *3, 9. In the ensuing coverage lawsuit, the GeoStar court construed the services exclusion narrowly and held the D&O insurer was required to defend the case. Id. at *12 ( [P]rofessional E&O exclusions in D&O policies must be interpreted more 34091\

23 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 23 of 27 (29 of 33) narrowly to avoid negating the entire coverage scheme through the operation of an overly broad exclusion. ). Specifically, the court found that the services exclusion, while potentially barring coverage for claims based on investment advice GeoStar provided to the program clients, did not apply to claims based on the sale of interests in the horses. Id. at * The court reasoned that the exclusion: Id. at *12. does not remove from coverage every claim against the company for any error or omission that occurred in the course of its business. Indeed, the D&O portion of the policy was expressly designed to provide coverage for losses resulting from civil lawsuits against the company and its officers and directors alleging negligent or intentional misconduct in the operation of GeoStar s business. The court properly concluded that the relationship between the claims based on the sale of interests in the horses (i.e., fraud and securities fraud) and the professional tax advice provided by GeoStar and its subsidiaries was too attenuated to permit eliminating of coverage under the professional services exclusion provision. Id. at 13. As a result, the court determined that a claim based on the sale of interests in horses was a claim for misconduct that occurred in the course of GeoStar s business; it is not a claim alleging an error or omission in the provision of professional services. Id. at * This analysis strikes an appropriate balance between the intended coverage under a D&O policy and the professional services exclusion, which carves out a narrow category of claims for the provision of services directly to clients that are 34091\

24 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 24 of 27 (30 of 33) typically covered under a standard professional liability policy. This Court should narrowly interpret the exclusion, as required by California law, and hold that the exclusion applies only when a claim is based on errors or omissions in the provision of professional services to a client. Construing the exclusion more broadly will frustrate the reasonable expectations of policyholders under private company D&O Policies. See Samuel Williston, A Treatise on the Law of Contracts 900 (3d ed. 1963). The Policy s insuring agreement promises to cover liability for errors and omissions made in the company s decisions relating to management of its business operations. The broad interpretation adopted by the District Court, would effectively eliminate that promised coverage, particularly when the policyholder company is in the business of providing services. All business decisions of such companies relate in some way to the services they provide. As a result, a proper construction of the professional services exclusions, after accounting for the private company D&O Policy s coverage scheme, would eliminate coverage only for those claims that allege errors or omissions in the rendering, or failure to render, professional services to clients. IV. CONCLUSION For the foregoing reasons, UP respectfully requests that this Court reverse the order granting judgment in favor of Scottsdale Insurance Company \

25 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 25 of 27 (31 of 33) Dated: March 30, 2017 Respectfully submitted, FARELLA BRAUN + MARTEL LLP By: /s/ Tyler C. Gerking Tyler C. Gerking Attorneys for Amicus Curiae 34091\

26 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 26 of 27 (32 of 33)

27 Case: , 03/30/2017, ID: , DktEntry: 8-2, Page 27 of 27 (33 of 33) CERTIFICATE OF SERVICE I hereby certify that I electronically filed the foregoing with the Clerk of the Court for the United States Court of Appeals for the Ninth Circuit by using the appellate CM/ECF system on March 30, I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the appellate CM/ECF system. /s/ Jeffrey L. Amante Jeffrey L. Amante 34091\