On December 22, 2011, the Fourth Circuit reversed a decision of the United States District Court for Maryland in favor of an accountants professional liability insurer with regard to the applicability of an insurance agents and brokers errors and omissions exclusion in the policy. Trice, Geary & Myers, LLC v. CAMICO Mut. Ins. Co., No. 10-1473, 2011 U.S. App. LEXIS 25462 (4^th Cir., December 22, 2011). The insurer filed its Petition for Rehearing and Rehearing En Banc on January 5, 2012. Copies of both the Opinion and the Petition are attached.

The underlying claims against the insured accounting firm involved the creation of defined benefit plans under § 412 (i) of the Internal Revenue Code. The insured helped arrange for the funding of those plans by certain life insurance policies to be purchased by its client, for which it received commission income from the life insurer. The insured advised its client that the premiums paid for those policies would be tax deductible. Ultimately, the IRS disallowed the deduction, allegedly causing significant loss to the client, which sued the insured.

The insurer denied coverage for these claims against the insured based upon exclusionary provisions pertaining to acts as an insurance agent or broker. The key exclusionary language provided as follows.

This insurance does not apply to any Claim in connection with or arising out of any act,   error or omission by any Insured in his/her capacity as an agent or broker for the placement or renewal of insurance products or for the sale of annuities. (emphasis added)

The District Court found the exclusion sufficiently broad enough to preclude coverage despite the insured’s arguments that the gravamen of the claim involved negligent tax advice re the deductibility of the premiums paid for the life policies. The insurer successfully argued that although one of the principals of the insured firm may have in fact rendered tax advice, the claims arose from his acts as an insurance agent in procuring the policies.

The Fourth Circuit reversed finding that the exclusion was not broad enough to preclude coverage, essentially because it believed negligent tax advice was the principle underlying claim and that in fact there was another agent involved in placing the life insurance. It also concluded that the receipt of commission income did not affect its conclusion that the insured was not acting as an insurance agent.

I believe this case was wrongly decided and, unless it is reversed upon rehearing, it should be of significant concern to insurers in drafting preamble language to exclusionary provisions. While tax advice may well have been at issue in causing the client damage, and there is no dispute that negligent tax advice is clearly within the scope of coverage under an accountants professional liability policy, the Court apparently lost sight of what should have been the determinative question – did the claims against the insured arise from its acts in procuring the life policies?

Perhaps even more amazing is the Court’s conclusion that, although the underlying claims referenced the insured’s receipt of commissions, it did not specifically allege that they were acting as an insurance agent. Maybe I am being a bit impertinent but, if one receives commissions from an insurance company, what else can that one be but an agent or broker? 

The exclusion language here in the “arising out of” format is typically referenced as “absolute” and should have been sufficient to uphold the application of the exclusion to the underlying claim. Although it is uncertain whether this Fourth Circuit panel would have been persuaded otherwise, perhaps insurers need to consider utilizing the “super absolute” language along the lines of “this insurance does not apply to any Claim in connection with or arising out of, whether in whole or in part, any act, error or omission by any Insured.” This may have alleviated the Court’s apparent concern that the claim here arose from more than broking activity.