When my daughter was little, we loved putting jigsaw puzzles together. We would dump the pieces on the floor and spend hours trying to figure out how they fit. Sometimes there would be a “gap” in the puzzle, and we’d eventually get frustrated and assume that we were missing a piece. But somehow, the missing piece would almost always show up. In many ways, that’s how insurance exclusions work. They often create a (frustrating) “gap” that’s intended to be filled by other types of insurance. The so-called professional services exclusion is an excellent example of that phenomenon.

In insurance-speak, many businesses have two separate components: (A) the commercial, and (B) the professional.  “Professional services” exclusions ostensibly serve the purpose of limiting a general liability carrier’s exposure in an area in which the policyholder is supposed to buy separate errors and omissions coverage. Many courts have found that losses falling within the insuring provision of an errors and omissions policy are excluded by the typical professional services exclusion in a commercial general liability policy.

But here’s the foundational question:  What are “professional services”?  It’s not always so clear, but generally “professional services” are acts that require the actor to draw upon his or her professional training or expertise.  As an example of wrestling with this question, in Guaranty Nat. Ins. Co. v. North River Ins. Co., a patient died after jumping out a hospital window.  After an earlier incident in which a psychiatric patient had escaped through a window, the hospital had inserted screws in the window sashes to prevent the windows from being opened more than a few inches.  But they didn’t work. The carrier tried to disclaim coverage for liability resulting from the patient’s death, arguing that the “professional services” exclusion applied, because the decision on how best to secure the windows involved professional, medical judgment. The Court disagreed, writing: “The decision to protect…patients through screws in the window sashes rather than through fixed, protective screens over the windows was an administrative, business decision and was not a professional, medical decision.”  (Emphasis mine.)

(You can read the Guaranty National case by clicking here.)

The Third Circuit recently dealt with an interesting twist on the “professional services” question. PNC Financial Services Group paid $102 million to resolve several class action lawsuits.  The suits involved an automated, fee-based overdraft program that processed debit card transactions, and charged PNC’s customers overdraft fees. PNC allegedly manipulated the order in which transactions were processed, by processing them from largest to smallest instead of chronologically, supposedly to gouge customers on the fees. The suits also contended that PNC failed to disclose to customers that they could opt out of this policy and avoid overdrafts and fees altogether.

PNC had a $25 million self-insured retention, above which sat a $25 million professional liability policy sold by Houston Casualty Company. Axis sold a $25 million excess policy, over the Houston coverage.

The policies defined “damages” to mean “a judgment, award, surcharge or settlement… and any award of pre-and post-judgment interest, attorneys’ fees and costs.” But the policies excluded “fees, commissions or charges for Professional Services paid or payable to an Insured” from the definition of “damages.”

“Professional Services” were defined to mean “services performed… for the benefit of, or on behalf of a Customer or potential Customer of the Insured for a fee, commission, or other consideration…”

The Court held that PNC’s practice of charging overdraft fees constituted “professional services,” and were therefore excluded from the definition of “damages” under the policy. Approximately $30 million of the settlement related to the underlying plaintiffs’ attorneys’ fees and costs, and the Court held that those weren’t covered either.

The Court wrote: “We conclude that the approximately $30 million awarded to class counsel as attorneys’ fees and costs do not constitute an award of attorneys’ fees and costs that PNC was legally obligated to pay. Rather, PNC was legally obligated to pay $102 million to reimburse class members for charged overdraft fees, from which the class plaintiffs – not PNC – paid their attorneys approximately $30 million for their services. Accordingly, the entire $102 million in settlement payments constitute a refund of fees or charges for Professional Services that class members paid to PNC…and as such, are excluded from coverage pursuant to the Professional Services Charge Exception.”

A couple of takeaways from this case.

First, I wasn’t personally involved with the case and therefore I’m sure I’m missing something, but I don’t understand the assumption that a program for charging bank fees necessarily constitutes “professional services,” in light of the case law on that issue. It seems more like a ministerial function, more akin to the decision to use screws on the windows that we saw in the Guaranty National case.  From the policyholder’s perspective, the first question always has to be, are these really “professional services” – that is to say, services that require some level of professional judgment – at all?

Second, from a coverage perspective, always be careful how you describe payments in settlement documents. Here, the policyholder may have left $30 million on the table because, the Court said, the fees were simply part of a larger settlement payment intended to compensate the underlying plaintiffs for improper overdraft fees. It’s possible that a more insurance-savvy approach to categorizing the fee payment in the documents could have supported coverage. (And again, armchair hindsight is always 20/20.)

(You can read the PNC decision by clicking here.)