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The District of Columbia Court of Appeals vacated a superior court decision holding that insurers had no duty to defend underlying suits on the basis of a professional services exclusion.  Carlyle Inv. Mgmt., LLC v. Ace Am. Ins. Co., 2016 WL 555742 (D.C. Feb. 11, 2016).

Following the “mortgage and liquidity crises” in 2008, several lawsuits were filed against the Carlyle Capital Corporation, its parent company and other affiliates.  The suits alleged, among other things, that the Carlyle defendants enticed investors into unsafe investments by issuing false and misleading statements.  The Carlyle defendants turned to their private equity management and professional liability insurers for the advancement and reimbursement of defense costs, which the insurers denied on the basis of a professional services exclusion.  The Carlyle defendants brought suit alleging breach of contract and seeking a declaration as to the insurers’ defense obligations.  A District of Columbia trial court granted the insurers’ motion to dismiss, ruling that the professional services exclusion was unambiguous and excluded coverage for all losses alleged in the underlying suits.  The appellate court vacated the ruling and remanded the matter for discovery.

The appellate court ruled that the term “professional services” was ambiguous.  Noting that the definition of “professional services” contained eight sub-parts and included various important terms that were undefined (such as “investment management services,” “fund” and “organization”), the court held that the exclusion was “not easy to interpret.”  In addition, the appellate court expressed doubt as to the trial court’s application of the “eight corners rule” in dismissing the duty to defend suit as a matter of law.  For example, the court questioned whether all of the claims alleged in a 121-page, nineteen-count complaint filed by liquidators of the Carlyle Capital Corporation (including claims alleging breach of fiduciary and other duties, breach of fiduciary duty as a de facto or shadow director, wrongful trading and unjust enrichment) fell within the scope of the exclusion as a matter of law.  Similarly, the appellate court noted the trial court’s failure to specify how the exclusion encompassed underlying claims relating to corporate governance or arising out of conduct or statements unrelated to the solicitation for the purchase or sale of interests.