Professional Services Exclusion Precludes Coverage for False Claims Act Lawsuit

Applying California law, the United States Court of Appeals for the Ninth Circuit has held that a professional services exclusion in a D&O policy barred coverage for an underlying lawsuit alleging violations of the federal False Claims Act.  Hotchalk, Inc. v. Scottsdale Ins. Co., 2018 WL 2473474 (9th Cir. June 4, 2018).

The insured provided technology and support services to universities seeking to establish or expand their online education programs.  The insured’s services primarily involved marketing the universities’ online programs and recruiting students and faculty.  In 2014, former employees of the insured filed a qui tam lawsuit against the insured on behalf of the federal government under the False Claims Act.  The lawsuit alleged that the insured had violated federal regulations in connection with the enrollment of students who had received federal financial aid, which caused the students, the universities, and the insured to submit false claims to the Department of Education.  The insured tendered the lawsuit to its D&O insurer, which denied coverage based on the policy’s professional services exclusion.

The carrier prevailed in the trial court, and the insured appealed.

The Ninth Circuit affirmed, holding that no coverage was available because the underlying lawsuit “clearly arose” out of the insured’s rendering of professional services.  The court noted that the insured had previously conceded that the services it provided to universities, including its recruitment services, constituted “professional services” within the meaning of the policy.  The court further determined that the claims at issue in the underlying lawsuit clearly arose out of the insured’s professional services, as the claims alleged that the insured had caused ineligible students and ineligible universities to submit claims for federal financial aid.  Because the insured’s alleged liability in the lawsuit derived from its professional services, the court concluded that the professional services exclusion precluded coverage.