A management liability policy’s professional services exclusion, encompassing a wide range of investment management services, did not preclude coverage for lawsuits brought by investors in failed investment firm. Carlyle Investment Mgt., LLC, et al. v. ACE American Insurance Company, et al., No. 14-cv-659, 2016 WL 555742 (D.C. Ct. App. Feb. 11, 2016).

The Carlyle Group is a private global investment firm comprised of numerous companies. It formed Carlyle Capital Corporation (CCC) as an independent company to invest in AAA-rated residential mortgage-backed securities. Carlyle Investment Management (CIM) and its affiliates, TC Group, LLC (TCG) and TCG Holdings, LLC (TCGH) served as CCC’s managers. After its formation, CCC offered Class A and Class B shares to investors. CCC subsequently collapsed in 2008 due to the mortgage and liquidity crises. As a result, investors filed a number of lawsuits against the CCC and the Carlyle entities. The complaints alleged a number of causes of action, including breach of fiduciary and other duties, breach of fiduciary duty as a de facto or shadow director, wrongful trading, breach of contract, gross negligence or negligence, unjust enrichment and claims for the return of CCC’S books, records and other property.

The Carlyle entities were insured under a complex insurance program that included primary and excess management and professional liability policies issued to TCG. In 2007, the insurers in the TCG program added a Professional Services Exclusion to each of the policies that precluded coverage for “Loss in connection with any Professional Services Claim arising from Professional Services provided to [CCC].” The exclusion defined “professional services” expansively to include, in relevant part:

“the giving of financial economic or investment advice regarding investments…the rendering of or failure to render investment management services…the organization or formation of, the purchase or sale or offer or solicitation for the purchase or sale of any interest(s) in, the calling of committed capital to, a Fund or prospective Fund…the providing of advisory, consulting, management, monitoring, administrative, investment, financial or legal advice or other services for, or the rendering of any advice to, or with respect to, an Organization, a Fund…or a Portfolio Entity…or other similar or related services.”

CIM, TCG and TCGH sought coverage for the investor lawsuits under the TCG insurance program, which the insurers denied based on the Professional Services Exclusions in the policies. The entities filed a complaint for declaratory relief. The trial court dismissed the complaint, finding that the Professional Services Exclusions were broad and unambiguous and barred coverage for all of the losses and defense costs in the underlying lawsuits.

On appeal, D.C. Court of Appeals vacated the trial court’s ruling and remanded the case for further proceedings, finding the definition of “professional services” was ambiguous and therefore presented a question for the factfinder. Specifically, the court found that the exclusions failed to define important terms such as “investment management services,” “management services,” “fund,” “organization” and “portfolio entity.” Further, the exclusions made no reference to important terms like “corporate governance,” making it unclear whether the term “investment management services” encompassed corporate governance.

The court further held that it could not be sure that the trial court properly applied the “eight corners rule” in determining whether the insurers had a duty to defend CIM, TCG and TCGH. It noted that the complaints in the underlying lawsuits consisted of approximately 121 pages and raised 19 individual claims against the Carlyle entities. It was unclear why all of the claims fell within the Professional Services Exclusions, particularly in light of the court’s finding that the definition of Professional Services was ambiguous.

Tressler Comment

This case highlights the potential difficulty in applying a broadly worded professional services exclusion in a management liability policy. While the exclusion at issue here appeared to encompass all services provided by the Carlyle entities to CCC, the appellate court’s decision makes clear that even expansive professional services exclusions can be subject to different interpretations. Insureds also argue that application of broadly worded professional services exclusions would preclude coverage for the insured’s entire business, rendering management liability coverage illusory.