The problem of using "arising out of" to draft exclusions on the D&O Insurance Policies

The term "arising out of" aims to broaden the scope of the professional services exclusion, ensuring that claims meant to be covered under a financial institution's professional liability (often referred to as the FIPI policy) aren't inadvertently picked up. While the intention behind this is clear, applying such an exclusion, especially the term “arising out of,” can pose challenges.

A recent ruling by the Delaware Supreme Court in the case of ACE American Ins. Co. v. Guaranteed Rate, Inc. highlights such a challenge.

In this case, the court had to decide whether a False Claims Act suit was "arising out of" Guaranteed Rate's professional services to determine if the professional services exclusion in the D&O policy would apply. The Delaware Supreme Court concluded that the act of certifying mortgages to the government did not fall under the professional service category. As a result, the suit wasn't a consequence of Guaranteed Rate's professional services, and the Management Liability Policy provided coverage.

This decision emphasizes the crucial role of clear and precise language in policy drafting. The phrase "arising out of" was interpreted not to allow the insurer to exclude activities that are merely tangentially related. A "meaningful linkage" between the stipulated conditions in the contract is required.

For a deeper dive into this topic, read the full article:

[Delaware Supreme Court Affirms that D&O Insurer Must Cover Settlement of Alleged False Claims Act Violations]

https://www.natlawreview.com/article/delaware-supreme-court-affirms-do-insurer-must-cover-settlement-alleged-false