E-Alert Case Updates

Preparing Workers’ Compensation Insurance Documents Were Not “Professional Services”

Maryland Accounting Servs., Inc. v. Continental Cas. Co.
(D. Md.) (Nov. 21, 2011)
by Kevin M. Cox, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Plaintiffs, Maryland Accounting Services, Inc. (“MAS”) and Ivan A. Jaramillo (“Jaramillo”) filed a Complaint for Declaratory Judgment in state court against Defendant, Continental Casualty Co. (“Continental”). MAS and Jaramillo sought a court ruling that Continental, which underwrote Plaintiff’s business insurance policy, had a duty to defend and indemnify them in an underlying lawsuit. Continental removed the declaratory judgment action to Federal court, based on diversity jurisdiction.

MAS is an accounting company in Maryland where Jaramillo worked as an accountant. MAS had a business insurance policy (“Policy”) from Continental, which included coverage for prior acts committed by MAS and its employees from January 19, 2006, until the Policy’s start date. The Policy required Continental to defend and indemnify MAS and its employees in lawsuits relating to professional services they rendered. These contractual duties were limited by a specific number of exclusions, and by limitations on the definition of “professional services.”

Jaramillo and MAS were sued by the Injured Workers’ Insurance Fund (“Fund”), an independent state agency, that offers workers’ compensation insurance to Maryland employers. The Fund considers a number of factors when determining what premium to charge an insured business, including the number of employees, the size of payroll, and whether the business uses uninsured subcontractors. The Fund alleged in its complaint that MAS, Jaramillo and a number of third-parties defrauded the Fund by under reporting the number of employees, payroll size, and use of sub-contractors for a variety of small Maryland businesses. The Fund’s Complaint included several different theories of recovery, including that Jaramillo and MAS either negligently or intentionally provided advice and services that allowed the other Defendants to defraud the Fund of over $1 million in insurance premiums. Jaramillo and MAS notified Continental of the Insurance Workers’ Insurance Fund case, and requested defense and indemnification under the Policy. Continental refused both.

Jaramillo and MAS argued that Continental was required to defend and indemnify them because their allegedly wrongful acts qualified as “professional services” under the Policy. Continental argued just the opposite in that Jaramillo and MAS’s alleged acts did not qualify as covered “professional services”, and further argued that those acts were specifically excluded by the Policy’s financial products exclusion.

The Policy specifically defined the term, “professional services”, as among other things, “preparing financial or accounting records; preparing, assembling, or compiling financial statements, preparing payroll records and payroll checks; and offering services as a life insurance agent.” The Financial Products Exclusion noted that “this Policy does not apply to . . . any claim based on or arising out of . . . servicing of or providing advice on any products that are not financial products.” “Financial Products” are a small group of items, including U.S. Treasury Bonds, Mutual Funds, and variable life insurance contracts. Workers’ compensation insurance policies are not included in this exclusive group.

The Fund accused MAS and Jaramillo of negligently or intentionally preparing fraudulent workers’ compensation insurance applications on behalf of several MAS clients. The Fund alleged that those workers’ compensation insurance applications included false financial statements and payroll records prepared by Jaramillo and MAS. The parties debated whether the preparing of the workers’ compensation insurance applications — including the preparation of financial statements and payroll records — qualified as the provision of professional services, and thus whether the acts alleged in the underlying lawsuit triggered Continental’s duties to defend and indemnify.

The Fund alleged that MAS and Jaramillo advised clients to obtain workers’ compensation insurance and prepared their clients’ workers’ compensation insurance applications. Even services that might otherwise be considered “professional services” under the Policy, such as the preparation of payroll records, were rendered in the specific context of helping clients obtain workers’ compensation insurance. The text of the Fund’s complaint demonstrated that all of the services that were the subject of the underlying lawsuit were services rendered in connection with workers’ compensation insurance, not in connection with financial products.

The court also held that a review of the underlying complaint made it clear that the Fund’s complaint concerned services that Jaramillo and MAS allegedly rendered in connection with a product — workers’ compensation insurance — that was not a financial product as defined by the Policy. Such services were specifically excluded from the scope of the Policy.

Because the services attributed to Jaramillo and MAS were specifically excluded from coverage, there was no possibility that the claims made in the underlying Fund case could be covered by the business insurance policy MAS obtained from Continental. Therefore, Continental had no obligation to defend and/or indemnify MAS and Jaramillo in the underlying lawsuit. Continental’s Motion for Summary Judgment was, therefore, granted.