David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company

Filing 23

ORDER granting 12 Motion to Dismiss for Failure to State a Claim: For the reasons set forth herein, the Court grants defendant's motion to dismiss. The Clerk of the Court is directed to enter judgment accordingly and close the case. SO ORDERED. Ordered by Judge Joseph F. Bianco on 3/29/2013. (Pilmar, Philip)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 12-cv-1609 (JFB) (AKT)
_____________________

DAVID LERNER ASSOCIATES, INC.,
Plaintiff,
VERSUS

PHILADELPHIA INDEMNITY INSURANCE COMPANY,
Defendant.
___________________
MEMORANDUM AND ORDER
March 29, 2013
___________________

JOSEPH F. BIANCO, District Judge:
Plaintiff David Lerner Associates, Inc.
(“plaintiff” or “DLA”) brought this action
against Philadelphia Indemnity Insurance
Company (“defendant” or “Philadelphia”)
alleging breach of contract and seeking a
declaratory judgment that Philadelphia is
obligated to indemnify and defend DLA
against claims asserted by FINRA1 and
private plaintiffs.2 These complaints allege
that
DLA
made
misrepresentations
regarding shares in real estate investment
trusts and failed to conduct adequate due
diligence of those trusts.

1

The FINRA action is captioned Department of
Enforcement v. David Lerner Associates, Inc. &
David Lerner, Disciplinary Proceeding No.
2009020741901.
2
The lawsuits brought by the private plaintiffs have
been consolidated in In re Apple REITs Litigation,
No. 11-cv-02919, which is currently pending in the
Eastern District of New York.

Philadelphia now moves to dismiss the
complaint, pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. For the
reasons set forth below, Philadelphia’s
motion is granted. Specifically, Philadelphia
does not have a duty to indemnify or defend
DLA in the underlying litigation due to the
unambiguous language of the professional
services exclusion in the insurance policy,
which discharges Philadelphia from
defending or indemnifying claims resulting
from DLA’s performance of “professional
services.” More specifically, the underlying
lawsuits allege, among other things, that
DLA, as the underwriter and sole distributor
for the Apple REITs, failed to engage in due
diligence in connection with the sale of
these financial products. These alleged
actions or inactions quintessentially and
unambiguously fall within a common-sense
understanding of the term “professional
services,” which is not defined in the
insurance policy itself. In other words, when

an underwriter performs due diligence in
connection with the sale of financial
products, such activity certainly constitutes
“professional services” by the plain meaning
of the term. This Court’s conclusion is
consistent with numerous courts in New
York, as well as courts in other jurisdictions
who have reached the same conclusion
under analogous circumstances in states
with laws similar to New York in all
material respects. Plaintiff cites to no
applicable case authority to the contrary.
Although plaintiff attempts to point to the
definition of “professional” in the context of
malpractice law, the New York Court of
Appeals itself has emphasized that the term
“professional” has many applications in the
law, and that the definition of “professional”
in malpractice decisions is limited to that
particular context. In sum, because the
“professional services” exclusion exempts
Philadelphia from providing coverage to
DLA for these lawsuits, DLA’s breach of
contract action cannot be maintained, and a
declaratory judgment in favor of DLA
cannot be issued. Accordingly, dismissal of
this lawsuit is warranted.3

I. BACKGROUND
A. Factual Background
Philadelphia issued Private Company
Protection Plus Insurance Policy, Policy No.
PHSD577699 (“the policy”) and named
DLA as the insured. (Compl. ¶ 8.) The
policy was effective from November 30,
2010 to November 30, 2011.
Section I of Part 1 of the policy
provides:
INDIVIDUAL
COVERAGE

LIABILITY

The Underwriter [Philadelphia] shall
pay on behalf of the Individual
Insured, Loss from Claims made
against Individual Insureds during
the Policy Period (or, if applicable,
during the Extending Reporting
Period), and reported to the
Underwriter pursuant to the terms of
this Policy, for D&O Wrongful Acts,
except to the extent the Private
Company has indemnified the
Individual Insured for such Loss.
A.
PRIVATE
COMPANY
INDEMNITY COVERAGE
The Underwriter shall pay on behalf
of the Private Company, Loss from
Claims made against Individual
Insureds during the Policy Period
(or, if applicable, during the
Extended Reporting Period), and
reported to the Underwriter pursuant
to the terms of this Policy, for D&O
Wrongful Acts, if the Private
Company has indemnified such
Individual Insureds for such Loss.

3

Although plaintiff has not requested leave to replead the complaint, the Court has considered
whether plaintiff should be given an opportunity to
re-plead its claims. Under Rule 15(a) of the Federal
Rules of Civil Procedure, the “court should freely
give leave [to amend] when justice so requires.” Fed.
R. Civ. P. 15(a)(2). However, even under this liberal
standard, this Court finds that any attempt to amend
the pleading in this case would be futile because no
amendments could alter the conclusion that, given the
allegations in the underlying lawsuits, the
professional services exclusion applies to those
claims. See Cuoco v. Moritsugu, 222 F.3d 99, 112
(2d Cir. 2000) (“Repleading would [] be futile. Such
a futile request to replead should be denied.”).

2

With respect to coverage under Part
1, the Underwriter shall not be liable
to make any payment for Loss in
connection with any Claim made
against the Insured based upon,
arising out of, directly or indirectly
resulting from or in consequence of,
or in any way involving the Insured’s
performance of or failure to perform
professional services for others.

B.
PRIVATE
COMPANY
LIABILITY COVERAGE
The Underwriter shall pay on behalf
of the Private Company, Loss from
Claims made against the Private
Company during the Policy Period
(or, if applicable, during the
Extended Reporting Period), and
reported to the Underwriter pursuant
to the terms of this Policy, for a
D&O Wrongful Act.

It is provided, however, that the
foregoing shall not be applicable to
any derivative action or shareholder
class action Claim alleging failure to
supervise those who performed or
failed to perform such professional
services.

(Id. ¶ 10.) A D&O Wrongful Act is
defined by the policy as:
1. act, error, omission, misstatement,
misleading statement, neglect, or
breach of duty committed or
attempted by an Individual Insured
in his/her capacity as an Individual
Insured; or

(Id. ¶ 54.) The term “professional services”
is not defined in the policy.
DLA, a New York corporation, is a
privately held broker-dealer that operates
branches in New York and Florida and
employs approximately 370 registered
representatives. (See Compl. Ex. C, Am.
Compl. and Request for Expedited Hearing
(“FINRA Compl.”) ¶ 9.) A real estate
investment trust (“REIT”) is a company that
owns and operates income-producing real
estate, and DLA served as the Managing
Dealer for the Apple REIT offerings.
(Compl. ¶¶ 17-18.)

2. act, error, omission, misstatement,
misleading statement, neglect, or
breach of duty committed or
attempted by the Private Company;
or
3. act, error, omission, misstatement,
misleading statement, neglect, or
breach of duty committed or
attempted by an Individual Insured
arising out of serving in his/her
capacity
as
director,
officer,
governor or trustee of an Outside
Entity if such service is at the written
request or direction of the Private
Company.

On May 27, 2011, The Financial
Industry Regulatory Authority (“FINRA”)
filed a complaint in a disciplinary
proceeding against DLA, alleging that since
January 2011, DLA sold over $300 million
worth of shares in a REIT by
misrepresenting the value of those shares,
while failing to perform adequate due
diligence. (Compl. Ex. B, Complaint ¶¶ 13.) On December 13 2011, FINRA filed an
amended complaint against not only DLA
but also David Lerner individually,

(Id. ¶ 11.) However, the policy was
modified by endorsement to include a
“Professional Services Exclusion” which
provides:

3

filed a motion to dismiss the complaint on
July 17, 2012. Plaintiff submitted an
opposition to the motion to dismiss on
August 31, 2012, and defendant replied on
September 14, 2012. The Court held oral
argument on October 26, 2012.

containing
substantively
the
same
allegations, but additionally alleging that
DLA sold over $442 million worth of shares
in a REIT. (Compl. Ex. C, FINRA Compl.
¶¶ 1-2.) FINRA also alleged that DLA
targeted
senior
citizens
and/or
unsophisticated investors. (Id. ¶¶ 1, 17.)

II. STANDARD OF REVIEW
Between June 17 and June 28, 2011,
three class actions were filed against DLA,
David Lerner, and other defendants, all
arising out of the same facts as detailed in
the FINRA Complaint. (See Compl. Ex. D,
Kowalski v. Apple REIT Ten, Inc., et al., No.
11-cv-2919 (E.D.N.Y.); Compl. Ex. E,
Kronberg v. David Lerner Assocs. Inc., et
al., No. 11-cv-3558 (D.N.J.); Compl. Ex. F,
Leff v. Apple REIT Ten, Inc., et al., No. 11cv-3094 (E.D.N.Y.).) On December 13,
2011, these actions were consolidated in the
Eastern District of New York in front of
Judge Matsumoto. (See Stipulation and
Order Regarding Consolidation, Lead
Plaintiff, Lead Counsel and Scheduling, In
re Apple REITs Litig., No. 11-cv-2919
(KAM)(JO) (E.D.N.Y. Dec. 13, 2011), ECF
No. 78.) On February 16, 2012, another
individual lawsuit was filed, and
subsequently consolidated in the action in
front of Judge Matsumoto. (See Compl. Ex.
H, Brody v. David Lerner Assocs. Inc., et
al., No. 12-cv-782 (E.D.N.Y.).)

In reviewing a motion to dismiss
pursuant to Rule 12(b)(6), the Court must
accept the factual allegations set forth in the
complaint as true and draw all reasonable
inferences in favor of the plaintiff. See
Cleveland v. Caplaw Enters., 448 F.3d 518,
521 (2d Cir. 2006); Nechis v. Oxford Health
Plans, Inc., 421 F.3d 96, 100 (2d Cir. 2005).
“In order to survive a motion to dismiss
under Rule 12(b)(6), a complaint must
allege a plausible set of facts sufficient ‘to
raise a right to relief above the speculative
level.’” Operating Local 649 Annuity Trust
Fund v. Smith Barney Fund Mgmt. LLC, 595
F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555
(2007)). This standard does not require
“heightened fact pleading of specifics, but
only enough facts to state a claim to relief
that is plausible on its face.” Twombly, 550
U.S. at 570.
The Supreme Court clarified the
appropriate pleading standard in Ashcroft v.
Iqbal, 556 U.S. 662 (2009), setting forth a
two-pronged approach for courts deciding a
motion to dismiss. The Supreme Court
instructed district courts to first “identify[ ]
pleadings that, because they are no more
than conclusions, are not entitled to the
assumption of truth.” Id. at 679 (explaining
that although “legal conclusions can provide
the framework of a complaint, they must be
supported by factual allegations”). Second,
if a complaint contains “well-pleaded factual
allegations, a court should assume their
veracity and then determine whether they
plausibly give rise to an entitlement to

DLA
notified
Philadelphia,
a
Pennsylvania corporation, of the regulatory
action and the private class action so that it
could be indemnified for the costs of
defending the lawsuits. (Compl. ¶ 53).
However, Philadelphia denied coverage, and
notified DLA that its acts and omissions
were not covered by the policy due to the
professional services exclusion. (Id. ¶ 54.)
B. Procedural Background
Plaintiff filed the complaint in this
diversity action on April 3, 2012. Defendant
4

Gillette Co., 64 N.Y.2d 304, 310 (1984)
(“Where an insurance policy includes the
insurer’s promise to defend the insured
against specified claims as well as to
indemnify for actual liability, the insurer’s
duty to furnish a defense is broader than its
obligation to indemnify.”); see also
Fitzpatrick v. Am. Honda Motor Co., 78
N.Y.2d 61, 65 (1991) (“[A]n insurer may be
contractually bound to defend even though it
may not ultimately be bound to pay, either
because its insured is not factually or legally
liable or because the occurrence is later
proven to be outside the policy’s
coverage.”).

relief.” Id. A claim has “facial plausibility
when the plaintiff pleads factual content that
allows the court to draw the reasonable
inference that the defendant is liable for the
misconduct alleged. The plausibility
standard is not akin to a ‘probability
requirement,’ but it asks for more than a
sheer possibility that a defendant has acted
unlawfully.” Id. at 678 (quoting and citing
Twombly, 550 U.S. at 556-57) (internal
citation omitted).
The Court notes that in adjudicating this
motion, it is entitled to consider: “(1) facts
alleged in the complaint and documents
attached to it or incorporated in it by
reference, (2) documents ‘integral’ to the
complaint and relied upon in it, even if not
attached or incorporated by reference, (3)
documents or information contained in
defendant’s motion papers if plaintiff has
knowledge or possession of the material and
relied on it in framing the complaint, (4)
public disclosure documents required by law
to be, and that have been, filed with the
Securities and Exchange Commission, and
(5) facts of which judicial notice may
properly be taken under Rule 201 of the
Federal Rules of Evidence.” In re Merrill
Lynch & Co., 273 F. Supp. 2d 351, 356-57
(S.D.N.Y. 2003) (internal citations omitted),
aff’d in part and rev’d in part on other
grounds sub nom., Lentell v. Merrill Lynch
Co., 396 F.3d 161 (2d Cir. 2005).

“[A]n insurer will be called upon to
provide a defense whenever the allegations
of the complaint suggest a reasonable
possibility of coverage.” Auto. Ins. Co. of
Hartford, 7 N.Y.3d at 137 (alteration,
citation, and internal quotation marks
omitted); see also Fitzpatrick, 78 N.Y.2d at
65 (“This Court has repeatedly held that an
insurer’s duty to defend its insured arises
whenever the allegations in a complaint state
a cause of action that gives rise to the
reasonable possibility of recovery under the
policy.”). An insurer has a duty to defend a
claim against its policy holder unless it can
“establish, as a matter of law, that there is no
possible factual or legal basis on which the
insurer might eventually be obligated to
indemnify [the insured] under any provision
contained in the policy.” Villa Charlotte
Bronte, Inc. v. Commercial Union Ins. Co.,
64 N.Y.2d 846, 848 (1985). An insurer who
seeks to be relieved of the duty to defend
based on a policy exclusion “bears the heavy
burden of demonstrating that the allegations
of the complaint cast the pleadings wholly
within that exclusion, that the exclusion is
subject to no other reasonable interpretation,
and that there is no possible factual or
legal basis upon which the insurer may
eventually be held obligated to indemnify
the insured under any policy provision.”

III. DISCUSSION
A. Applicable Law
Under New York law, an insurer has an
“exceedingly broad” duty to defend the
insured. Auto. Ins. Co. of Hartford v. Cook,
7 N.Y.3d 131, 137 (2006) (citation and
internal quotation marks omitted). The duty
to defend is broader than the duty to
indemnify. See Seaboard Surety Co. v.
5

DLA in conducting due diligence and selling
REITs fall squarely within the professional
services exception. In particular, defendant
argues:

Frontier Insulation Contractors. v. Merchs.
Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997);
see also Ment Bros. Iron Works Co., Inc. v.
Interstate Fire & Cas. Co., 702 F.3d 118,
121 (2d Cir. 2012). Further, “[i]f any of the
claims against the insured arguably arise
from covered events, the insurer is required
to defend the entire action.” Frontier
Insulation Contractors, 91 N.Y.2d at 175.

Here, the Underlying Actions for
which DLA seeks coverage under
the Policy uniformly allege that DLA
had a duty to perform reasonable due
diligence “to understand the potential
risks and reward associated with a
security it recommends to customers
. . .” and that DLA was required to
investigate and identify potential
“red flags” regarding securities to
safeguard its customers from
damage. See, Complaint, Exhibit C
at ¶¶ 88-89. DLA was also allegedly
required to exercise care and skill in
the preparation of information
regarding
securities
and
its
presentation of that information to its
customers in the course of providing
investment advice to ensure that the
information is balanced, truthful and
free from exaggeration or misleading
statements. See, Complaint, Exhibit
C at ¶ 8. These services that DLA
provides to its customers constitute
professional services under New
York law because they require
specialized acumen, skill and
training with respect to securities and
investments.

“Insurance policies are contracts to
which the ordinary rules of contractual
interpretation apply.” Accessories Biz, Inc.
v. Linda & Jay Keane, Inc., 533 F. Supp. 2d
381, 386 (S.D.N.Y. 2008). New York
insurance contracts are construed in light of
“common speech.” Ace Wire & Cable Co. v.
Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 398
(1983); see also Ment Bros. Iron Works, 702
F.3d at 122 (“Terms in an insurance contract
must be given their plain and ordinary
meaning.” (citation and internal quotation
marks omitted)). Insurance contracts must
also be interpreted “according to the
reasonable expectations and purposes of
ordinary businessman when making an
ordinary business contract.” Gen. Motors
Acceptance Corp. v. Nationwide Ins. Co., 4
N.Y.3d 451, 457 (2005) (internal citations
and quotation marks omitted). Ambiguous
terms in a policy “must be construed in
favor of the insured and against the insurer.”
White v. Cont’l Cas. Co., 9 N.Y.3d 264, 267
(2007).

(Def.s’ Reply Mem. at 2 (footnote omitted).)
Plaintiff, on the other hand, argues that,
since the term professional services is
undefined in the policy, the term is
ambiguous and the litigation should proceed.
(Pl.’s Opp’n at 7-7-8.) The Court disagrees
with plaintiff’s interpretation of both New
York law and the policy language. As
argued by defendant, and discussed below,
the common sense understanding of the term
“professional services” makes clear that
DLA’s conduct at issue in these underlying

B. Professional Services Exclusion
Defendant argues that, since the
insurance policy excludes it from covering
claims “in any way involving [DLA]’s
performance of or failure to perform
professional services for others” (Compl.
¶ 54), plaintiff’s suit should be dismissed as
defendant is not liable to defend or
indemnify plaintiff in the lawsuits regarding
REITs. (Def.’s Mem. at 14-15.) Defendant
contends that the services performed by
6

undefined terms should be “read in light of
common speech and the reasonable
expectations of a business person.” St. Paul
Fire, 472 F.3d at 421; accord Belt Painting
Corp., 100 N.Y.2d at 383; see also Cont’l
Cas. Co. v. JBS Constr. Mgmt., Inc., No. 09Civ-6697, 2010 WL 2834898, at *5
(S.D.N.Y. Jul. 1, 2010) (defining
“construction manager” in an insurance
policy based on a “common-sense
understanding”). Thus, New York courts, as
well as federal courts applying New York
law, have not limited the scope of insurance
policy exclusions for “professional services”
to
situations
involving
traditional
“professions,” such as lawyers, doctors,
architects, and engineers. See, e.g.,
Westchester Fire Ins. Co. v. Metro. Life Ins.
Co., 280 A.D.2d 331, 332 (1st Dep’t 2001)
(applying professional services exclusion to
employees of a life insurance company);
Nat’l Union Fire Ins. Co of Pittsburgh, Pa.
v. Ambassador Grp., Inc., 157 A.D.2d 293,
298 (1st Dep’t 1990) (applying professional
services exclusion to insurance claim
handlers); see also Hollis Park Manor
Nursing Home v. Landmark Am. Ins. Co.,
803 F. Supp. 2d 205, 209 (E.D.N.Y. 2011)
(applying professional services exclusion to
employees of a nursing home).

lawsuits unambiguously falls within the
meaning of that term and, thus, that the
exclusion from coverage applies.
1. Analysis Under New York Law
“Professional services” is neither defined
by the policy nor by New York law. When
attempting to define a term, the “insurance
policy should be read in light of common
speech and the reasonable expectations of a
businessperson.” Parks & Real Estate
Purchasing Grp. v. St. Paul Fire & Marine
Ins. Co., 472 F.3d 33, 42 (2d Cir. 2006)
(quoting Pepsico, Inc. v. Winterthur Int’l
Am. Ins. Co., 13 A.D.3d 599, 600 (2d Dep’t
2004) (quoting Belt Painting Corp. v. TIG
Ins. Co., 100 N.Y.2d 377, 383 (2003)))
(internal quotation marks omitted).
In Reliance Insurance Co. v. National
Union Fire Insurance Co. of Pittsburgh, Pa.,
262 A.D.2d 64 (1st Dep’t 1999), the
Appellate Division stated that courts should
“[look] to the nature of the conduct under
scrutiny rather than the title or position of
those involved, as well as to the underlying
complaint . . . .” Id. at 65 (internal citation
omitted); see also Lumbermens Mut. Cas.
Co. v. Flow Int’l Co., 844 F. Supp. 2d 286,
302 (N.D.N.Y. 2012) (citing the Reliance
standard). Applying this standard in the
specific context of defining the term
“professional services,” courts have held
that the question of whether one is engaged
in a professional service depends on whether
those individuals “acted with the special
acumen and training of professionals when
they engaged in the acts . . . .” Gen. Ins. Co.
of Am. v. City of N.Y., No. 04-Civ-8946,
2005 WL 3535113, at *5 (S.D.N.Y. Dec. 23,
2005); see also Lumbermans, 844 F. Supp.
2d at 302 (citing the court’s test in General
Ins., 2005 WL 3535113, at *5). Such a
definition is consistent with the directive of
both the New York Court of Appeals and the
Second Circuit, noted above, that such

In the instant case, it is clear that the
only
reasonable
interpretation
of
“professional services” is that individuals
engaged in the due diligence and sale of
financial products are engaged in
professional services. According to the
underlying complaints, DLA was an
underwriter for Apple REITs. (Compl. Ex.
C, FINRA Compl., ¶ 43.) It was required to
conduct due diligence for these products,
including performing financial analysis and
meeting with Apple REIT management. (Id.
¶ 44.) DLA then recommended and sold
over $442 million of this security. (Id. ¶ 1.)
These actions, allegedly taken by DLA and
individuals within the company, fall
7

squarely
within
a
common-sense
understanding of “professional services.”

2. Analysis Under Other States’ Laws
Although obviously not binding, the
approach that courts in other states (with
legal standards on this issue analogous to
those of New York) have taken in defining
the professional services exclusion is
consistent with this Court’s conclusion,
under New York law, that the alleged
conduct by DLA in the underlying lawsuits
falls within the plain language of the
exclusion.

As noted above, the First Department, in
Westchester Fire, reached a similar
conclusion when it held that the professional
services exclusion barred coverage for
liability stemming from the sale of life
insurance. 280 A.D.2d at 332. If the sale of
life insurance is considered a professional
service, then surely the due diligence and
sale of investment products must also be
classified in the same manner. Similarly, in
Hollis Park, the court held that claims
arising from the alleged falsification of
patient records at a nursing home fell within
a professional services exclusion similar to
the one in the instant case. 803 F. Supp. 2d
at 206-09. In addition, in Ambassador
Group, the First Department held that the
professional services exclusion applied to an
alleged failure to properly handle an
insurance claim. 157 A.D.2d at 298.

For example, in Piper Jaffray Cos., Inc.
v. National Union Fire Insurance Co. of
Pittsburgh, Pa., 967 F. Supp. 1148 (D.
Minn. 1997), the court held that claims that
arose from the insured’s “alleged failure to
prudently manage the assets of its investor”
fell within the professional services
exclusion that barred coverage for such
claims. Id. at 1156. Specifically, the court,
under
Minnesota
law,
defined
a
“professional service” as “one calling for
specialized skill and knowledge in an
occupation” and the “skill required to
perform a professional service is
predominantly intellectual or mental rather
than physical.” Id. (quoting Ministers Life v.
St. Paul Fire & Marine Ins. Co., 483
N.W.2d 88, 91 (Minn. Ct. App. 1992))
(alteration and internal quotation marks
omitted). Applying that standard, the court
concluded that “[m]anaging investments
requires specialized skills and effort which
are almost exclusively intellectual” and,
therefore, claims relating to the insured’s
alleged mismanagement of investments were
excluded by the policy. Id.; see also
Reinhardt v. Certain Underwriters at
Lloyd’s, London, No. A06-949, 2007 WL
900731, at *5 (Minn. App. Mar. 27, 2007)

In sum, it is clear under New York law
that the allegations in the underlying
lawsuits against DLA – relating to its
purported failure to, inter alia, conduct due
diligence on the REITs in connection with
providing investment advice to its customers
in the sale of this financial product –
constitute “professional services” under the
common understanding of that term and,
thus, the exclusion from coverage under the
policy unambiguously applies here.4

4

Plaintiff argues that the contra proferentem rule
should apply, which states that “unresolvable
ambiguities in insurance contracts are construed in
favor of the insured.” Hugo Boss Fashions v. Fed.
Ins. Co., 252 F.3d 608, 615 (2d Cir. 2001). The Court
disagrees because that rule is not triggered “unless
this court first determines that the contract is, in fact,
ambiguous.” Id.at 616. Moreover, as the Second
Circuit has explained, the fact that a contract “does
not specify the meaning of a disputed term does not
entail that an ambiguity sufficient to trigger the
contra proferentem exists.” Id. at 617. Here, even

though the term “professional services” is undefined
in the policy, the Court concludes that its definition is
unambiguous as applied to the claims at issue in this
case. Thus, the contra proferentem rule has no
application under these circumstances.

8

DLA are “professional services.” To
perform due diligence on REITs and market
those securities, individuals are employed in
an occupation, they rely on specialized
knowledge or skill, and the skill is mental
rather than physical. There is simply no
question, based upon the allegations in the
underlying lawsuits, that the professional
services exclusion applies.

(holding that “professional services”
exclusion applied to services provided as a
trust manager and equity-investment
manager).
Similarly, in Aetna Casualty & Surety
Co. v. Dannenfeldt, 778 F. Supp. 484, 496
(D. Ariz. 1991), the court noted that “the
case law is in accord that, ‘[i]n determining
whether a particular act is of a professional
nature or a ‘professional service’ we must
not look to the title or character of the party
performing the act, but to the act itself.’”
(quoting Marx v. Hartford Accident &
Indem. Co., 183 Neb. 12, 14 (1968)). The
court further explained that, “[t]he act itself
is not viewed in isolation” and “[c]ourts
consistently consider the context of the
business or profession in which it is
performed.” Id. Applying this standard,
which is analogous to New York law, the
court held that the professional services
exclusion applied because “the bond sales
[at issue] were the final juncture in a chain
pursuant to which the bonds were
conceived, issued, and marketed to the
public” and “were an integral part in
marketing
sophisticated
investment
instruments in a savings and loan.” Id.; see
also MDL Capital Mgmt. v. Fed. Ins. Co.,
274 F. App’x 169, 173-74 (3d Cir. 2008)
(per curiam) (“Assuming the complaint
states that [the directors] failed in their
capacity as directors of MDL Capital to
oversee its activities with respect to the
Active Duration Fund, the allegation stems
from MDL Capital’s purported failure as
investment adviser and investment manager.
Consequently, the claim arises from the
providing of, or failure to provide,
professional services and D&O coverage is
not available pursuant to the ‘Professional
Services Exclusion – Complete.’”).

Plaintiff relies on the Second Circuit’s
opinion in Northfield Insurance Co. v.
Derma Clinic, 440 F.3d 86 (2d Cir. 2006) to
advance the proposition that the term
“professional services” is ambiguous and,
therefore, the policy must be construed in
favor of the insured. However, such reliance
is misplaced. In Northfield, three women
filed lawsuits against a massage therapy
company for physical and sexual assault,
and the insurance company refused to cover
the cost of defending those claims because
they argued that assault fell outside the
definition of the “professional services” for
which the defendants were covered. Id. at
88-89. The Second Circuit decided that they
could not adequately resolve the case
without guidance from the Supreme Court of
Connecticut. However, the Court did not
state that “professional services” is always
ambiguous, but that it was ambiguous
whether the training, monitoring, and
supervision of masseuses was covered by
the professional services clause in the policy
under the peculiar circumstances of that
case. Id. at 93-94. Northfield is inapplicable
here because the Second Circuit’s decision
in that case is limited to Connecticut law.
3. Ministerial Exception
Although not advanced in plaintiff’s
memorandum of law, some have argued
that, even if the professional services
exception does apply, that “purely
ministerial acts requiring no expertise fall
without the scope of professional services.”

As in Piper and Aetna, the actions
alleged in the underlying complaints by
FINRA and the private plaintiffs against
9

law. (Pl.’s Opp’n at 8-9); see Santiago v.
1370 Broadway Assocs., 264 A.D.2d 624,
624-25 (1st Dep’t 1999) (holding that, under
malpractice law, a “‘profession’ is an
occupation generally associated with longterm educational requirements leading to an
advanced degree, licensure evidencing
qualifications met prior to engaging in the
occupation, and control of the occupation by
adherence to standards of conduct, ethics
and malpractice liability” and that the field
has “traditionally been limited to such
‘learned professions’ as law, accountancy,
architecture, and engineering” (internal
citations omitted)).

Piper Jaffray, 967 F. Supp. at 1156.
According to the well-reasoned opinions of
some courts, an act is not a professional
service “merely because it is performed by a
professional”; “it must be necessary for the
professional to use his specialized
knowledge or training.” Potomac Ins. Co. of
Ill. v. Jayhawk Med. Acceptance Corp., 198
F.3d 548, 552 (5th Cir. 2000) (quoting
Atlantic Lloyd's Ins. Co. v. Susman Godfrey,
982 S.W.2d 472, 476-77 (Tex. App. 1998))
(internal quotation marks omitted). This
echoes the Reliance standard, which states
that courts should “[look] to the nature of
the conduct under scrutiny rather than the
title or position of those involved . . . .”
Reliance, 262 A.D.2d at 65.

This argument is unavailing. The New
York Court of Appeals has explicitly stated,
in a decision involving the statute of
limitations for malpractice actions, that
“[w]hile the term [professional] has myriad
applications in law – as, for example, in
insurance policy exclusions and peer
negligence standards – we underscore that
our definition is limited to the context
presented . . . .” Chase Scientific Research,
Inc. v. NIA Grp. Inc., 96 N.Y.2d 20, 28
(2001). In Aetna, the Court similarly stated
that any attempt to define professional
services by reference to professional
malpractice cases is “misplaced,” and that
professional services in insurance cases
“applie[s] to a far broader range of
activities” than under malpractice law. 778
F. Supp. at 495-96. Plaintiff has not cited
any cases where a court has used the
definition of professional in the malpractice
context to define professional services under
an insurance policy, and the Court declines
to do so in this case. Instead, the Court, as
instructed by New York courts, utilizes the
common understanding of the term.

If plaintiff attempted to argue that the
actions taken by DLA employees were
ministerial, this argument would fail because
performing a due diligence analysis and
marketing financial products requires
specialized knowledge and training, and is
not a rote activity performed by a
professional. Even if the actual sale of the
REITs required less training or knowledge
than the due diligence, that would not negate
the large degree of specialized training or
knowledge required in all of the other
actions performed by DLA. See, e.g., Aetna,
778 F. Supp. at 496-97 (holding that the sale
of bonds was a professional service because
even if the bond representatives were “illtrained, or untrained” they were “part of the
natural progression from conception of the
bonds to sale[]” and the sales “were an
integral part of marketing sophisticated
investment instruments”).
4. Definition of Professional in
Malpractice Lawsuits
Plaintiff’s main argument is that
financial advisors do not perform
professional services since they are not
classified as professionals under malpractice

5. Issue of Discovery
It is well-settled that “save where
extrinsic evidence is relevant, the
10

and conclusory allegations), this is not one
of those cases.

comparison of a complaint (allegedly
triggering a duty to defend) with an
insurance policy is ordinarily treated as a
matter of law.” Saint Consulting Grp., Inc.
v. Endurance Am. Specialty Ins. Co., 699
F.3d 544, 550 (1st Cir. 2012); see also
Cardinal v. Long Island Power Auth., 309 F.
Supp. 2d 376, 391 (E.D.N.Y. 2004) (“The
interpretation of an insurance policy is a
question of law to be decided by the
Court.”). In its opposition papers, plaintiff
made purely legal arguments as to why the
motion to dismiss should be denied –
namely, that the term “professional services”
is ambiguous and financial advisors and/or
underwriters, such as DLA, are not
considered “professionals” under existing
New York law. (See Pl.’s Opp’n at 1
(“Philadelphia
improperly
based
its
disclaimer of insurance coverage upon a
Professional Services Exclusion which is
ambiguous, undefined in the policy issued to
DLA and the terms of which are open to
differing
reasonable
interpretations.
Furthermore, Philadelphia also asserts that
DLA’s activities are subject to the
Professional Services Exclusion of the
policy even though DLA, as a brokerage
firm, is not deemed to be a ‘professional’
under New York law.”).) In its opposition
papers, plaintiff does not contend that there
are any factual disputes in connection with
these two legal issues. However, at oral
argument, plaintiff’s counsel suggested for
the first time that, rather than being a pure
legal issue as to whether the exclusion
applies based upon the allegations in the
complaint, there might be a need for some
factual
discovery
to
make
that
determination. For the reasons set forth
below, the Court disagrees. As noted above,
although there could be situations where the
application of a professional services
exclusion could not be decided on a motion
to dismiss (such as, for example, if the
underlying lawsuits contained only vague

As plaintiff conceded in its complaint,
one of the central components in the
underlying lawsuits is an alleged failure by
plaintiff to conduct due diligence with
respect to whether there was a reasonable
basis for plaintiff to recommend the security
to its customers. For example, in its
complaint, plaintiff notes:
The FINRA Complaint further
alleges that DLA, in its capacity as
best efforts underwriter and sole
distributor for all of the Apple REITs,
solicited numerous customers to
purchase Apple REIT Ten without
performing adequate due diligence to
determine that there is a reasonable
basis to recommend the security to
any customer.
***
The FINRA Complaint alleges that
DLA violated National Association
of Securities Dealers (“NASD”)
Rules 2310 and 2210(d)(1), and
FINRA Rules 2310(b) and 2010, by
failing to conduct adequate due
diligence, thereby leaving it without
a reasonable basis for recommending
its customers purchase Apple REIT
Ten, in addition to using misleading
statements
regarding
the
performance of earlier Apple REITs.
(Compl. ¶¶ 20, 22.) The FINRA Complaint
itself is replete with detailed allegations that
DLA, as the underwriter and sole distributor
of Apple REITs, failed to perform due
diligence required by
law
before
recommending and selling Apple REITs to
investors. In fact, the FINRA Complaint has
an entire section entitled “DLA’s
11

several courts, including those in some of
the cases cited supra, similarly found the
exclusion to apply at the motion to dismiss
stage. See, e.g., Rupracht v. Certain
Underwriters at Lloyd’s of London
Subscribing
to
Policy
No.
B0146LDUSA0701030, No. 11-CV-654,
2012 WL 4472158, at *5 (D. Nev. Sept. 25,
2012) (dismissing a complaint because the
plaintiff only alleged claims that were
excluded by the professional services
exception); Hawks v. Am. Escrow, LLC, No.
09-C-2225, 2012 WL 966059, at *4-5 (N.D.
Ill. Mar. 16, 2012) (granting motion to
dismiss because the “allegations asserted by
the plaintiffs are excluded from coverage
pursuant to the plain language of the
policy”); Piper Jaffray, 967 F. Supp. at
1156-1159 (although declining to dismiss
the claims under the professional services
exception because the underlying complaint
may have alleged a failure to supervise
claim, holding on a motion to dismiss that
the underlying actions are professional
services); Aetna, 778 F. Supp. at 495 (“At
issue is whether a bond sales representative
in a savings and loan new accounts
department or teller window performs a
professional service. It is a question of
law.”). Thus, the Court rejects plaintiff’s
belated assertion at oral argument that
discovery may be needed to determine
whether the exclusion in this case applies.

Insufficient Due Diligence” which contains
several paragraphs of how DLA failed to use
its professional expertise to conduct due
diligence. (Compl. Ex. C, FINRA Compl.,
¶¶ 41-44.) For example, in that section, the
FINRA Complaint states: “Through its
position as underwriter and sole distributor
of Apple REITs, DLA was uniquely
empowered and had the duty to conduct
thorough due diligence of Apple REIT Ten
prior to selling it to customers. For example,
pursuant to an agency agreement with each
of the Apple REITs, DLA can request
certain non-public information concerning
the ‘business and financial condition’ of the
Apple REITs. DLA has not sufficiently
availed itself of this opportunity.” (Id. ¶ 43.)
As noted supra, the other complaints against
DLA contain similar allegations.
Where the underlying complaints make
clear that DLA (as an underwriter and
distributor of a financial product) is being
sued due to its alleged failure to use its
special training and acumen to perform due
diligence, it is clear that the professional
services exclusion applies. No discovery is
necessary to ascertain what the underlying
complaints make apparent – namely, that
these lawsuits are about DLA’s alleged
failure to provide professional services in
the form of, among other things, due
diligence in connection with the sale of a
financial product. These alleged failures
unquestionably fall within the commonsense understanding of professional
services, and no amount of discovery will
change that determination based upon the
common understanding and meaning of the
term “professional services.” To hold
otherwise
would
subject
insurance
companies to costly and unnecessary
discovery with respect to the application of
an exclusion, even though the detailed
allegations in the underlying lawsuits make
clear that the exclusion applies. In fact,
12

III. CONCLUSION
For the foregoing reasons, the Court
grants defendant’s motion to dismiss. The
Clerk of the Court is directed to enter
judgment accordingly and close the case.
SO ORDERED.

______________________
JOSEPH F. BIANCO
United States District Judge
Dated: March 29, 2013
Central Islip, NY
***
Philadelphia is represented by Andrew T.
Houghton and Jeffrey Dillon, Sedgwick
LLP, 125 Broad Street, 39th Floor, New
York, NY 10004. DLA is represented by
Darren P. Renner and Stephen J. Romano,
Keidel, Weldon & Cunningham, LLP, 925
Westchester Avenue, Suite 400, White
Plains, NY 10604.

13