Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—D. Md.: D&O insurer must defend career colleges against false advertising, deceptive practices charges, (Aug 1, 2016)

By Pamela C. Maloney, J.D.

The Professional Services Exclusion (PSE) in a directors and officers liability policy did not extend to marketing and advertising of professional services and, therefore, the insurance company had a duty to defend two career colleges against false advertising and unfair and deceptive trade practices claims brought by the State of Florida and by former students (Education Affiliates Inc. v. Federal Insurance Co., July 28, 2016, Motz, J.).

Underlying action. Education Affiliates, Inc. and its wholly owned subsidiary, KIMC Investments, Inc., own and operate several post-secondary schools (career colleges), including some formerly known as MedVance Institute. After the U.S. Government Accountability Office issued a report targeting career colleges such as those owned by Education Affiliates and KIMC, the Florida Attorney General’s Office issued a subpoena to KIMC under Florida’s Deceptive and Unfair Trade Practices Act and subsequently served the company with a draft complaint alleging, among other counts, that the companies had marketed their services to prospective students through unfair, deceptive, and/or unconscionable acts and practices.

Several months later, two separate groups of former MedVance students filed complaints against the two companies alleging that the MedVance recruiters had made false statements regarding the quality of education and facilities, accreditation, the cost of education, job prospects, etc. The companies were successful in having the complaints dismissed and compelling arbitration.

The two companies then filed a lawsuit against Federal Insurance Company to compel a defense of these claims under the Directors & Officers Liability Coverage included in their "Forefront Portfolio" policy.

Professional services exclusion. The insurer had argued that it was not obligated to defend under the policy’s professional services exclusion which provided that no coverage would be available for any claim for actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty allegedly committed or attempted in connection with the rendering of, or alleged failure to render, any professional services for others. The court rejected this argument, explaining that the PSE applied only to the rendering of services for others. The alleged illegal marketing in which the two companies engaged was for their own benefit, not for the benefit of others. The fact that the marketing related to the professional services to be rendered by the career colleges could not be said "to conflate the two" because, in light of the fact that the companies’ core business was the rendering of educational services to others, such conflation would amount to an unlawful "evisceration" of coverage.

Coverage of work performed. The work performed by these companies in responding to the Florida Attorney General’s subpoena also was covered under the policy. The insurer had argued that the definition of claim for "insured organizations" differed from that for individual directors and officers in that only the latter referred to a subpoena. The court rejected that interpretation, concluding that the purpose of adding subpoena coverage to the latter was to provide protection for individual directors and officers who had subpoenas issued to an insured organization served on them.

The case is Civil No. 1:15-cv-01624-JFM.

Attorneys: John William Schryber (Reed Smith LLP) for Education Affiliates, Inc. and KIMC Investments Inc. Daniel James Standish (Wiley Rein LLP) for Federal Insurance Co.

Companies: Education Affiliates, Inc.; KIMC Investments Inc.; Federal Insurance Co.

Cases: Advertising StateUnfairTradePractices MarylandNews