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CNA not liable under professional liability policy

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A CNA Financial Corp. unit is not obligated to provide coverage under an accountants professional liability insurance policy because the accountant was not engaged in professional services when he arranged for an unsuccessful investment, says a federal appeals court, in affirming a lower court ruling.

Glendale, Arizona-based Kool Radiators Inc. was approached in 2007 by Stephen Evans, a partner in Phoenix accounting firm HarnerEvans P.L.C., to invest in Carlsbad, California-based Aegis Jet L.L.C. prior to its planned acquisition of the assets of Scottsdale, Arizona-based Aero Jet Services L.L.C., according to court papers in Continental Casualty Co. v. Kool Radiators Inc.

In litigation first filed in 2009, Kool filed suit against Mr. Evans, his wife, HarnerEvans and Aegis Jet alleging that Mr. Evans had represented that Kool’s investment would be used for the Aero Jet purchase, but if the acquisition did not occur — which was the case — Kool’s $250,000 investment would be returned.

Kool charged that Mr. Evans failed to disclose a nonrefundable deposit agreement, and that Aegis was in default of the purchase agreement at the time it had agreed to make the investment.

HarnerEvans’ professional liability insurer, Continental, a unit of Chicago-based CNA, agreed to provide a defense to HarnerEvans and Mr. Evans, subject to a reservation of rights.

In 2013, a jury in Phoenix state court returned a verdict in Kool’s favor and against Mr. Evans and Aegis on counts of negligent misrepresentation, securities fraud and fraud. It apportioned liability equally between him and Aegis for the $250,000, according to court papers. The court later granted Kool’s request for $261,251 in attorney’s fees and for prejudgment interest. 

CNA denied coverage in the matter, and Kool filed suit against the insurer as a judgment creditor. The U.S. District Court in Phoenix ruled CNA was not obligated to provide coverage, and Kool appealed.

A three-judge panel of the 9th U.S. Circuit Court of Appeals In San Francisco unanimously affirmed the lower courts ruled. “To be covered by the Continental Casualty professional lability insurance policy, Evans’ conduct must have met the policy’s definition of ‘professional services,’” which is defined as either work performed for HarnerEvans’ remuneration, or approved pro bono work, said the ruling.

Neither is the case here, according to the ruling. “There is no evidence in the District Court record that the investment solicitation by Evans was for remuneration inuring to the benefit of HarnerEvans. Nor is there any evidence that the investment solicitation constituted pro bono work,” said the ruling.
 
It added Mr. Evans had paid himself $32,000 from the Aegis Jet bank account holding the Kool Radiators investment just one day after the firm made the investment.

“Soliciting an investment in a company in which Evans had a financial stake and then taking some of that money for himself, was not pro bono work,” said the ruling, in affirming the lower court ruling.