The doctrine of concurrent causation can apply in many different insurance coverage scenarios. The doctrine provides that if two causes – one covered by an insurance policy and the other excluded by the policy – both contribute to a loss, then coverage should be afforded under the policy. The doctrine would seem to expand coverage in scenarios where a potential exclusion might otherwise preclude it. Seems simple, right? Not always. Take for example the following APL case where the court found the concurrent causation doctrine did not apply and coverage was denied.
Financial Strategy Group, PLC v. Continental Casualty Company, arose out of Financial Strategy Group’s (FSG) preparation of tax returns for clients A and B. Clients A and B engaged in a strategy to buy and sell distressed debt in a multi-step process that would reduce their tax bills, and they each formed LLCs for this purpose. FSG then prepared the tax returns for the LLCs to hold the distressed debt. The preparation of the tax returns was the final step in implementing the tax shelters, which were determined to be illegal by the IRS. Clients A and B then sued FSG for malpractice and fraud alleging that FSG had “conspired with other financial, tax and legal advisors to develop, promote, sell and implement” illegal tax shelters.
After receiving notice of the claims, FSG notified its professional liability insurer. Insurer denied the claims based on an exclusion in the policy that did not cover claims “based on, arising out of or in connection with the design, recommendation, referral, sale or promotion” of illegal tax shelters. FSG then sued Insurer for breach of the policy agreement and the case was dismissed for failure to state a claim.
On appeal, FSG argued that the doctrine of concurrent causation required coverage under the policy because the clients asserted they were injured by two distinct causes: 1) the design, recommendation or sale of illegal tax shelters; and 2) the preparation of tax returns. FSG contended that it did not design, recommend, or sell illegal tax shelters because it only prepared the tax returns for the LLC’s after the shelters were designed, marketed or sold. Therefore, the wrongful conduct, if any, was in the preparation of the tax returns which was specifically covered by the policy.
The Sixth Circuit Court of Appeals disagreed. The Court focused on the term “recommendation” contained in the policy exclusion. By advising the clients that their tax returns were “prepared in accordance with the applicable laws”, signing the client’s tax returns and instructing the clients to sign and file the returns, FSG’s conduct amounted to recommendation of illegal tax shelters. FSG advised the clients they could properly claim losses from the illegal tax shelters, which was not separate or distinct from the tax preparation, and as a result the concurrent causation doctrine did not apply.
The foregoing case is a good example of how the concurrent causation doctrine is not always clear cut and may not always result in coverage. Professionals should always be aware of any exclusions in their professional liability policy. Knowing how the services being provided may or may not fall within a policy exclusion can make the difference in whether coverage is afforded when a claim is filed.