Practice Fusion, Inc. - Software Developer Denied D&O Coverage for ~$118 Million Settlement

Background
Practice Fusion licensed free electronic health-records software (EHR) and provided “clinical decision support” (CDS) alerts to doctors and health-care providers. Pharmaceutical companies paid Practice Fusion to sponsor or influence those alerts through its platform. In early 2020 the U.S. Department of Justice (DOJ) alleged violations of the Anti-Kickback Statute and the company settled for approximately $118 million. (Hunton Andrews Kurth)

Coverage Issue
Practice Fusion held a $50 million D&O (Directors & Officers) insurance tower. However, their insurers denied coverage on the basis of a professional services exclusion contained in the D&O policies. The policies excluded any “claim … alleging, arising out of, based upon or attributable to … performance of or failure to perform professional services for others.” (Hunton Andrews Kurth)

The appellate court affirmed the denial, finding the insured’s revenue-model (design and implementation of CDS alerts for pharmaceutical companies) involved professional services and thus the exclusion applied. (Policyholder Pulse)

Why the Standard Package Fell Short

• The D&O policy was designed for board/management exposure (mis-statements, governance, securities) yet the underlying loss stemmed from operational service-delivery (CDS alerts) which the insurer said was a “professional service”.

• Lack of separate Technology E&O or Professional Services Liability coverage meant there was no dedicated policy to pick up service-errors exclusions.

• The “arising out of” language in the exclusion was interpreted broadly by the court — even an indirect causal link was enough.

• The startup/tech nature of the business (software + service) caused a misalignment between the policy form and the actual exposure.

What a Custom Policy Would Have Changed

• A dedicated Tech E&O policy (or endorsement) covering software/model errors, bugs, service-failures, and performance claims.

• Explicit removal or narrowing of the “professional services” exclusion in the D&O policy (or carve-back) so that the D&O remained responsive for governance/management claims.

• Coordination of D&O + Tech E&O + Cyber (if relevant) so that service-delivery losses aren’t accidentally excluded via the wrong policy.

• Underwriting disclosure that the business model involved “software licensing plus alert-services” to ensure proper underwriting and targeted exclusions.

Key Take-away for Startups & Tech Firms

Even when you have a large D&O tower, if your business model includes software and service, you must read the exclusions and ensure proper E&O/Tech coverage is in place. Exclusions like “professional services” can nullify coverage unexpectedly.

NOTE: This case study is for informational purposes only. Execurisk was in no way involved in the brokering or advising of insurance in the case described above.