Insurance Coverage – Analysis of Professional Liability Exclusion
Source: http://www.jdsupra.com, September 28, 2017
Energy Insurance Mutual Limited v. ACE American Insurance Company
Court of Appeal, First District (July 11, 2017)
This case involves an insurance coverage dispute arising from an explosion that occurred when an excavator struck an unmarked petroleum pipeline.
Kinder Morgan, Inc. owns and operates oil and gas pipelines. Comforce Corporation is a staffing company that supplied two temporary employees to work as construction inspectors for Kinder Morgan. Kinder Morgan selected and trained the inspectors.
On November 9, 2004, an excavator punctured a high-pressured petroleum line owned by Kinder Morgan. An explosion occurred and killed five individuals and injured four others. Cal/OSHA conducted an investigation and concluded the primary cause of the accident was a failure to properly mark the petroleum pipeline. Cal/OSHA issued two “serious willful” citations to Kinder Morgan due to its employee’s failure to mark the location of the pipeline prior to excavation. Numerous wrongful death and personal injury lawsuits were filed against Kinder Morgan and Comforce, alleging that the explosion was caused by the parties’ negligence in failing to mark the location of the Kinder Morgan pipeline, and failing to properly supervise contractors.
After the lawsuits against Kinder Morgan settled, the excess insurer for the pipeline (Energy Insurance Mutual Limited (“EIM”)) sought to recover defense costs and settlement payments from Comforce’s insurer, ACE American Insurance Company (“ACE”). Comforce’s excess insurance policy excluded damages arising from “services of a professional nature.” The trial court found the claims in the underlying litigation fell within the scope of the professional services exclusion, which the court found was set forth in “clear” policy language. The Court of Appeal affirmed summary judgment in favor of ACE, finding Comforce’s policy excluded the claims in the underlying claims.
The Court of Appeal noted that, despite having special features, insurance contracts are still contracts to which ordinary rules of contractual interpretation apply. They should be interpreted as a layperson would, in their ordinary and popular sense.
Here, the ACE professional services exclusion is contained in a section entitled “Professional Liability Exclusion,” which states that it “modifies insurance provided” under the commercial umbrella liability policy. Specifically, the exclusion states: “this insurance does not apply to any liability arising out of the providing or failing to provide any services of a professional nature.” The policy does not define professional liability or “services of a professional nature.”
California Courts have defined “professional services” as those arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill. EIM argued the professional exclusion in ACE’s policy is “ill-defined” and should not be enforced. The Court explained the activities involved in owning and operating a pipeline are analogous to other skilled services that have been determined to be “professional services.” The Court noted that inspectors must have specialized knowledge of the facets of pipeline construction, and the tasks assigned to the inspectors reflected the professional nature of the services they were expected to perform. The failure to mark the pipeline clearly fell within the scope of the professional services exclusion.
The underlying lawsuits included claims for personal injury and wrongful death actions. The Court stated that, though these claims may not directly arise out of Comforce’s and Kinder Morgan’s provision of or failure to provide professional services, where allegations in a complaint are “inseparably intertwined” with non-covered conduct, there is no coverage even where the nature of a particular claim appears to be covered. It is the nature of the conduct that governs whether an exclusion applies. Here, it was Comforce’s and Kinder Morgan’s failure to render professional services that comprised the basis of the underlying lawsuits, so the exclusion applies.
EIM also argued that, because the general liability policy included a “separation of insureds” provision, the application of the exclusion policy must be analyzed separately with respect to the named insured, Comforce, and to the additional insured, Kinder Morgan. The Court found evidence that Comforce and Kinder Morgan were tasked with providing professional services in connection with the pipeline. They both failed to locate and mark the pipeline. Further, Kinder Morgan trained and supervised the inspectors it hired through Comforce. OSHA also cited Kinder Morgan for “serious willful” violations of the California Code of Regulations as a result of the failure of its employees to locate and mark the underground pipeline. The main cause of the explosion and the injuries was the failure to mark the pipeline, and that cause was excluded from coverage. So, Kinder Morgan could not obtain coverage.
Finally, EIM asserted that by failing to narrowly interpret the professional services exclusion, the trial court’s broad interpretation withdrew so much of the basic coverage of the policy that it rendered the policy illusory. The Court of Appeal stated the policy was not an errors and omissions policy that insured against professional malpractice. Rather, Comforce’s policy was a business liability policy. It provided coverage for accidental occurrences involving ordinary negligence, and not coverage for professional negligence. The Court concluded, since the professional liability exclusion did not withdraw all of the coverage extended by Comforce’s business liability coverage, the exclusion must be applied.
This case provides an analysis of when the professional liability exclusion in a business liability policy will exclude coverage when services of a professional nature are performed. The decision contains a sound analysis of the exclusion.
For a copy of the complete decision, see: Energy Ins. v. Ace American Ins.