Professional Liability Exclusion Case
Where a construction excavator struck an unmarked petroleum pipeline causing a massive explosion and rupture, the commercial general liability (CGL) excess insurance carrier of the pipeline owner, Kinder Morgan, settled claims against the owner and then make an equitable subrogation claim demanding recovery of defense costs and settlement amounts from the CGL carrier of a staffing agency company that provided personnel to work on the pipeline.
The court agreed that the staffing agency’s CGL carrier could refuse that demand on the basis that the personnel in question were hired as construction inspectors and provided a professional service in “marking” or failing to mark the pipeline, and the claim against them was a “professional liability” claim subject to the professional liability exclusion of the CGL policy. Energy Insurance Mutual Limited v. ACE American Insurance Company, 221 Cal. Rptr. 711 (2017).
The job description of the personnel was to “to ensure compliance with engineering specifications, safety standards, and industry codes.” They were also required “to have knowledge of the practices, principles, procedures, regulations and techniques as they related to terminal pipeline construction, and to “have the ability to understand and interpret construction drawings, maps, and blueprints.”
The exclusion in the policy in question provided, “This insurance does not apply to any liability arising out of the providing, or failing to provide, any services of a professional nature.”
Analysis
In analyzing the case, the court explained that “CGL policies are limited to providing coverage for accidental occurrences, and do not provide coverage for professional negligence claims.” The issue in this case was whether the services and work provided by the staffing personnel constituted professional services and professional liability within the meaning of the exclusion.
The court found that the “tasks assigned to the inspectors and line riders reflect the professional nature of the services they were expected to render.” The underlying personal injury and wrongful death claims alleged that they “arose from the failure to properly locate and mark the underground pipelines.” This, said the court, “unquestionably involves more than the mere presence of the inspectors on the site.”
The excess carrier argued, however, that the professional services exclusion didn’t apply because the underlying lawsuits alleged ‘”ordinary, common law negligence’ and “other actionable conduct,” such as trespass and nuisance. The court found this argument to be of no avail because the potentially covered claims were “inseparably intertwined” with the non-covered conduct.
“Ultimately, it is the nature of the conduct, not the source of law, that governs whether an exclusion applies. Thus, although the underlying cases also alleged ordinary negligent acts and other causes of action, the gravamen of the actions is that [staffing agency] and Kinder Morgan failed to mark the pipeline, the very thing they were required to perform at the site. It is [their] failure to render professional services that comprises the basis of the underlying lawsuits. Accordingly, the basic occurrence that caused the injuries (failure to mark, the pipeline) was excluded from coverage by the CGL umbrellas policy.”
The court concluded its analysis of this issue by stating, “The professional services exclusion simply reconfirms that the policy was not intended to cover the insured’s mistakes in how it provided promised services to others…. In this instance, this is even more clear as Kinder Morgan [like the staffing agency] could have purchased errors and omissions coverage but declined to do so.”
Comment on Professional Liability Exclusion Case
This decision once again addresses the distinction between claims for general liability and professional liability, and demonstrates the importance of project owners and contractors that have professional liability exposure purchasing appropriate professional liability policies to cover their potential professional acts, errors and omissions. Owners may obtain such coverage through policies such as the Owner’s Protective Professional Indemnity (OPPI) liability policies that are readily available from multiple carriers. Contractors can likewise readily avail themselves of similar coverage through polices such as Contractors Protective Professional Indemnity (CPPI) insurance. The effective rates for owners and contractors to purchase such insurance are generally less than what design professionals must pay for their own coverage.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 20, No. 1 (Jan 2018). Copyright 2018, ConstructionRisk, LLC