Professional Services Exclusion Bars Coverage Where Ordinary Negligence is Inseparably Intertwined With Professional Service

In Energy Ins. Mutual Ltd. v. Ace American Ins. Co. (No. A140656, filed 7/11/17, ord. Pub. 8/10/17), a California appeals court found that a professional services exclusion barred coverage for wrongful death and other claims blamed on pipeline inspectors’ failure to identify and properly mark a gas pipeline that was ruptured during construction of another pipeline, resulting in an explosion and fire.

In Energy Ins. Mutual, a pipeline owner hired two temporary construction inspectors through a staffing company. The inspectors had to ensure compliance with engineering and safety standards, practices and procedures for pipeline construction, and understand construction drawings and blueprints. They worked together with one of the owner’s employees to perform daily surveillance to ensure the integrity of the pipeline and avoid third party damage.

An excavator operated by a subcontractor punctured a high-pressure petroleum line releasing gasoline into the pipe trench that was ignited by another contractor’s welding. The resulting explosion and fire killed five employees, seriously injured four others and caused extensive property damage. A Cal/OSHA investigation concluded that failure to properly mark the petroleum pipeline was the primary cause. Wrongful death and other lawsuits followed.

The settlements reached into the owner’s excess insurance, with a second layer excess insurer paying out $30 million of its $100 million limit that was excess to $35 million in first layer excess coverage. The second layer excess insurer then sued the excess/umbrella insurer for the temporary staffing company, seeking reimbursement of that insurer’s $25 million in coverage on a theory that the owner was an additional insured of that insurer, and that the umbrella carrier was first layer excess for the owner, which therefore should have paid ahead of the second layer insurer.

The staffing company’s umbrella insurer argued among other things that its professional services exclusion barred coverage, and the trial court granted summary judgment on that ground.

On appeal, the owner’s insurer argued that application of the professional services exclusion rendered the umbrella carrier’s insurance illusory, but the appeals court disagreed. While noting that “professional services” is broader than “profession,” and encompasses services performed for remuneration, the court said that “it is the type of activity, rather than actual compensation, that controls whether the professional services exclusion applies.”

The Energy Ins. Mutual court distinguished North Counties Engineering, Inc. v. State Farm General Ins. Co. (2014) 224 Cal.App.4th 902, saying that in North Counties there was evidence that the insured also performed some ordinary labor and construction work in addition to the professional engineering services, while also pointing out that North Counties had involved a narrower definition of professional services. Plus, the loss in North Counties had occurred after the work had been completed, not during the insured’s actual operations.

The Energy Ins. Mutual court also distinguished Food Pro Internat., Inc. v. Farmers Ins. Exchange (2008) 169 Cal.App.4th 976 and Tradewinds Escrow, Inc. v. Truck Ins. Exchange (2002) 97 Cal.App.4th 704, as not involving sufficient causal connection between the injury and the provision of professional services, saying that by contrast, the allegations of the complaint before it were “inseparably intertwined” with excluded conduct. The court cited Uhrich v. State Farm Fire & Casualty Co. (2003) 109 Cal.App.4th 598, Medill v. Westport Ins. Corp. (2006) 143 Cal.App.4th 819 and Southgate Recreation & Park Dist. v. California Assn. for Park & Recreation Ins. (2003) 106 Cal.App.4th 29, saying that:

“[H]ere, the claims of ‘ordinary, common law negligence’ and the so-called ‘other actionable claims’ … are ‘inseparably intertwined’ with the non-covered conduct…. [A]lthough the underlying cases also allege ordinary negligent acts and other causes of action, the gravamen of the actions is that Comforce and Kinder Morgan failed to mark the pipeline, the very thing they were required to perform at the site. It is Comforce’s and Kinder Morgan’s 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 umbrella policy.”

The Energy Ins. Mutual court went on to reject an argument that the presence of a “separation of insureds” provision somehow changed the analysis, saying that both the staffing company and the owner had been sued for the employees’ failure to properly mark the pipeline, and the nature of the basic occurrence supporting liability was the same for both the named and additional insureds.

Finally, the Energy Ins. Mutual court disagreed that application of the professional services exclusion rendered coverage illusory, pointing out that the umbrella policy was a general liability form, not a professional errors and omissions policy. Therefore, “the professional liability exclusion did not withdraw virtually all of the coverage extended by the insuring agreement that defined [the] liability coverage.”

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August 11, 2017