No Coverage Where Negligence is Inseparable with Professional Service

No Coverage Where Negligence is Inseparable with Professional Service

In the recent matter of Energy Ins. Mutual Ltd. v. Ace American Ins. Co. (2017 WL 3476705), the First District Court of Appeals 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 injuries and damages.

Facts:

A pipeline owner, Kinder Morgan, hired two temporary construction inspectors through a staffing company, Comforce Corporation.  Kinder Morgan was insured by Energy Insurance Mutual Limited.  Comforce Corporation was insured by ACE American Insurance Company.

The inspectors from Comforce Corporation were 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 Kinder Morgan’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. Of course, wrongful death and other lawsuits followed.

Settlements reached into the Kinder Morgan’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 Comforce Corporation, seeking reimbursement of that insurer’s $25 million in coverage on a theory that the Kinder Morgan was an additional insured of that insurer, and that the umbrella carrier was first layer excess for Kinder Morgan, which therefore should have paid ahead of the second layer insurer.

The Comforce Corporation’s umbrella insurer, ACE American, argued among other things that its professional services exclusion barred coverage.  The trial court granted summary judgment on that basis and the ruling was appealed.

Rationale:

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

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

The Court of Appeals 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 was “inseparably intertwined” with excluded conduct.

The Court of Appeals 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, stating:

“[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 Court of Appeals rejected an argument that the presence of a “separation of insureds” provision somehow changed the analysis, explaining both the Comforce Corporation and Kinder Morgan 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.

The Court of Appeals also 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.”

Holding:

A professional services exclusion in an insurance policy will bar coverage where the negligence is inseparably with the insured’s professional services.

Keep Reading

More by this author