Craig F. Stanovich
Austin & Stanovich Risk Managers, LLC
Article provided with permission of International Risk Management Institute, Inc.
In a case filed on March 13, 2014, the California Court of Appeal provided important commentary on the application of the professional services exclusion that is substantially the same (but not identical) to CG 22 43. In the California case, an engineering firm (NCE) designed and built a dam for a winery. Shortly after the dam was built, neighbors complained of excess sediment downstream and that the construction was causing erosion in the surrounding waterways. The state brought a complaint against the owner of the winery, who in turn cross-complained against NCE, alleging NCE’s failure to construct the dam in a good and professional manner. Specifically, NCE placed fill for construction of the dam, roadways, and the spillway, and the complaint alleged that the fill resulted in damage to downstream tributaries.
The Trial Court. After a rather astonishing handling of the claim, the insurer denied any duty to defend NCE under the business liability portion of a businessowners policy based in part on the professional liability exclusion. The trial judge granted a directed verdict for the insurer on the coverage matter, finding the project “to be complicated” and therefore to require “professional expertise.” On this basis, the judge concluded that all the work that was done, including the construction of the dam, was “professional work” to which the professional liability exclusion applied, ruling there was no conceivable basis for coverage and thus no duty to defend.
Insurer’s View. The position taken by the insurer at the trial and adopted by the trial judge was that a professional service is any task requiring skill performed for payment. The insurer’s view was the professional liability exclusion applied to any task requiring skill, including any manual work if such work was performed by a professional. According to the insurer, the professional liability exclusion applied to almost any purposeful activity done in furtherance of the insured’s business. In other words, the insurer asserted the most expansive view of the professional services exclusion imaginable: Because the named insured was a professional services company, no general liability coverage would apply to virtually any business activity conducted by the named insured.
Appeals Court. It may be an understatement to observe that the appeals court justices sharply disagreed with the trial court judge. The appeals court first remarked that many of the allegations were clearly outside of the professional services exclusion—including damages sought for negligence in construction of the dam.
The appeals court determined that NCE performed ordinary labor and construction work in connection with building the dam and was being sued for construction work. This construction work was not, according to the appeals court, within the policy definition of professional services. The policy defined professional service, and that definition did not include the terms “construction” or “labor.” North Cntys. Eng’g, Inc. v. State Farm Gen. Ins. Co., 2014 Cal. App. LEXIS 235 (Cal. App. 1st Dist. Mar. 13, 2014).
Appeals Court Ruling. The appeals court was influenced by the S.T. Hudson Engineers decision in New Jersey and took a similar position. The professional services exclusion also did not apply because the business liability policy provided products-completed operations for “your work.”
In the NCE case, one of the allegations was the failure to notify the dam owner of the need for permits and, thus, the “failure to provide warnings or instructions.” The appeals court found that this allegation fell within the products-completed operations hazard and was covered by the CGL policy. The California Court of Appeal reversed the trial court’s rulings and determined the insurer did have a duty to defend.
Because of the potential for an overly expansive application of the professional services exclusion, the endorsement CG 22 43 is no longer intended by ISO to be used with contractors engaged in construction operations. In 1996, ISO introduced two additional professional services exclusions—CG 22 79 and CG 22 80.
The first exclusion—CG 22 79—”Exclusion—Contractors—Professional Liability” is almost verbatim to CG 22 43 but with one significant difference. Professional services does not include (and therefore the exclusion does not apply) to “services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor.” Thus, allegations of faulty construction should not be excluded, to the extent the operations involve construction “means and methods.”
The second exclusion—CG 22 80—”Limited Exclusion—Contractors—Professional Liability” is also almost verbatim to CG 22 43, but the exception to this exclusion is very significant—the professional services exclusion does not apply to the named insured’s construction work, including construction work done on behalf of the named insured.
CG 22 80 is intended for design-build contractors; the CGL policy excludes coverageonly if the named insured is providing professional services in connection with construction not performed by or on behalf of the named insured. Design work done as part of the named insured’s construction work, including construction work done on behalf of the named insured, is not excluded by this endorsement.
The ruling in NCE has caused at least one legal commentator to observe that any of the professional liability exclusions apply only if the bodily injury, property damage, or personal or advertising injury takes place during the performance of the services—if the allegations are that the bodily injury, property damage, or personal or advertising injury took place after the service was completed, the professional services exclusions should never apply. In other words, the professional services exclusions and products-completed operations coverage are mutually exclusive.
1The engineering firm had purchased professional liability insurance, but the policy excluded claims arising out of completed operations.
From Expert IRMI commentary April 17, 2014
Craig F. Stanovich, CPCU, CIC, CRM, AU, is cofounder and principal of Austin & Stanovich Risk Managers LLC, a risk management and insurance advisory consulting firm specializing in all aspects of commercial insurance and risk management, providing risk management and insurance solutions, not insurance sales. Services include fee-based “rent-a-risk manager” outsourcing, expert witness and litigation support, and technical/educational support to insurance companies, agents, and brokers. E-mail at firstname.lastname@example.org.
Craig F. Stanovich
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