This does not suggest that all professional services are covered
by the unendorsed CGL policy. Coverage is not triggered unless the claim
against an insured is for damages because of bodily injury or property damage
(which must be caused by an occurrence) or the claim is for damages because
of personal and advertising injury.
For example, assume that, due to an architect's arithmetic error, the
control tower of an airport was built too close to the terminal—resulting in
inadequate site lines for the ground control staff. The cost to rectify this
error and move the control tower was not damages because of property damage
(the claim was not for physical injury to tangible property), and thus, the
architect's CGL did not provide coverage for this claim—regardless of
whether or not the CGL excluded professional services.
Contractor's Professional Liability Exclusions
While certainly there are numerous professional services exclusions that
can be added to the CGL by endorsement, ranging from blood banks to
pharmacists to law enforcement activities, the exclusionary endorsement that
has been the subject of the most substantial litigation has been the
exclusion of professional services on the CGL policy of a contractor.
Contractors Engaged in Construction Operations—Exclusion of Professional
Services
It is customary to find an exclusionary endorsement attached to a
contractor's CGL policy with one of the following titles and form
numbers:
- "Exclusion—Engineers, Architects or Surveyors Professional
Liability" (CG 22 43)
- "Exclusion—Contractors—Professional Liability" (CG 22
79)
- "Limited Exclusion—Contractors—Professional Liability" (CG 22
80)
All three exclusionary endorsements eliminate coverage for bodily injury,
property damage, and personal and advertising injury "arising out of the
rendering of or failure to render any professional services.…" While
each endorsement is materially different in the scope of the
coverage eliminated, it is fair to say these endorsements are generally
intended to remove coverage from the contractor's CGL policy for
engineering, architectural, or surveying services.
Exclusion—Engineers, Architects or Surveyors Professional Liability (CG
22 43)
Traditionally, insurers used only endorsement CG 22
43—"Exclusion—Engineers, Architects or Surveyors Professional
Liability." This endorsement defined professional services of engineers,
architects, or surveyors to include "the preparing, approving, or
failure to prepare or approve maps, shop drawings, opinions, reports,
surveys, field orders, change orders or drawings and specifications."
Further, the endorsement also defined excluded as professional services
"supervisory, inspection, architectural or engineering
activities."
This exclusion applied whether the named insured or an engineer,
architect, or surveyor engaged by the named insured performed the
professional services. In other words, if a contractor that performed
none of the services described in the endorsement engaged an
engineer, architect, or surveyor to perform any of the excluded services, the
contractor was not covered for any allegations that implicated those
services.
Illustration of the Application of CG 22 43
Assume a general contractor was engaged by the owner to build a house for
the property owner. The general contractor engaged an engineering firm to
survey and stake out the location of the home on the parcel. After completion
of the house, the building inspector would not grant an occupancy
permit—alleging the setback was less than the required 25 feet from the
property line. The home owner sued the general contractor. While there was
dispute over who actually staked out the home site—the general contractor or
the engineering firm—the trial court found that it did not matter—the
professional services exclusion applied irrespective of that fact.
The court noted that the general contractor "failed to supervise or
otherwise ensure the professional service of preparing an accurate
survey" and that the insurer had no duty to defend as the circumstances
fell within the professional liability exclusion. Western World Ins. Co. v. Azoff, 24 Mass. L. Rep. 450
(Mass. Super. Ct. 2008).
Professional versus Nonprofessional Services
A substantial amount of the litigation regarding the meaning of the
professional services exclusion centers on which activities are professional
services and which are not professional services—the result of which
greatly affects the scope of the professional services exclusion.
Illustration of a Typical Dispute—Professional versus Nonprofessional
Services
An engineering firm was engaged by a restaurant owner to monitor a pier on
which the restaurant was located. The engineer found that the pier was not
stable—the pier was actually moving. While the engineer did not believe the
pier was in imminent danger of collapse, the engineer did testify he informed
the owner of the restaurant on May 17 that the pier was going to collapse. On
May 18, the pier suffered a catastrophic collapse, resulting in three deaths,
numerous other injuries, and significant property damage.
The Complaint. The engineering firm was one of many
defendants named in a complaint that soon followed, which included
allegations that the engineering firm had a duty to warn the owner, public
authorities, and the restaurant patrons and had failed to provide the
requisite warnings. The engineering firm sent the claim to its CGL and
umbrella insurer.1
Denial of Coverage. The insurer denied coverage under the
engineering firm's CGL and umbrella policy, citing the terms of the
professional liability exclusion CG 22 43, contending the injuries and
property damage came "under the mantle of professional services because
the negligent conduct arose out of professional services rendered … and was
thus excluded under both policies."
The Ruling. Because exclusions are to be strictly
construed, the trial and appellate court found that the professional
liability exclusion did not apply. The court stated, "The excluded acts
in the CGL policy are the actual professional services, whereas the acts that
fall within the products-completed operations relate to giving information
i.e. warnings or instructions. Thus, we conclude liability … resulting from
the failure to warn or give instructions was not excluded by the professional
liability exclusion."
Completed Operations Coverage. In other words, the claims
against the engineer were found by the court to fall within the
products-completed operations hazard—bodily injury or property damage
occurring away from the engineering firm's premises and arising out of
"your work." "Your work" as defined in the CGL policy
expressly states the term includes the providing of or failing to provide
warnings or instructions.
Failure To Warn Is Not a Professional Service. But the
court went even further, finding that the professional liability services
exclusion would not have applied even in the absence of the
products-completed operations coverage. According to the court, the failure
to provide warnings did not emanate from the performance of or failure to
perform actual professional services. The court observed:
To be sure, allegations respecting a professional's failure to provide
adequate engineering, supervisory, inspection, or architectural services or
to discover or remedy a condition for which the professional services were
engaged would necessarily fall within the exclusion as dependent on the
professional services provided. However, allegations encompassing the
violation of a duty to provide information about a known danger resulting
from either a negligent omission or commission, whether based upon the
relationship of the parties or legal principle, are not dependent on the
rendering of professional services. Instead, such allegations arise from
the information actually possessed and not provided by a party obligated to
disclose such information.
Put another way, the engineering firm's failure to warn was not
considered the rendering of or failing to render professional service, and
the CGL and umbrella policies applied to the collapse loss. S.T. Hudson Eng'rs, Inc. v. Pennsylvania Nat'l Mut. Cas.
Co., 189 N.J. 647 (App. Div. 2007).
Another Ruling on the Professional Services Exclusion
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."
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. North Cntys. Eng'g, Inc. v. State Farm Gen. Ins. Co.,
2014 Cal. App. LEXIS 235 (Cal. App. 1st Dist. Mar. 13, 2014).
Conclusion
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
coverage only 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.
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.