Professional Services Exclusion Negates Coverage for Liability Arising Out of Insured’s Failure to Mark Oil Pipeline

Source: https://www.lexology.com, September 18, 2017
By: Jeffrey S. Crowe and Jennifer Hoffman, Sheppard Mullin Richter & Hampton LLP

Energy Insurance Mutual Limited v. Ace American Insurance Company, 14 Cal.App.5th 281 (2017); First Appellate District Court of Appeal, Division Four, Case No. A140656 (July 11, 2017). In Energy Insurance Mutual Limited v. Ace American Insurance Company, the California Court of Appeal held that a “professional services” exclusion applied to bar coverage for claims made against an oil pipeline owner, Kinder Morgan, and its temporary staffing agency, Comforce, following an explosion at a construction site. Kinder Morgan had hired two temporary employees from Comforce to work as construction inspectors on a water supply line project. As a result of Kinder Morgan’s alleged failure to properly mark the oil pipeline, an excavator punctured a high-pressured petroleum line and caused the explosion.

Numerous lawsuits were filed against Kinder Morgan and others seeking damages because of bodily injury and property damage resulting from the explosion. Several insurers, including Energy Insurance Mutual Limited (“EIM”), contributed towards the defense and settlement of those suits. EIM then sued Comforce’s commercial liability insurer, ACE American (“ACE”), seeking reimbursement of EIM’s defense costs and settlement payments. ACE’s policy contained a “Professional Liability Exclusion” stating: “This insurance does not apply to any liability arising out of the providing or failing to provide any services of a professional nature.” ACE argued that the exclusion applied to bar coverage for both Comforce and its additional insured, Kinder Morgan. The Court of Appeal agreed with ACE, concluding that California courts have interpreted both “professional services” and “arising out of” broadly, and that “the activities involved in owning and operating a pipeline, including mapping and marking underground installations are clearly analogous to other skilled services that have been held to be ‘professional services.’” It made no difference that the underlying lawsuits alleged ordinary negligence theories against Comforce and Kinder Morgan, because the “basic occurrence that caused the injuries (failure to mark the pipeline)” was a professional service excluded from coverage. The court also rejected EIM’s argument that applying the “professional services” exclusion against Kinder Morgan as an additional insured violated the “separation of insureds” provision under the ACE policy. The court recognized that, while an issue of first impression in California, “a few cases from other jurisdictions have concluded additional insureds were entitled to coverage where the named insureds provided professional services and the additional insureds did not provide any such services.” But here, the court reasoned, “the claims against Kinder Morgan arise from the same facts that preclude coverage vis-à-vis Comforce.” Finally, the court held that the professional services exclusion did not render coverage illusory because it did not “withdraw virtually all of the coverage extended by the insuring agreement.” The policy did not extend coverage for professional liability and then withdraw it through an exclusion: “Rather, Comforce’s policy was a business liability policy, which provided coverage for accidental occurrences involving ordinary negligence, not for professional negligence.”

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