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Calif. court further expands reach of 'professional services' exclusion.

Byline: Steven A. Meyerowitz, Esq., Director, FC&S Legal

This story is reprinted with permission from FC&&S Legal, the industry's only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

An appellate court in California has issued a decision in a case stemming from a massive explosion at a pipeline owned by Kinder Morgan, Inc., that further expands the reach of the "professional services" exclusion in commercial general liability ("CGL") insurance policies.

5 deaths, extensive property damage

On November 9, 2004, an excavator operated by Mountain Cascade, Inc. ("MCI"), a contractor for East Bay Municipal Utility District ("EBMUD") at a project at Walnut Creek, California, punctured a high-pressured petroleum line owned by Kinder Morgan. Gasoline was released into the pipe trench and was ignited by the welding activities of Matamoros Pipelines, Inc., a subcontractor working for MCI. The resulting explosion and fire killed five employees and seriously injured four other employees. Extensive property damage also occurred.

Following the explosion, the California Division of Occupational Safety and Health, better known as Cal/OSHA, conducted an investigation and concluded that the primary cause of the accident had been the failure to properly mark the petroleum pipeline. Cal/OSHA determined that "[s]everal employers failed to take required action and committed errors that contributed to the failure to determine and mark the location of the utility line."

Failure of employees

Cal/OSHA issued two "serious willful" citations to Kinder Morgan due to the failure of its employees to mark the location of the petroleum pipeline prior to the excavation activities. Cal/OSHA also determined that Kinder Morgan "employees were aware that an unsafe condition existed and failed to assure that the utility was clearly marked which would have resulted in its relocation or other appropriate measures to safeguard employees."

Numerous wrongful death and personal injury lawsuits were filed against several defendants, including Kinder Morgan and Comforce Corporation, a staffing company that provided workers to Kinder Morgan entities. The underlying lawsuits largely alleged that the pipeline rupture had been caused by the negligence of the parties, including Kinder Morgan and Comforce, in failing to identify and mark the location of the Kinder Morgan pipeline, and by failing to properly supervise contractors who were working near the pipeline. Additional theories of liability were asserted against Kinder Morgan, including premises liability, nuisance, trespass, and strict liability for ultrahazardous activities.

Coverage for lawsuits

Kinder Morgan sought coverage for the lawsuits under insurance policies that it had obtained from Associated Electric & Gas Insurance Services Limited ("AEGIS") and from Energy Insurance Mutual Limited ("EIM") as well as under policies issued by ACE American Insurance Company to Comforce.

AEGIS and EIM participated in Kinder Morgan's defense of the actions. ACE agreed to participate in Kinder Morgan's defense under Comforce's primary CGL policy, but under a reservation of rights. ACE declined coverage under Comforce's umbrella policy, in part, on the grounds that the claims were excluded from coverage.

Each of the underlying lawsuits against Kinder Morgan was settled prior to trial. When the AEGIS policy limit was exhausted through payments of defense costs and settlements, EIM agreed to pay more than $30 million to reimburse Kinder Morgan for the settlements resolving the underlying lawsuits.

Murwood Elementary School students prepare to be evacuated by local authorities after an underground petroleum pipeline exploded near the school in Walnut Creek, Calif., Tuesday, Nov. 9, 2004. (AP Photo/Dino Vournas)

EIM filed suit against ACE, seeking full reimbursement of the payments it had made to Kinder Morgan under its excess policy, up to the full $25 million limit of Comforce's umbrella policy with ACE.

ACE moved for summary judgment, arguing among other things that the professional services exclusion categorically precluded coverage under the Comforce umbrella policy.

Trial court found claims fell within exclusion

The trial court granted ACE's motion, finding that the claims in the underlying litigation fell within the ambit of the professional services exclusion.

The dispute reached the California Court of Appeal.

The ACE Policy

The ACE policy's

Professional Liability Exclusion

stated:

This insurance does not apply to any liability arising out of the providing or failing to provide any services of a professional nature.

Policy didn't define 'professional services'

The appellate court affirmed, ruling that the policy's professional services exclusion precluded coverage.

In its decision, the appellate court observed that the policy did not define "professional liability" or "services of a professional nature."

It then noted that California courts have defined "professional services" as those "arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual." The appellate court said that it was a broader definition than "profession," adding that courts have applied the professional services exclusion "broadly to bar coverage for damages resulting from a wide range of professional services" that extended "beyond those traditionally considered Cyprofessions,' such as medicine, law, or engineering."

Related: Here are the top 10 most significant liability coverage cases of all time

Here, the appellate court continued, the activities involved in owning and operating a pipeline, including mapping and marking underground installations, were "clearly analogous to other skilled services that have been held to be Cyprofessional services.'"

Specialized knowledge

It reasoned that construction inspectors were required to have specialized knowledge in various facets of pipeline construction, including understanding and interpreting construction maps, drawings, and blueprints; ideal training would have included a minimum of 10 years of experience in petrochemicals, and/or a bachelor's degree in mechanical, civil, or electrical engineering. Similarly, line riders were required to have specialized knowledge in pipeline identification, including locating and marking lines; desired experience would have included knowledge of cathodic protection, piping, valves, and pressures.

The tasks assigned to construction inspectors and line riders reflected "the professional nature of the services they were expected to render," according to the court of appeal.

These expectations, the appellate court added, were further reflected in Kinder Morgan's statutory obligations as a pipeline owner, pursuant to which it was required to have a "qualified person" locate and mark the underground pipeline.

Failure to mark pipeline

The appellate court said that the essence of the underlying actions was that Comforce and Kinder Morgan had failed to mark the pipeline -- the very thing they were required to perform at the site. Accordingly, the basic occurrence that had caused the injuries (failure to mark the pipeline) was excluded from coverage by the umbrella policy, the appellate court concluded.

The case is Energy Ins. Mutual Limited v. Ace American Ins. Co., No. A140656 (Cal. Ct.App. July 11, 2017).

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.
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Publication:Property and Casualty 360
Article Type:Reprint
Geographic Code:1U9CA
Date:Jul 19, 2017
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