The Professional Services Exclusion: You May Not Have the Coverage You ThinkCould you be providing “professional services” that might lead to liability excluded by your commercial general liability policy? The answer may be different than you think.

A recent unpublished Eleventh Circuit opinion provides a reminder that it is important to review your CGL policy and understand whether you are covered. The facts upon which the court relied in Witkin Design Group, Inc. v. Travelers Property Casualty Co. of America appear simple enough. An intersection traffic accident resulted in the death of a young boy. The resulting lawsuit included a negligence claim against the landscape architect who designed and constructed the intersection. The landscape company called on its CGL insurer to defend and indemnify it from the claim. You can imagine the company doing so with the thought that a liability claim had been brought and its general liability policy would provide coverage for that claim.

Like most CGL policies, however, this CGL policy contained a professional services exclusion that excluded coverage for claims “arising out of the rendering of or failure to render any ‘professional service’.” Professional services were defined by the policy as “any service requiring specialized skill or training.” The CGL policy said that professional services included:

a. Preparation, approval, provision of or failure to prepare, approve, or provide any map, shop drawing, opinion, report, survey, field order, change order, design, drawing, specification, recommendation, warning, permit application, payment request, manual or inspection;

b. Supervision, inspection, quality control, architectural, engineering or surveying activity or service, job site safety, construction contracting, construction administration, construction management, computer consulting or design, software development or programming service, or a selection of a contractor or subcontractor; or

c. Monitoring, testing, or sampling service necessary to perform any of the services included in a. or b. above.

But, these are merely non-exhaustive examples. The Eleventh Circuit was clear: “the professional service exclusion applies to any service requiring specialized skill or training.” Because the claim for which the landscape company sought coverage arose out of its design and construction of the intersection, which required specialized skill or training, the court found the professional liability exclusion applied, resulting in no coverage under the CGL policy.

The Eleventh Circuit’s opinion is not ground-breaking. Whether an insured’s conduct constitutes excluded “professional services” is a frequently litigated coverage question, which turns on policy language, the insured’s specific conduct, and applicable state law’s definition of professional services. Other recent examples of cases in which courts have found no coverage because of professional services exclusions include a claim against a home inspector alleging failure to discover insect and water damage; a claim against a real estate broker who failed to disclose an adverse property condition; a claim against a property manager for failing to properly supervise construction; and a claim against an insurance company for misrepresenting insurance policies.

Simply because a professional services claim is excluded by the CGL policy, however, does not always mean that the insured is left holding the bag without insurance coverage. Many companies purchase professional liability policies, which are errors and omissions policies intended to provide coverage for claims arising from the specific professional services in which the insured is engaged. It is critical to understand, however, that these policies may define “professional services” differently than the insured’s CGL policy, and care should be taken to ensure that your professional liability policy covers what your CGL policy may exclude.

So, while the Eleventh Circuit’s recent decision is not ground-breaking, it does provide a useful reminder to think about whether you have the liability coverage that you think you have.  We suggest that you consider the following questions, and discuss them with your broker or attorney if necessary:

  • Does my CGL policy have a “professional services” exclusion?
  • Am I engaged in conduct that could expose me to liability claims and that could be construed as a “professional service” as defined and excluded by the policy?
  • Do I need to purchase a professional liability policy to protect from those claims, and does that professional liability policy cover what the CGL policy excludes?

It is better to know the answers to these questions now, rather than find out after a claim has been filed that you don’t have the coverage you thought. After all, It Pays to be Covered.™

erosionA recent Fifth Circuit case highlights the potential risks of purchasing a defense-within-limits policy: If an insurer is obligated to hire independent counsel due to a conflict of interest, that counsel’s fees may erode your policy limits.

When an insurer accepts coverage of a liability claim, the insurer typically has the right to choose counsel to defend the policyholder as well as to control the defense. When an insurer defends under a reservation of rights, however, a conflict of interest arises between insurer and policyholder. Many states obligate the insurer in this situation to pay for independent defense counsel selected by the policyholder to obviate the conflict. For example, in Mississippi, a policyholder’s right to independent counsel paid by the insurer is known as the “Moeller” rule.

The Fifth Circuit recently decided just how far the rule extends. In Federal Insurance Co. v. Singing River Health Systems, the insurer agreed to defend a public hospital system, Singing River Health System (SRHS), and various officers, under a reservation of rights in multiple lawsuits stemming from alleged underfunding of a pension plan. The policy and policy application clearly stated that defense costs would erode the limits of liability. SRHS nevertheless argued that defense costs paid under Moeller should not erode the policy limits.

The policy defined covered “loss” to include defense costs that SRHS was “legally obligated to pay.” Because the insurer, not SHRS, is “legally obligated to pay” for Moeller counsel, SRHS reasoned that such costs should fall outside the limits. The federal district court agreed, holding that at a minimum, the phrase “legally obligated to pay” was ambiguous and should be construed in favor of SRHS.

During oral argument before the Fifth Circuit, the insurer reported that it had expended over $3 million in defense costs on a policy with $1 million limits.

The panel held that the district court’s ruling pushed the Moeller rule too far. The court cited a more recent Mississippi Supreme Court decision holding that the policyholder must meet the policy’s deductible requirement before the insurer’s Moeller obligation is triggered. The Fifth Circuit held that the insurer’s duty to pay for independent defense counsel is similarly subject to the terms of the policy, including the policy limits. The court also rejected SRHS’s public policy arguments against enforcement of the defense‑within-limits provision.

At oral argument, one of the judges quipped that perhaps SRHS underfunded its insurance coverage. While not apropos from a legal perspective, as a practical matter it is a valid point. SRHS had the option to purchase a separate limit of liability for defense costs and chose not to do so. However, even if there had been a separate limit, defense costs were triple the policy limit with the underlying litigation still ongoing. Failure to realistically assess risks and secure sufficient insurance coverage for those risks can be the ultimate peril.