Professional Services Exclusion and Applicability to CGL Coverage
The United States Court of Appeals, Fifth Circuit, took up an appeal centering on the question of the applicability of a professional services exclusion in an CGL policy. This case is Admiral Insurance Company v. Ford, 2010 WL 2026699 (C.A.5).
Ford purchased two insurance policies from Admiral Insurance Company. The CGL policy provided occurrence-based coverage with a $1 million limit per occurrence. The professional liability policy provided claims-made coverage for oil and gas consultant operations with a $50,000 limit per claim. Ford was hired by Exco Resources to create a drilling plan for an oil well and to consult and assist in the drilling of the well. During the drilling, the well had a blowout and Exco sued Ford. Ford's insurer paid the $50,000 professional liability limit but then filed a declaratory judgment action seeking a declaration that it owed no coverage to Ford under the CGL form because of a professional services exclusion. The trial court ruled in favor of Ford and found the professional services exclusion was illusory because it defined professional services as “all operations of the insured”. This appeal followed.
Admiral argued before the appeals court that the “all operations” language does not define professional services, but rather provides the scope of the exclusion. According to Admiral, the phrase meant that the parties intended the legal definition of professional services to exclude coverage for professional services in any of Ford's operations. Admiral wanted the court to apply the legal definition of professional services (as articulated by Texas courts) that would limit professional services to those that require the professional's specialized knowledge or training. In contrast, Ford argued that since the exclusion is so broadly worded, it defeats any coverage at all, and so, it is illusory and should be given no effect.
The court noted that, in this case, the provision is confusingly worded and a literal interpretation would imply that all operations are excluded as professional services; therefore, the court said that the literal interpretation is unreasonable. In the eyes of the appeals court, Admiral advanced the only reasonable interpretation of the exclusion: namely, the parties intended the legal definition of professional services to exclude coverage for professional services in any of Ford's operations.
Having determined that the professional services exclusion was operative, the court then turned to whether the exclusion defeats coverage. The parties in this case disagreed whether Exco's allegations against Ford meet the legal definition of professional services. Admiral argued that the underlying lawsuit was based only on Ford's failure to use specialized or technical knowledge in preparing and implementing the drill plan. Ford responded that some of the allegations were not based on specialized knowledge and so fall outside the professional services exclusion, thereby triggering Admiral's duty to defend.
The appeals court looked to Texas law and the facts of the incident. Texas law stated that professional services are acts particular to the individual's specialized vocation and it must be necessary for the professional to use his specialized knowledge or training. The facts of the incident showed that Ford was tasked with ensuring that the well did not blow out, and taking (or not taking) certain measures to ensure that the drill pipe did not fail under the particular drilling conditions required Ford's specialized knowledge and training. Thus, this was an act of professional services and the CGL form excluded coverage.
The judgment of the district court was reversed.
Editor' Note: The meaning of “professional services” is important because it influences borderline coverage and claims situations. Its meaning helps to determine whether a certain act or service is in keeping with the primary role of a professional and, therefore, rightfully with the scope of professional liability insurance. Conversely, it also helps to determine whether the act or service is akin to a premises and operations exposure and so, a subject for general liability insurance.
Since the definition of professional services is usually not found in clear and comprehensive terms in insurance policies, each situation has to be judged on its own merits and facts. It helps when the state has offered a legal definition (such as here in Texas ) and when the acts of the insured match those legal guidelines. Not all of a professional's actions are professional services, but when those acts require specialized knowledge and training, there is strong support for placing the acts in the professional services category.