Insurers Attempt to Avoid Coverage (Mis)using the Professional Services Endorsement

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The marathon is over. After seemingly endless negotiations with the other side, you’ve reached an agreement and you’re ready to start construction. This isn’t your first project, and you know that, despite the parties’ best intentions, there is a real chance of claims relating to defective construction, and you’re particularly pleased that you were able to negotiate favorable insurance provisions to provide protection in case of a loss. But, can you rest easy? You shouldn’t – at least until you’ve confirmed that you’re getting the insurance coverage you’ve bargained for. 

As anyone who has attempted to read an insurance policy knows, what insurers give with one hand, they attempt to take away with the other. Coverage can evaporate by way of any number of exclusions often attached by the insurer. One exclusion in particular has worked significant mischief.

Commercial General Liability policies issued to contractors almost always contain an exclusion barring coverage for bodily injury or property damage arising out of the insured’s rendering or failure to render professional services. Intended to exclude from the commercial general liability policy losses that would be covered by an architect’s or engineer’s errors and omission policy, insurers  at times attempt to misuse this exclusion.

In the extreme, insurers have argued that the exclusion bars general liability coverage for any business activity conducted by a named insured who is engaged in the practice of professional services. Although this view has been almost uniformly rejected, there remain a number of more nuanced arguments that can defeat coverage. 

Most commonly, insurers argue that they are not required to provide coverage for damages because they were caused by a contractor’s performance of “professional services.” Because the term “Professional Services” is often not defined in insurance policies,  courts have adopted widely varying definitions of the term. For instance, courts in California have broadly defined the term to include services “arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill is predominantly mental or intellectual, rather than physical or manual.” What this definition lacks in brevity, it makes up for in breadth. Any number of contractor-provided services could fit within this definition. Indeed, insurers have successfully argued that coverage is precluded under a commercial general liability policy because the services provided by a contractor fall within the scope of the professional services exclusion.

This exclusion is even more troubling for design-build or EPC projects on which the contractor provides both construction and design services. Design services fall squarely within even the narrowest definition of the term “professional services,” and the difficulty in determining whether damages were caused by the contractor’s design or construction services can provide significant fodder for an insurer’s arguments that the damages are excluded by the professional services exclusion.

Fortunately, there’s a fairly straightforward solution to this problem. Most of the cases in which the professional services exclusion has worked its mischief involve a particular endorsement:  CG 22 43 (Exclusion – Engineers, Architects or Surveyors Professional Liability). Contractors (or owners) engaged in construction operations should make sure they do not have this endorsement in their policy, and  should use one of two endorsements specifically designed for use in connection with contractors’ liability insurance policies:  CG 22 79 (Exclusion – Contractors – Professional Liability) or CG 22 80 (Limited Exclusion – Contractors – Professional Liability). 

The former specifically excludes from the professional services exclusion – and thus includes within the scope of the liability policy – “services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor.” In other words, this endorsement eliminates any uncertainty where damages arise out of the means or methods of construction.

The latter excludes from the professional services exclusion – and thus includes within the scope of the liability policy – the named insured’s construction work, including construction work done on behalf of the named insured. Intended to be used by design-builders, this endorsement is not intended to exclude design work done as part of the named insured’s construction work. Instead, it is only intended to exclude coverage if the named insured is providing professional services in connection with construction performed by others. 

What’s the moral of the story? Make sure that the policies you’re bargaining for contain the appropriate provisions. Contracting parties should either require the use of specific endorsements appropriate to the work contemplated by the contract or, at minimum, confirm in advance that the appropriate endorsement has been secured.

Originally published as “OP-ED: Watch for insurers misusing professional services endorsement” by the Daily Journal of Commerce on September 15, 2017.

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