Professional Services Exclusion

Insurer v. Insurer

It is seldom wise for one insurer to sue another over a coverage issue since the decision – whether successful or nor – can set a precedent that is not favorable to the plaintiff. This is the second post where the professional services exclusion came into play and, had it been read by the plaintiff, might have avoided the lawsuit in its entirety.

In Energy Insurance Mutual Limited V. Ace American Insurance
Company, A140656, Court of Appeal of the State of California First Appellate District Division Four (July 11, 2017) the unfavorable decision made clear the application of a “professional services” endorsement in California and cost the two litigating insurers a great deal of money in legal services that should probably have been resolved by a negotiated settlement between the insurers.


The insurance coverage dispute arose from a massive explosion that occurred when an unmarked petroleum pipeline was struck by an excavator. Numerous lawsuits were filed against a range of defendants, including the pipeline owner and the staffing agency providing personnel to the pipeline. After settling the lawsuits against the pipeline owner, an excess insurer for the pipeline sought to recover defense costs and settlement payments from the staffing agency’s insurer. The staffing agency’s excess insurance policy excluded damages arising from professional services.

Kinder Morgan, Inc., together with its affiliated companies (Kinder Morgan), owns and operates thousands of miles of oil and gas pipelines. Comforce Corporation (Comforce) is a staffing company that supplies businesses with temporary employees in a variety of contexts. Comforce has been providing employees to Kinder Morgan entities since the late 1980s. ACE American Insurance Company (ACE) insured Comforce under a primary commercial general liability (CGL) policy with a limit of $1 million per occurrence. ACE also issued Comforce a stand-alone “Commercial Umbrella Liability Policy” (the umbrella policy) with a $25 million limit per occurrence. The umbrella policy contained a professional services exclusion regarding claims arising out of the provision or failure to provide “services of a professional nature.”

In keeping with their long-standing business relationship, Kinder Morgan hired two temporary employees through Comforce to work as construction inspectors on a large water supply line project being constructed for the East Bay Municipal Utility District (EBMUD) in Walnut Creek. Kinder Morgan selected and trained the inspectors. Though not required, an ideal inspector would have had a minimum of 10 years of experience in petrochemicals and/or a bachelor’s degree in mechanical, civil, or electrical engineering.

On November 9, 2004, an excavator operated by Mountain Cascade, Inc. (MCI), EDMUD’s contractor at the Walnut Creek project, 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.

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 to install the water line. 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. The underlying lawsuits largely alleged that the pipeline rupture was 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.

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.


EIM commenced this action against ACE on March 16, 2011, seeking full reimbursement of the payments it made to Kinder Morgan under its excess policy, up to the full $25 million limit of Comforce’s umbrella policy with ACE.

The trial court granted ACE’s motion on the grounds that the claims in the underlying litigation fell within the ambit of the professional services exclusion, which the court found was set forth in “clear” policy language.


“Interpretation of an insurance policy is primarily a judicial function. When the trial court’s interpretation did not depend upon conflicting extrinsic evidence, the reviewing court makes its own independent determination of the policy’s meaning.” (Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 35-36 (Armstrong).) ” ‘ “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” Words in an insurance policy are to be interpreted as a layperson would interpret them, in their ordinary and popular sense. Whether policy language is ambiguous is a question of law.

EIM contends that the professional liability exclusion in ACE’s policy is “ill-defined” and should not be enforced. The policy exclusion is contained in an endorsement entitled “Professional Liability Exclusion,” which states that it “modifies insurance provided” under the commercial umbrella liability policy. The exclusion specifies: “This insurance does not apply to any liability arising out of the providing or failing to provide any services of a professional nature.” The policy does not further define professional liability or “services of a professional nature.”

Although California courts have defined “professional services” as those arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, EIM argues that application of the professional services exclusion has generally been limited to ear-piercers and plumbers who sought coverage outside of the general liability context.

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.”  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. The tasks assigned to construction inspectors and line riders reflect the professional nature of the services they were expected to render.

The failure to mark the pipeline squarely falls within the ambit of the professional services exclusion. Nevertheless, EIM asserts that the professional services exclusion does not apply.

Although exclusions are generally construed narrowly the underlying personal injury and wrongful death actions theoretically raise some claims that do not arise out of Comforce’s and Kinder Morgan’s provision of or failure to provide professional services. However, where allegations in a complaint are inseparably intertwined with noncovered conduct, there is no coverage even where the nature of a particular claim appears to be covered. Ultimately, it is the nature of the conduct that governs whether an exclusion applies. Thus, although the underlying cases also allege ordinary negligent acts and other causes of action, the gravamen of the actions is that Comforce and Kinder Morgan failed to mark the pipeline, the very thing they were required to perform at the site. It is Comforce’s and Kinder Morgan’s failure to render professional services that comprises the basis of the underlying lawsuits.

There is evidence that both the named insured (Comforce) and the additional insured (Kinder Morgan) were tasked with providing professional services in connection with the pipeline. In the underlying litigation, both Kinder Morgan and Comforce are alleged to have failed to locate and mark the pipeline. Further, it is undisputed that Kinder Morgan trained and supervised the inspectors it hired through Comforce. Moreover, it is undisputed that OSHA cited Kinder Morgan for “serious willful” violations of the California Code of Regulations as a result of the failure of its employees to locate and mark the underground pipeline.

In sum, the basic occurrence that caused the injuries (failure to mark the pipeline) was excluded from coverage by the CGL umbrella policy, and Kinder Morgan cannot obtain coverage.


When all else failed EIM asserted the trial court failed to narrowly interpret the professional services exclusion and its broad interpretation withdrew so much of the basic coverage that it rendered the policy illusory.

The policy was not an errors and omissions policy, insuring against professional malpractice. Rather, Comforce’s policy was a business liability policy, which provided coverage for accidental occurrences involving ordinary negligence, not for professional negligence.

Since the professional liability exclusion did not withdraw virtually all of the coverage extended by the insuring agreement that defined Comforce’s business liability coverage the exclusion needed to be applied.


This lawsuit is an example of one insurer – that clearly provided coverage for claims against its insured for bodily injury and property damage – tried to lay off that coverage to another insurer: ACE. It failed because the ACE policy had a professional services exclusion that eliminated ACE’s obligation to defend or indemnify its insured. The entire action and appeal could have been avoided if EIM had simply read the exclusion as it would had it been in its policy.


ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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