Whose Line Is It?
Learn to determine when a claim is a general liability claim or a professional liability claim. Part 1 of a 2-part series
General liability policies are designed to cover ordinary risks, those common to most businesses, so they contain exclusions in an attempt to rein in extraordinary exposures. One such exclusion is the "professional services" exclusion, which is often added by endorsement when the policyholder is a professional. The ISO issues a standard professional services exclusion endorsement, but insurers commonly use profession-specific exclusions. Professional liability insurance is designed to fill the gap created by the professional services exclusion in the general liability policy.
One problem that arises in settling claims is that general liability and professional liability policies make little effort to define the term "professional services." Where the term is defined in the policies, the definitions are little more than statements to the effect that professional services are any services of a recognized profession. As a result, it is often left for the courts to determine whether or not a particular claim involves a professional service.
The landmark case discussing the definition of professional services is Marx v. Hartford Accident and Indemnity Co. The decision, issued by the Nebraska Supreme Court in 1968, involved fire damage that occurred when an insured's employee accidentally put benzene, rather than water, into a sterilization container. The question in that case was whether or not a claim filed by another tenant in the building was covered under the insured's professional liability policy. In determining if the insured's employee was engaged in a professional service, the court determined that the term "professional," in the context used in the policy provision, meant something more than mere proficiency in the performance of a task and implied intellectual skill as contrasted with that used in an occupation for production or sale of commodities.
The court said: "A 'professional' act or service is one 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." Significantly, the court observed that, "in determining whether a particular act is of a professional nature or a 'professional service,' we must look not to the title or character of the party performing the act, but to the act itself." The court then held that the act of boiling water for sterilization did not by itself constitute an act necessitating professional knowledge or training because any unskilled person could conduct the routine of cleaning of equipment. Accordingly, there was no coverage under the professional liability policy.
The Role of Exclusions
Although the Marx case involved the scope of coverage under a professional liability policy, the decision has also been applied equally in connection with rulings on professional liability exclusions in general liability policies. Of course, this doesn't mean that the professional services exclusion has precisely the same scope as the coverage afforded for professional services by a professional liability policy. Courts typically construe insuring agreements broadly. Exclusions, on the other hand, are usually construed narrowly. This means that the court may well apply the term "professional services" differently in different cases, depending on its location and function in the policy.
Similarly, ambiguities in the contract language are generally construed against the insurer. If a court determines that the term "professional services," as defined in the policy, is ambiguous, it may construe the term against the insurer. For example, in URS Corporation v. Tristate Environmental Management Services, Inc., the claimant asserted negligent-supervision claims against URS in connection with a drilling project that caused damage to underground cables. URS was an additional insured under a liability policy issued to its subcontractor that provided coverage for general liability, professional liability and contractors pollution legal liability. URS was covered under the general liability portion of the policy only. The general liability form included a broadly worded professional services exclusion that precluded coverage for property damage arising out of the rendering of or failure to render any professional service, including but not limited to supervision, inspection, construction or project management, quality control or engineering services. But the policy also included a number of endorsements that appeared to have been specifically negotiated for the project at issue, including an endorsement that defined professional services more narrowly as "environmental consulting services." The insurer argued that the claim against URS was excluded by the broadly worded professional liability exclusion and that the definition of professional services in the endorsement was inapplicable because it applied only to the "contractors pollution legal liability coverage."
The court determined that the policy definition of professional services was ambiguous and that the general liability coverage form was modified by the endorsement, which defined professional services as "environmental consulting services." As a result, the professional service exclusion was held inapplicable.
The Reach of the Term 'Professional'
Courts have generally held that policies covering professional services reach only those acts committed by the insured in his capacity as a professional. Thus, professional services do not include general administrative activities that occur in all types of businesses. So for example, the courts have uniformly held that allegations arising from the billing practices of a professional are not professional services. Similarly, employment decisions relating to non-professionals don't generally constitute professional services.
Professional services don't include acts by professionals that don't require technical expertise. For example, in Thermo Terratech v. GDC Enviro-Solutions, Inc., an engineer caused a fire when he disconnected the control panel of an incinerator. The court held that the professional services exclusion in the general liability policy did not apply. The court reasoned that the removal of the control panel, although performed by an engineer, "could have been performed by individuals who had neither engineering training nor the ability to exercise special judgment unique to the field of engineering."
Similarly, in American Casualty Company v. Hartford Insurance Company, a 76-year-old patient was injured in a fall after an EKG technician instructed him to enter the EKG examination room, remove his shirt and place himself on the examination table. In holding that the claim was properly covered by the insured's general liability insurer rather than its professional liability insurer, the court stated that the actions of the EKG technician were purely mechanical and administrative in nature, did not require the exercise of any special training, and could be performed by any unskilled or untrained employee.
Sometimes, however, an act which may appear to be administrative or ministerial can be held to constitute a professional service if the court deems that the act arises from the performance of professional services. For example, in American Economy Ins. Co. v. Jackson, the administrator of a nursing home facility allegedly failed to engage the facility's air conditioning system during a heat wave. As a result of this decision, four nursing home residents died from heat exposure. The court held that the claims were excluded under the general liability policy by the professional services exclusion. The court explained that, "although the failure to engage the HVAC system's air conditioning could be considered a ministerial or administrative act," the facts in that case showed that the administrator's decisions "are all decisions that were made using specialized training, skill, experience, and knowledge…and the action or inaction involved in regulating the temperature was a 'nursing' or 'health' service."
Likewise, in Duncanville Diagnostic Ctr., Inc. v. Atlantic Lloyd's Ins. Co. of Texas, a patient died after receiving an incorrect dosage of medicine at a diagnostic center. The insured argued that the professional services exclusion in its GL policy wasn't triggered because the allegedly negligent acts, like documenting drug dosages, required only clerical skills. The court held that the "professional service" exclusion did apply because the administering of drugs requires the exercise of trained medical judgment. Furthermore, the skills involved in rendering these medical services are predominantly intellectual rather than physical.
Expanded Professional Services Definition
Sometimes a professional's employment-related decisions and supervisory role will be held to constitute professional services because the selection and supervision of one's own employees is a component of a professional's job. For example, Biborash v. Transamerica Ins. Co. involved a wrongful discharge claim filed by an insurance agent against the manager of the agency. The manager sought a defense under a professional liability policy. The insuring clause was fairly broad and provided coverage for "any act, error, or omission of the insured...in rendering or failing to render professional services in the conduct of the insured's profession as an insurance agent or manager." (italics added) The court held that Transamerica had a duty to defend the agency manager because the policy specifically insured him not only as an insurance broker but also as a manager of the agency.
Likewise in National Fire Ins. Co. of Hartford v. Briseis Kilfoy, the plaintiff filed a negligent-hiring suit against a professional who had previously hired physicians to work at his clinic. The court held that the professional services exclusion in the GL policy applied to the professional's action of hiring professional employees because, "unlike performing an administrative act, the determination of whether a physician is qualified to render professional services requires specialized knowledge and skill." In essence, the court distinguished between hiring procedures that involve administrative reviews (which do not constitute professional services) and hiring procedures that involve the application of specialized knowledge (thereby constituting professional services).
Lawrence D. Jackson is an attorney and partner with Nelson Levine de Luca & Horst, a firm solely dedicated to protecting and building the insurance industry's business practices. (215) 358-5080 email@example.com
Editor’s Note: Can a claim be covered under professional and general liability? Find the answers to this question and many others in part two of this series in the Winter 2011 print issue due out in November.