From termite inspectors to Web site designers, the list of potentially excluded professionals grows
One thing that has become abundantly clear over the years is that the choice of whether a producer should suggest the purchase of professional liability insurance is not as easy as it once was. For many years, professional liability insurance was reserved for those persons involved in the time-honored professions of medical or health care, legal, architects and engineers and the clergy.
Based on a plethora of court cases over the years, one should have no trouble noting that professional liability insurance is no longer dependent on a vocation, calling or employment which involves a skill that is predominately mental or intellectual as opposed to physical or manual. What a number of courts are saying now is that the term "professional" has long ceased to apply only to so-called "learned professions."
Translated, this means almost everyone involved in employment could be a target for professional liability insurance, even those who are employed in the trades. An example is the problem that confronted a termite inspection company in the case of Yasuda Fire & Marine Insurance Co., Ltd. v. Heights Enterprises, 1998 Guam 5, (Sup. Ct. Cas. No. CVA97-014).
The allegation against the termite inspection company was for alleged defective workmanship in termite spraying done at a condominium project. The insurer of the termite inspection company denied coverage for two reasons, one of which was a professional services exclusion. This exclusion provided that the policy did not apply to bodily injury or property damage due to "the rendering or failing to render professional services."
The insurer argued that the professional services exclusion was not ambiguous, as maintained by the named insured, and that the term "professional services" was not limited to those traditionally recognized professions, such as law or medicine.
In agreeing with the insurer, the court stated that it was the status of the service provider as one generally paid for rendering such services that was important. If, for example, the court explained, someone has a business license allowing one to be paid for performing such services, it would be considered a professional service provider.
Licensing is an important criterion
It is uncertain whether it is the rule in every state that licensing is a criterion for being considered a professional, but in the case of Auto-Owners Insurance Co. v. E.N.D. Services, Inc., et al., No. 8:10-cv-2387-T-30EAJ (U.S. Dist. Ct. M.D. FL 2011), the court thought it was.
Prior to purchasing a home, the home owners hired E.N.D., a home inspection company to inspect the property. The home owners later sued E.N.D. for breach of contract, negligence and other offenses. They alleged that E.N.D. failed to discover certain undisclosed defects.
At the time that E.N.D. performed the home inspection, it was covered by a CGL policy issued by Auto-Owners. After the suit was filed, the insurer notified its named insured, E.N.D., that it believed coverage was excluded by a professional services exclusion.
Lacking representation, E.N.D. failed to contest the action. As a result, the state court entered a default judgment against E.N.D. in the amount of $245,940. E.N.D. subsequently assigned its rights under its CGL policy to the home owners. The home owners, in turn, filed an action against the insurer asking the court to declare that the professional serv- ices exclusion in the CGL policy of E.N.D. was not applicable.
The court in this case stated that the mere fact a home inspector was not a traditional professional (such as a doctor or lawyer) was of no significance. It added that numerous courts have held that the exclusion of professional services can apply to non-traditional professionals, as long as the exclusion of such services was fairly encompassed by the policy.
In this particular case, the endorsement titled: "Exclusion-Inspection, Appraisal and Survey Company" was said to have fit into the nature of what the inspector had done.
Specifically, it precluded coverage for bodily injury, property damage, personal injury or advertising injury for which the insured may be held liable because of the rendering or failure to render professional services in the performance of any investigation, adjustment, engineering, inspection, appraisal or audit services.
The state of Florida clearly considers home inspections to be professional services, since it regulates home inspectors and requires them to be licensed. See FLA. STAT. Sec. 468.83-468.8325. (Interestingly, however, that state did not regulate or require licensing of inspectors at the time E.N.D. performed its work.)
The court nonetheless upheld the endorsement to preclude coverage, explaining that it did not matter that there was no statute or license requirement, since it is the nature and character of the service that is performed that is important.
The court's message is somewhat confusing because it brings a mixed message. On the one hand, being licensed is a criterion for professional status; but on the other hand, it does not matter even if a license is not required.
Another case where a state appellate court ruled against coverage involving a home inspector sued for failing to report defects after performing an inspection is Brown v. Oklahoma Farm Bureau Ins. Co., 261 P.3d 622 (Okla. Civ. App. 2011). The professional service exclusion was said to have been identical to the one in the foregoing Auto-Owners. The Oklahoma case did not mention anything about state licensing requirements. Apparently, the professional services exclusion was sufficient to preclude coverage.
It appears that there is no safe haven for people whose CGL policy is endorsed with a professional services exclusion. In fact, even an independent insurance adjuster found himself without coverage for certain opinions expressed during the course of adjusting a fire insurance claim.
Following a fire loss, the named insured business owner retained the services of a public adjuster, who brought suit against the independent adjuster, who allegedly acted in a manner meant to induce the named insured to terminate its relationship with the public adjuster.
Specifically, the public adjuster's complaint alleged that the independent adjuster falsely represented that the public adjuster grossly overstated and possibly engaged in fraudulent misrepresentation of the fire loss. When the independent adjuster sought coverage under the business owner's policy issued to his employer, the insurer denied coverage based on the professional services exclusion.
This exclusion was upheld in the case of Pekin Insurance Company v. L.J. Shaw & Company, et al., 684 N.E.2d 853 (Ill. App. 1 Dist. 1997). The independent adjuster or his employer must have decided that a professional liability policy was not necessary.
A confused state of affairs
In light of whom the courts are naming for purposes of the professional services exclusion, one has to wonder whether there will eventually be any need for an errors or omissions policy or exclusion. Traditionally, errors or omissions liability could be defined as liability for other than bodily injury, personal injury or property damage arising out of business decisions of persons whose occupation or employment does not involve specialized knowledge, labor or skill.
Yet, if one were to review various endorsements available for issuance in conjunction with the commercial general liability policy, some additional confusion is likely to result. The reason is that some insurers exclude certain disciplines as professionals and others as nonprofessionals without any clear reason for doing so.
Examples are the Professional Liability Website Designers endorsement CG 22 99, and the Internet Providers and Internet Access Providers Errors or Omissions endorsement CG 22 98.
What begs a question here is, why is a Web site designer viewed as a professional when some designers are youngsters, and yet Internet providers are not professionals? What about when the Testing or Consulting Errors or Omissions exclusion is issued? Shouldn't this be within the professional category?
Insurance companies are going to have to get a handle around this entire subject and do something about it because no one knows for sure when someone is to be viewed as a professional as opposed to a nonprofessional, and that includes insurance companies.
Until this mess is straightened out, producers should recommend some kind of professional liability insurance whenever a professional services exclusion accompanies a CGL policy. That is a foregone conclusion in the state of Florida and, perhaps, in other states.
What needs to be determined also is whether a state regulates people involved in the trades and/or a statute applies to that effect. The reason is that either one of these requirements is likely to solidify the need for professional liability insurance.
Target risks need to be told that going without professional liability insurance may serve to their detriment. A case in mind is Amex Assurance Company v. Allstate Insurance Co., 112 Cal. App. 4th 2003, where a plumber installed a propane water heater at his friend's house.
Unfortunately, following the work, the house burned to the ground. When the homeowner's policy insurer paid more than $1.5 million for the loss, it then sought reimbursement from the plumber, who had nothing but a homeowners policy that excluded both professional services and business activities.
Producers need to keep in mind that, unless both the general liability and professional liability coverages are written by the same insurer (which is not often), both are likely to deny coverage. There is a plethora of cases on this point as well.
Finally, the important point to remember is what the courts are saying: The term "professional" has long ceased to apply to only the so-called "learned professions."
It is nice when a commercial general liability policy does not have a professional services exclusion attached to it. When it does, it is a foregone conclusion about what must be done.
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.