How To Understand The Difference Between Construction And Design Insurance Coverage

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1 INSURANCE & INSURED RISK/PROJECT DELIVERY Is the Line Blurring Between General and Professional Liability? By Sean T. Devenney and Gregg Bundschuh Sean T. Devenney Gregg Bundschuh In recent years the construction industry has slowly moved from the traditional design-bid-build project delivery method to a more team-oriented approach requiring significant interaction between the designer and contractor. The ultimate cooperation of the designer and contractor in which they are operating as a team is referred to generally as integrated project delivery (IPD). There are various degrees of integration between the constructor and the designer depending upon the project. Importantly, owners are likely to require more integration between designers and contractors if they have experienced early successes on projects requiring an integrated approach. The rise of increased integration has been attributed to at least two forces: (1) the traditional design-bid-build model creates substantial inefficiencies attributable to the inherently adversarial relationship between the designer and contractor caused by the contractual separation of design and construction duties and the liabilities associated with each and (2) computer technology (i.e., building information modeling (BIM)) has reached, or will reach, the point where significant project information can be shared between designers and constructors in real time, reducing wasteful downtime caused by design and construction clashes or inconsistencies. As referenced above, a more team-oriented approach to project delivery is an inherent attribute of integration. Sean T. Devenney is a partner of Drewry Simmons Vornehm, LLP, Indianapolis, Indiana. Gregg Bundschuh is an attorney, a partner of Ames & Gough, Atlanta, Georgia, a leading insurance firm, and a Fellow of the American College of Construction Lawyers. The authors would like to thank Andrew Briscoe, an associate with Drewry Simmons Vornehm, LLP, for his significant research and hard work on this article. Indeed, integration requires the formal involvement of the contractor and architect working closely together to meet project delivery needs. The IPD model requires that the contractors will have some input in the design and, as a consequence, construction problems are solved at the project level before and during the construction phase of the project. The blurred lines between constructor duties and design duties raise significant questions in the construction insurance market given the traditional line between professional liability coverage primarily for designers and commercial general liability (CGL) coverage primarily for constructors. With the substantial likelihood that integration between construction and design services will increase in the construction industry, it is important to understand the concepts and cases that define the application of insurance coverages to the work of designers and contractors and the blurred lines between professional liability coverage and CGL coverage for different aspects of work on a construction project. Commercial General Liability Versus Professional Liability Policies General liability insurance, commonly referred to as CGL, is designed to provide comprehensive insurance coverage, such as premises and operations liability, protective liability, broad form property damage liability, and so forth, to protect the insured against liability arising out of bodily injury and property damage to third parties caused by an occurrence. 1 Professional liability insurance, on the other hand, covers liability arising from the mistakes inherent in the practice of that particular profession or business, and applies not only to bodily injury and property damage claims, but also to pure economic loss. 2 Stated more succinctly, professional liability insurance is designed to protect against negligent acts, errors, or omissions during the course of providing professional services. There are some very important differences between the two policy types, including (1) CGL policies are typically occurrence-based whereas professional liability policies are typically claims-made policies; 3 (2) CGL policies typically provide no limit for payment of defense costs while professional liability policies typically limit total payment, including defense costs, to the limit of liability purchased (i.e., they are eroding-limits policies); Spring 2009 THE CONSTRUCTION LAWYER 15

2 (3) CGL policies typically carry low deductibles, whereas many professional liability policies apply high per-claim deductibles; (4) CGL coverage responds to bodily injury and property damage, whereas professional liability policies provide coverage against a broader array of damages, including economic damages; (5) CGL insurers traditionally allow their insureds to add additional insureds to their policy at little or no additional cost, whereas professional liability carriers generally do not. 4 Professional liability insurance is designed to protect against negligent acts, errors, or omissions during the course of providing professional services. Generally, CGL policies provide broader protection to the insured as long as the policy answers for the claim. However, CGL policies, as stated above, do not answer for the same types of claims as professional liability policies. It is significant to all contractors and design professionals that, while general liability coverage might provide some limited protection for losses arising from design error in the construction context, a general liability insurance policy is not a substitute for a professional errors and omission or malpractice policy. 5 Most, if not all, CGL policies contain endorsements or language explicitly excluding coverage for liability arising from design error. These types of endorsements on CGL policies are commonly referred to as the professional services exclusion. The Insurance Services Organization, or ISO, offers three standard endorsements to insurers that address professional liability for contractors: (1) CG 22 43, (2) CG 22 79, and (3) CG ISO endorsement CG is the Architects and Engineers Liability Exclusion. It states: This insurance does not apply to bodily injury, property damage, personal injury or advertising injury arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity. ISO endorsement CG 22 79, the Contractors Professional Liability Exclusion, states: This insurance does not apply to bodily injury, property damage, or personal and advertising injury arising out of the rendering of or failure to render any professional services by you or on your behalf but only with respect to either or both of the following operations: (a) Providing engineering, architectural or surveying services to others in your capacity as an engineer, architect or surveyor; and (b) Providing, or hiring independent professionals to provide, engineering, architectural or surveying services in connection with construction work you perform. Last, ISO endorsement CG 22 80, Contractors Professional Liability Limited Exclusion, provides: This insurance does not apply to bodily injury, property damage, or personal injury or advertising injury arising out of the rendering of or failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineer, architect or surveyor. This exclusion does not apply to your operations in connection with construction work performed by you or on your behalf. Common Coverage Issues That Arise Between CGL and Professional Liability Policies Claims under both CGL policies and professional liability policies receive careful scrutiny when questions arise as to which policy should respond. The determinative issue as to which, if any, policy will answer to a claim usually focuses upon the professional services exclusion of the general liability policy. Defining Professional Services Courts have struggled with defining professional services in such a way that the general liability policy provides the coverage that was intended, but does not turn the policy into a professional liability policy. The most oft-quoted definition of professional service is found in Marx v. Hartford Accident & Indemnity Co.: 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. 6 In Hurst-Rosche Engineers, Inc. v. Commercial Union Insurance Co., the Seventh Circuit applied Illinois law, essentially parroting the language of Marx. In doing so, however, the Seventh Circuit noted that the definition of professional services is expansive, meaning that the professional liability exclusion on a CGL policy could 16 THE CONSTRUCTION LAWYER Spring 2009

3 create significant hurdles to coverage for the unwary contractor. 7 Consistent with the Seventh Circuit, the Fifth Circuit in Thermo Terratech v. GDC Enviro-Solutions, Inc. further explained how courts determine the meaning of professional services: To determine whether services are professional in nature, we look: To the character of the services performed, such as whether special knowledge and technical expertise are required, rather than the title or character of the party performing the services. Acts which could have been done by an unskilled or untrained employee are not subject to a professional services exclusion. Professional services involve discretion acquired by special training and the exercise of special judgment. 8 Application of the Professional Services Exclusion Although most courts reference a definition of professional services similar to those definitions described above, the application of that definition to various factual issues in the construction context is difficult to predict with any certainty. The best guidance in a particular case is a review of multiple cases in the jurisdiction in which a case is pending. Where the courts of a jurisdiction have not provided clear guidance, opinions from other jurisdictions are helpful. The following cases demonstrate the approaches that a few courts have taken to define the confines of a professional service in the construction context. In Thermo Terratech, an insured engineer disconnected power to an incinerator s cooling system, which resulted in a fire. 9 Under the applicable law, professional services was defined as services performed by one in the ordinary course of the practice of [one s] profession, on behalf of another. 10 The court found that although a licensed engineer s actions were the alleged cause of the fire, all of the incinerator s operators had been trained to perform the same act. Furthermore, none of the incinerator s operators were engineers nor had they had engineering training. As a result, the court concluded that the act of disconnecting the power did not require the individual to exercise special judgment unique to the field of engineering and, therefore, was not deemed a professional service. 11 Thus, the CGL policy answered for the claim. The Southern District of Indiana, in Erie Insurance Group v. Alliance Environmental, Inc., found that while not every action a professional takes in the course of providing professional services will be a professional service for insurance purposes, when the professional draws upon (or at least should draw upon) his or her professional knowledge, experience, and training in taking some action, that action is a professional service for insurance purposes. 12 Thus, when the insured is being sued for taking actions in the course of providing professional services, and where those actions both are reasonably related to the service being provided and involve the use of (or failure to use) professional knowledge, skill, experience, or training, the professional services exclusion applies. 13 Erie Insurance Group illustrates the Seventh Circuit s expansive approach to the professional services exclusion. 14 The court was faced with the determination as to whether an opinion letter written by a professional engineer in which the engineer was critical of the contractor was covered under the defamation/advertising coverage provisions of the CGL. In finding that the opinion letter constituted work product and that the allegations of the defense fell outside of the CGL s coverage because of the professional services exclusion, the court noted that the letter itself stated, it is the professional environmental and safety engineering opinion of Alliance Environmental, Inc. that The activity in question arose out of a professional services relationship, and the offending activity (i.e., the allegedly defamatory letter) was explicitly a professional opinion. This was enough to allow the court to determine as a matter of law that the letter s contents fell outside CGL coverage because the work product fell within the confines of the professional services exclusion. Further, as will be discussed in more detail below, the court concluded that the entirety of the letter fell within the confines of the professional services exclusion and refused to parse parts of the letter that arguably did not require professional expertise. Basically, the court in Erie Insurance Group held that the professional services exclusion does not apply to claims based on alleged breaches of specific duties owed by professionals. 16 Rather the exclusion is framed expansively in terms of the services or activities that give rise to the liability, not in terms of the legal theory articulated by the plaintiff. 17 Claims under both CGL policies and professional liability policies receive careful scrutiny when questions arise as to which policy should respond. The Erie decision was based in large part upon the Seventh Circuit s opinion in Hurst-Rosche Engineers, Inc. In Hurst-Rosche, a public agency (a housing authority) contracted with a construction company to act as general contractor on a building project. 18 The housing authority also contracted with an engineering firm to inspect the construction company s work. The general manager of the engineering firm wrote a letter to the company that had issued the performance bond for the construction company s work. The letter was highly critical of the construction company s Spring 2009 THE CONSTRUCTION LAWYER 17

4 work on the project. The construction company then sued the engineering firm for, among other things, defamation and tortious interference with contract. The engineering firm tendered the claim to its general liability insurance carrier and its umbrella general liability carrier. Both policies contained professional services exclusions, and both insurers declined coverage based in part upon the professional services exclusion. The district court granted summary judgment to the insurers, and the Seventh Circuit affirmed. 19 The Seventh Circuit based its decision on the fact that the engineering firm s letter was written in the course of its professional services. Accordingly, the Seventh Circuit held that the professional services exclusion applied. 20 The court in Erie Insurance Group held that the professional services exclusion does not apply to claims based on alleged breaches of specific duties owed by professionals. Commonly Litigated CGL and Professional Liability Policy Issues End Product or Means or Method Frequently, claims are made against insureds alleging that the products or work in question were both (1) defectively designed and (2) defectively manufactured or performed. 21 In these situations, CGL insurers typically assert the professional services exclusion to deny coverage. 22 In Leverence v. U.S. Fidelity & Guaranty, a group of homeowners claimed that their prefabricated homes were defectively manufactured and designed. 23 The CGL policy at issue contained a malpractice and professional services exclusion. 24 Under this exclusion, there was no coverage if the claimed bodily injury and property damage were due to the rendering of or failure to render any professional service. 25 The insurer asserted this exclusion, arguing that designing the homes involved a predominately mental and intellectual exercise, rather than a physical one, such that the design-related claims should be barred. 26 The court was not persuaded by the insurers argument and held that the professional services exclusion did not bar the homeowners claims because the claims arose out of manufacture of an allegedly defective product and not malpractice in the rendering of a professional service. 27 The court went on to state that the proper focus should be on the end-product, not each step in the process that leads to the end product. 28 In deciding that the professional service exclusion did not provide a basis to deny coverage, the court specifically distinguished between a contract for the building of a prefabricated home and a contract for architectural services in relation to the building of a home. The court appeared to focus on the contract from the consumer standpoint to draw its distinction. In other words, coverage according to the court hinged on whether the product being purchased by the consumer could be termed a service or a commodity. Because the consumer in the case was purchasing a home (i.e., a commodity), the professional services exclusion did not apply. Apparently the court believed that when a consumer hires an architect directly, he is purchasing a professional service, not a building, and thus the professional services exclusion would apply. 29 In other cases, such as Harbor Insurance Co. v. Omni Construction, Inc., courts based their determinations upon the nature of the particular activity that gave rise to the claim, and not the final product. 30 In Harbor, a contractor was engaged to construct an office building on a lot adjacent to an office building owned by Sears, Roebuck & Company. 31 During excavation of the site, damage was done to the adjacent Sears building, and the contractor agreed to repair it. 32 The contractor then sought to recover the cost of repairs from its CGL carrier. 33 The policy issued to the contractor contained a professional services endorsement that excluded from coverage damage arising from the preparation or approval of maps, plans, opinions, reports, surveys, designs, or specifications. 34 The insurer, when denying coverage, argued that the damage done to the Sears building was caused by an error in the design of the sheeting and shoring system that the contractor s subcontractor designed and installed. 35 The contractor argued that the design of the sheeting and shoring system was not a professional service because such design work is a means or method of construction and therefore cannot possibly implicate a professional service because it is a contractor responsibility. 36 The court denied the contractor s means or method argument, but remanded the case to the district court stating that the issue of whether this particular aspect of work is a professional service is a question of fact. 37 Is Construction Site Safety a Professional Service? One common problem between CGL insurers and professional liability insurers arises when a construction site accident occurs. In these situations, liability may be imposed on a design professional in the absence of a contract or assumed responsibility for safety. In this instance, the CGL insurer will likely attempt to decline coverage and refuse to defend based on the professional services exclusion. For example, in Gregoire v. AFB Construction Inc., a construction worker brought an action against an engineering company and its resident engineer for injuries sustained when the worker came into contact with a high-voltage electric wire at the construction site. 38 The construction worker alleged that the engineer was negligent in the supervision of the project and allowed the 18 THE CONSTRUCTION LAWYER Spring 2009

5 project to proceed when he knew, or should have known, that a utility pole was in an unreasonably dangerous condition. 39 In response to the worker s suit, the engineering company filed a third-party claim against its CGL insurer, maintaining that its only supervisory responsibility under its contract with the owner was to insure that the general contractor s completed work was in compliance with the plans and specifications. 40 The engineer s CGL policy contained an endorsement titled Architects and Engineers Professional Liability Exclusions that specifically excluded supervisory inspection or engineering services. 41 Based on this exclusion, the insurer moved for summary judgment, claiming that the allegations were excluded by the professional services exclusion. 42 The court, however, construed the construction worker s allegations liberally, interpreting them to include the breach of the general duty of reasonable care to report unsafe conditions. 43 The court went on to state that such a duty to warn could be found outside of the professional or supervisory services the engineer had agreed to perform, and thus the engineering firm was entitled to a defense. 44 Likewise, in B.J. Services Co. USA v. Mid-Continent Group, the court refused to characterize general supervisory duties as professional services. 45 In B.J. Services, an injured employee of a subcontractor on an oil-drilling operation sued, among others, the supervisory contractor s general liability insurer alleging the contractor s failure to supervise. 46 The court held that the allegedly negligent service (i.e., supervision) is not the type of work recognized as requiring professional expertise or skill. Thus, the professional services exclusion did not operate to exclude coverage under a CGL policy. 47 The court went on to state that, contrary to the parties assertions, the title or trade of the insured contractor or the contractor s overall job description is not the determinative factor in the inquiry. 48 Rather, the nature of the particular service allegedly negligently performed, and whether that service is recognized as requiring specialized training or expertise, is the determinative factor of whether a professional services exclusion applies. 49 In Reliance Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., Seeley, an engineer, contracted to perform inspection services on a construction site. 50 The court found that based on the evidence... Seeley s alleged failure in the underlying action to make sure that the contractor at a renovation site remained in compliance with both its contract and the relevant safety laws did not require Seeley s engineering acumen, but rather normal powers of supervision and observation. 51 The court went on to state that [t]o hold otherwise, where, as here, Seeley was not required to create or review the plans, but merely to enforce them, would have the exclusion swallow the policy. 52 Thus, the court found that the professional liability exclusion did not apply. In Design Professionals Insurance Co. v. St. Paul Fire & Marine Insurance Co., Campbell, an architect, entered into a professional services agreement for the performance of architectural and design services. 53 The agreement identified Campbell s duties and responsibility and explicitly specified that such duties did not include mak[ing] exhaustive or continuous on-site observations to ascertain the quality or quantity of the work or being responsible for construction means and methods, techniques, sequences or procedures, or for safety precautions and programs in connection with the work The plaintiff, a construction worker, was injured when a wall collapsed on him while he was working on the project. The plaintiff claimed that Campbell was negligent in failing to provide proper braces, supports, ladders, and so forth to protect the injured worker. Campbell s carrier refused to defend, alleging that the professional liability exclusion applied. One common problem between CGL insurers and professional liability insurers arises when a construction site accident occurs. The court in Design Professionals Insurance Co. stated that [a] party hires an architect or engineer or surveyor to provide the professional services of prepar[ing] or approv[ing] drawings, specifications, maps, opinions, reports, surveys and the like. Thus, claims arising from Campbell s negligent preparation of a building design would fall outside of the [CGL policy coverage]. 55 However, the plaintiff alleged not only that the building design was negligent but also that Campbell was negligent for failing to call for proper braces and supports. According to the court, the policy was not clear that providing appropriate scaffolding, ladders, work platforms, braces, and supports are professional activities or services within the meaning of the policy. 56 The court stated that such activities do not necessitate the same degree of specialization or expertise as, for example, the preparation of designs or drawings. 57 The court reasoned that these activities are merely incidental to the professional services offered by an architect or engineer and involve the physical or manual activities at the construction site. 58 Therefore, because the complaint alleged issues that fell outside the scope of the professional services exclusion, the insurer had a duty to resolve any doubt in favor of its insured, and defend the case. 59 Further, courts have found that failure to warn of a known danger and misrepresentation of a condition as safe, when it is known to be dangerous, is not shielded by a professional services exclusion. 60 The court in Hudson Engineers, Inc. explained: Spring 2009 THE CONSTRUCTION LAWYER 19

6 To be sure, allegations respecting a professional s failure to provide adequate engineering, supervisory, inspection, or architectural services or to discover or remedy a condition for which the professional services were engaged would necessarily fall within the exclusion as dependent on the professional services provided. However, allegations encompassing the violation of a duty to provide information about a known danger resulting from either a negligent omission or commission, whether based upon the relationship of the parties or legal principle, are not dependent on the rendering of professional services. Instead, such allegations arise from the information actually possessed and not provided by a party obligated to disclose such information. 61 Contrary to some of the cases above, several courts have found that consulting services performed by an engineer at a construction site fall within the professional services exclusion. In Fidelity & Casualty Co. of Several courts have found that consulting services performed by an engineer at a construction site fall within the professional services exclusion. New York v. Environdyne Engineers, Inc., for instance, a worker on a construction site brought a negligence claim against a consulting engineer for injuries he suffered after falling off a scaffold. 62 The engineering firm in question was contracted for the limited duty of a consulting engineer. 63 The engineering firm was insured through a CGL policy that contained an exclusion that stated: It is agreed that this policy of insurance does not apply to bodily injury or property damage arising out of the rendering of or the failure to render any professional services by or for the named insured including... supervisory, inspection or engineering services. 64 The engineering firm s CGL insurer initially defended the claim under a reservation of rights, but subsequently filed a declaratory judgment action against the firm, alleging that the firm s activities at the job site were supervisory, inspection, or engineering services within the purview of the professional services exclusion. 65 After hearing deposition testimony that the only functions the engineering firm performed on the site were architectural or engineering in nature, the court agreed with the trial court s determination that the engineering firm s activities at the job site fell within the professional services exclusion, and therefore the CGL insurer did not have a duty to defend. 66 Avoiding the Professional Services Exclusion by Defining the Work as Ministerial or Administrative Services performed by design professionals that might be characterized as ministerial or administrative may be a basis for avoiding the professional services exclusion in general liability policies. However, to argue this point, counsel must argue two seemingly inconsistent opinions. In Womack v. Travelers Insurance Co., an action was brought against an engineering firm and its insurer arising out of an explosion and fire that resulted in property injury, personal injuries, and death when an unmarked gasoline line was struck during digging operations. 67 The contract between the engineering firm and the owner provided that the engineers were retained to prepare preliminary plans and contract plans and specifications for the improvement of the project. More specifically, in the preparation of the preliminary plans, the engineers were required to show the location of all existing utilities and to transmit prints to the various utility companies for verification and for the location of any additional utilities and other required information. 68 Plaintiff alleged that the engineer failed to identify all existing utilities on the plan and that the engineer failed to transmit the plans to the utility that owned the gas line. 69 The engineer, in turn, made a claim against its CGL policy premised on the argument that marking underground utilities on a plan and then transmitting those plans to the utility company constituted merely administrative acts, and thus was not barred by the CGL s professional services exclusion. 70 In making this argument, the engineer relied upon a case in the medical malpractice field that distinguished between professional and administrative duties of various personnel engaged in assisting abdominal surgery to determine coverage. The issue in the medical malpractice case was whether the CGL carrier was responsible for covering a nurse who failed to make a proper sponge count. The court in the medical malpractice case found that the nurse s actions were covered by the CGL policy because the act of counting sponges took no particular skill and was just an administrative duty. Thus, the act of counting sponges presumably fell outside the professional services exclusion. The court in Womack distinguished the nursing case from the engineering case, stating that the CGL policy s limitation specifically excluded from coverage work in preparation of plans and found that the site utility work was a step in the preparation of the plans. 71 Therefore, the court determined that there was no coverage for the engineer s failure to identify the gas line. 72 Importantly, the court did not address whether the administrative or ministerial argument made by the engineer might have any application to coverage questions in future construction cases. In a subsequent case, Milton J. Womack, Inc. v. House of Representatives of the State of Louisiana, the court was faced with a similar fact pattern that did not necessarily implicate insurance issues. 73 The case related to 20 THE CONSTRUCTION LAWYER Spring 2009

7 concealed structural bracing members in the Louisiana State Capitol. The architect failed to detail the fact that lateral wind bracing was concealed within the structure of the building. The contractor sued the architect for failing to find and detail the wind bracing, which the contractor claimed delayed the project. The trial court held that because the contractor did not present any expert testimony showing that the architect s work fell below the standard of care, the architect was entitled to a defense verdict. The Louisiana Court of Appeals overruled the trial court s determination finding that the plaintiff did present evidence that it was a simple task of reviewing prior plans to discover the bracing. According to the court of appeals, expert testimony was unnecessary to show a breach of the standard of care. The court of appeals explained its rationale as follows: We view it as a matter within the understanding of laymen that structural elements such as wind-braces are essential to the integrity of buildings, especially tall ones like the Capitol. Testimony from an expert in the field of architecture is not necessary for a layman to conclude that wind bracing must be considered by one making plans for renovations, nor is expert testimony needed for laymen to conclude, under the facts of this case, that failure to discover and thus consider such an important structural element is negligence. It is common sense to conclude that it is the duty of an architect to use reasonable skill and care to determine the location of important structural elements before he completes his plans and authorizes work to begin in accordance with those plans. [The architect s] error in failing to discover the X-brace is the sort of omission from which a layman can infer negligence. 74 The obvious question that arises, when faced with situations similar to the site inspection/utility work contemplated in these two Louisiana cases, is whether an argument can be made that the work is ministerial and falls outside the purview of the professional services exclusion. Basically, if a layman can understand the issue implicated in the design professional s work through common sense, why would CGL coverage be excluded? Presumably, ministerial work does not require specialized knowledge, labor, or skill implicated in the definition of the professional services exclusion. Although such arguments may be a stretch in jurisdictions where the definition of professional services is given an expansive interpretation, in other jurisdictions, under the right set of circumstances, there may be a legitimate argument for coverage that should not be ignored. Is a Bid a Professional Service? Interestingly, a design professional s bid may be considered a professional service so as to warrant coverage under a professional liability policy. In American Motorists Insurance v. Republic Insurance, an architectural firm, ECI/ Hyer, bid to design three schools for a school district. 75 A competitor design firm, LPK, sued ECI/Hyer, alleging that the firm negligently and fraudulently misrepresented itself in the bid package and also alleged defamation. 76 ECI/Hyer tendered the defense to both its CGL insurer and its professional liability insurer. The firm s professional liability insurer denied coverage, claiming that the bid was not a professional service. 77 The CGL carrier took the case to trial and won. After trial, the CGL carrier sought reimbursement of a portion of the legal fees it incurred from the professional liability carrier claiming that the professional liability carrier had a duty to defend. 78 The court determined that ECI/Hyer s detailed bid constituted a professional service, reasoning that the bid was much more than a price quote because it included an accelerated project schedule, drawings, a project approach, and, among other things, a selection of subconsultants. 79 In addition to the fact that the bid contained detailed information that required significant expertise to create, the court also noted that under Alaska statutes only an architect using his or her specialized knowledge, labor and skills could have prepared the bid. 80 Although underinsured design professionals are typically only concerned about additional coverage under a general liability policy, they also must be concerned about which policy is primary. Apportionment of Liability Between General and Professional Liability Insurers Although underinsured design professionals are typically only concerned about additional coverage under a general liability policy, they also must be concerned about which policy is primary. In order to avoid the traditionally large deductible under most professional liability policies, the design professional has a significant interest in the general policy being deemed the primary policy. What coverage will be declared primary and what policy will be declared excess, if either, will be determined by the court. Primary insurance is coverage whereby liability attaches immediately upon an occurrence that gives rise to liability. 81 Excess insurance, on the other hand, provides coverage whereby liability attaches only after a predetermined amount of primary coverage has been exhausted. 82 Where one policy has a pro rata clause, or otherwise provides that it is primary, and the other policy has an excess clause, the primary policy will be obligated to defend and pay first. 83 If, on the other hand, both policies have pro rata or excess clauses, the Spring 2009 THE CONSTRUCTION LAWYER 21

8 clauses will effectively cancel each other out and both insurers must respond as concurrent insurers. 84 When faced with concurrent coverage situations, some courts, rather than simply making an attempt to resolve the conflicts in the language of the other insurance clauses of the various policies, attempt to ascertain the total policy insuring intent of the respective policies, and allocate the liabilities accordingly. 85 Bettenburg v. Employers Liability Assurance Corporation, Ltd. involved a claim against a design firm for a poor design resulting in a building collapse. 86 The owner sued the firm, alleging that the collapse was due to Following its determination of coverage in favor of the architect and against the insurer, the court then had to decide which, if either, policy was primary. breach of contract, breach of warranty, and negligence on the part of the design firm. 87 At all relevant times, the firm was insured by a professional liability policy and a general liability policy. 88 The professional liability insurer accepted coverage, but the general insurer denied coverage, alleging that its policy did not provide coverage. 89 The limit on the professional policy was $250,000, whereas the limit on the general policy for this type of liability was $25, The architectural firm eventually settled the matter for $75, Of this, the professional insurer paid $67,000, and the firm paid $8, Following settlement, the professional carrier brought suit against the general insurer, alleging that the general insurer was required to contribute $25,000 toward the firm s ultimate liability. 93 Following its determination of coverage in favor of the architect and against the insurer, the court then had to decide which, if either, policy was primary. 94 Instead of resolving the conflict on the basis of the other insurance language clauses of the policies, the court ascertained the total policy intent of the respective policies. 95 The court, in determining that the professional liability policy was the primary policy, reasoned that the policy was designed to meet the type of liability to which the architectural firm was exposed as a result of the collapse of the building. 96 This is in contrast to the purpose of the general policy, which appeared to afford general, comprehensive coverage, with a major emphasis on liability arising out of automobile accidents. 97 Therefore, because the settlement was well within the professional liability insurer s limits, the general liability insurer was not required to contribute anything. 98 Other Issues to Consider Design professionals should not expect to be covered for all liability simply by being added as an additional insured under a contractor s CGL policy. In Prisco Serena Sturm Architects, Ltd. v. Liberty Mutual Insurance Co., an architect was sued by the owner for failing to properly supervise the contractor s work. 99 The architectural firm brought a declaratory judgment action seeking a declaration that the insurer had a duty to defend and indemnify the firm in the building owner s action against the firm. 100 The architect asserted that denial of coverage under the professional services exclusion of the contractor s CGL policy would, in effect, nullify the contractor s contractual obligation to obtain CGL coverage and name the architect as an additional insured. 101 The court disagreed with the architect s argument, pointing out that if someone entering the firm s trailer at the construction site were to slip and fall and then file an injury claim against the firm, the contractor s CGL policy would provide coverage. 102 Similarly, if a firm employee left a coffee pot on after departing for the day, resulting in a fire that caused damage to the construction project, claims based on that occurrence would be covered by the CGL policy. 103 In other terms, the wide variety of liability that a design professional may incur outside the provision of professional services, as discussed above, breathes purpose into the additional insured requirement. Finally, some jurisdictions hold that an insurer has a duty to defend an action, regardless of whether liability is ultimately established, if the facts bring the occurrence wholly, partially, or even arguably within the policy coverage. 104 In these jurisdictions, the injured party s allegations will be liberally construed, and, if the allegations suggest a cause of action covered by the policy, the insurer is bound to provide a defense. 105 On the other hand, other jurisdictions have held that an insurer has a duty to defend a claim against its insured unless the insurer can establish as a matter of law that there is no possible factual or legal basis on which the insurer might eventually be obligated to indemnify the claimant under the terms of the policy. 106 This issue is of significant importance given the expense of litigation. Conclusions and Final Thoughts on Construction Insurance As discussed above, there is no single test for the application of the professional services exclusion in CGL policies. Further, the application of the exclusion is highly fact-intensive and appears to be driven to a large degree by public policy, rather than by the strict confines of the policy language at issue. Indeed, the district court in Erie Insurance Group found it necessary to note that the design professional had the ability to obtain both general liability insurance and professional liability insurance, and that professional coverage would have protected the insured from the claim. 107 In other words, the court implied that a basis for denying coverage under the CGL policy was the fact that there was another avenue for the 22 THE CONSTRUCTION LAWYER Spring 2009

9 designer to obtain the right coverage. Of course, under a strict contract interpretation paradigm, whether other coverage might be available should have little impact on whether the policy at issue provides coverage. Given the propensity of courts to consider the whole picture (i.e., public policy) in rendering decisions relating to insurance coverage, old arguments that might have been rejected in the design-bid-build world might be considered anew in the integrated project delivery world where the contractor and designer roles necessarily intermingle more frequently. Further, given that the professional services exclusion arises in many industries beyond construction, the research into a particular question should not be limited to construction industry case law. There are many useful arguments that can be gleaned from the application of cases in other contexts. For instance, in the same jurisdiction in which Erie Insurance Group was decided, the Court of Appeals for Indiana in Norways Sanatorium Inc. v. Hartford Accident & Indemnity Co. decided that the professional services exclusion did not apply to avoid coverage where a patient sued an insured sanatorium for injuries he suffered when, while mentally ill, he jumped or fell from an unguarded second-story window. 108 The court held that because the underlying suit did not necessarily implicate a professional act of a physician or nurse, the sanatorium was entitled to coverage. In Erie Insurance Group the engineer essentially made the same argument with respect to the allegedly defamatory letter, claiming that while some of the letter required professional judgment, some of it did not. 109 Therefore, the engineer argued that the insurer was obligated to provide coverage for at least the portions of the letter that did not implicate professional judgment. The district court rejected the argument, looking at the letter as a whole and finding that the letter arose out of the engineer s professional relationship. It is difficult to reconcile these two opinions one finding coverage for an incident where it was possible that a portion of the liability arose out of actions of nonprofessionals and one finding no coverage for a letter written by a professional containing information that did not require professional services. Overall, these cases reflect the fact that the question of what is and what is not a professional service is highly fact-intensive. Certainly, contractors and designers alike should be counseled to procure both CGL and, to the extent possible, professional liability coverage. For some contractors, the need for professional liability coverage may be an entirely new and foreign concept, but in the evolving integrated project delivery world, it may soon be a necessity. Endnotes 1. See generally Fuur & Baltz, Insurance Planning for Construction Projects, Co n s t r. Br i e f i n g s no (Oct. 1985), 3 CBC Nat l Ben Franklin Ins. Co. of Illinois, 60 F. Supp. 2d 837, 844 (N.D. Ind. 1998). 3. An occurrence-based policy is one that covers a loss that occurs within the policy period, while a claims-made policy is one that covers a loss for which the claim is asserted during the policy period, regardless of when the claim occurred. 4. See Expert Commentary: Contractor s Professional Liability and the CGL, Slivka03.aspx. 5. Erie Ins. Group v. Alliance Envtl., Inc., 921 F. Supp. 537, 549 (S.D. Ind. 1996) N.W.2d 870 (Neb. 1968). 7. Hurst-Rosche Eng rs, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336, 1343 (7th Cir. 1994) F.3d 329, 336 (5th Cir. 2001) (quoting Abramson v. Florida Gas Transmission Co., 908 F. Supp. 1389, 1394 (E.D. La. 1995) (internal quotations omitted)). 9. Id. 10. Id. 11. Id. 12. Erie Ins. Group v. Alliance Envtl., Inc., 921 F. Supp. 2d 537, 546 (S.D. Ind. 1996). 13. Id.; see also Collins v. Covenant Mut. Ins. Co., 604 N.E.2d 1190 (Ind. App. 1992), vacated on other grounds, 644 N.E.2d 116 (Ind. 1994). 14. See Hurst-Rosche Eng rs, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336, 1343 (7th Cir. 1994). 15. Erie Ins. Group, 921 F. Supp. at Id. at Id. (finding that plaintiff s allegation of defamation arising from communications made in connection with the defendants investigation, and included as part of the reports and results of its professional investigation, fell within the professional liability exclusion). 18. Hurst-Rosche Eng rs, 51 F.3d at Id. at Id. 21. See Sc o t t D. Tu r n e r, In s u r a n c e Co v e r a g e o f Co n- s t r u c t i o n Di s p u t e s, at 39:1-6 (Rev. ed. 2008). 22. Id Wis. 2d 64, 462 N.W.2d 218 (Ct. App. 1990) (this decision was overruled on grounds not germane to the professional services exclusion issue discussed in this article). 24. Id. at Id. 26. Id. 27. Id. 28. Id. at Id F.2d 1520 (D.C. Cir. 1990); see generally Tu r n e r, supra note Harbor Ins. Co., 912 F.2d at Id. at Id. (Continued on page 52) Spring 2009 THE CONSTRUCTION LAWYER 23