A California appellate court has held that a pipeline owner’s insurer is not entitled to reimbursement of defense costs and settlement payments from the insurer for the staffing agency that supplied personnel to the pipeline because the professional services exclusion in the staffing agency’s policy unambiguously barred coverage.  Energy Ins. Mut. Ltd. v. ACE American Ins. Co., 2017 WL 3476705 (Cal. Ct. App., July 11, 2017).

The underlying lawsuits arose out of an explosion caused by an excavator striking an unmarked pipeline.  The pipeline owner’s insurer settled the lawsuits against the pipeline owner and then filed the instant coverage action seeking reimbursement for defense costs and settlement payments from the insurer for the staffing agency on the ground that the pipeline owner was an additional insured under the staffing agency’s policy.  The trial court granted summary judgment for the staffing agency’s insurer on the ground that the professional services exclusion in its policy, which provided that the policy “does not apply to any liability arising out of the providing or failing to provide any services of a professional nature,” unambiguously barred coverage for the underlying claims.

On appeal, the court affirmed the trial court’s decision, holding that the underlying claims arose out of the pipeline owner’s and the staffing agency’s failure to render professional services and therefore the professional services exclusion precluded coverage.  In so holding, the court concluded that, although the underlying cases also alleged ordinary negligent acts and other causes of action, the gravamen of the actions was that the staffing agency and the pipeline owner failed to mark the pipeline, and therefore the claims arose out of their rendering or failure to render professional services.

The pipeline owner’s insurer also argued that, even if the claims arose out of the staffing agency’s professional services, they did not arise out of the professional services of the pipeline owner and therefore, based on the policy’s severability provision, the professional services exclusion did not preclude coverage for the pipeline owner.  The court agreed that the relevant inquiry with regard to coverage for the pipeline owner is whether it engaged in professional services, but in any event, the court found that the pipeline owner did more than just passively own the pipeline and therefore the claims against it also arose out of its professional services.

Finally, the appellate court rejected the pipeline owner’s insurer’s argument that interpreting the professional services exclusion in this manner would render coverage under the staffing agency’s policy illusory, concluding that the business liability policy was intended to cover accidental occurrences involving ordinary negligence, not professional negligence.