United States: Energy Insurance Mutual Limited v. Ace American Insurance Company

In Energy Insurance Mutual Limited v. ACE American Insurance Company, 14 Cal.App.5th 281 (August 10, 2017), the California First District Court of Appeal affirmed the trial court's entry of summary judgment in favor of ACE American Insurance Company ("ACE") based on a professional liability exclusion in its policy. The parties' dispute arose out of an underlying oil and gas pipeline explosion. The pipeline was owned by Kinder Morgan, Inc. ("Kinder Morgan"). Kinder Morgan was insured under an excess liability insurance policy issued by Associated Electric & Gas Insurance Services Ltd. ("AEGIS") with a limit of $35,000,000 per occurrence, subject to a self-insured retention of $1,000,000 per occurrence for general liability. In addition, Energy Insurance Mutual Limited (EIM) insured Kinder Morgan under a "following form excess general liability indemnity policy" with a liability limit of $100,000,000 per occurrence, excess to the AEGIS policy limit of $35,000,000.

ACE insured co-defendant, Comforce Corporation ("Comforce"), which is a staffing company that supplies businesses with temporary employees in a variety of contexts. Comforce had been providing employees to Kinder Morgan entities since the late 1980s. ACE insured Comforce under a primary commercial general liability policy with limits of $1,000,000 per occurrence. ACE also insured Comforce under a stand-alone "commercial umbrella liability policy" (umbrella policy) with a $25,000,000 per occurrence limit. The umbrella policy contained a "professional services exclusion" regarding claims arising out of the provision or failure to provide "services of a professional nature." Comforce was also insured under a "Specific Professions Professional Liability Insurance" policy by Steadfast Insurance Company, with limits up to $5,000,000 per claim.

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, California. Comforce did not train or supervise the employees. Kinder Morgan selected and trained the inspectors. According to the job description, construction inspectors were required to ensure compliance with engineering specifications, safety standards and industry codes. Kinder Morgan also required inspectors to have knowledge of the practices, principles, procedures, regulations, and techniques as they related to terminal pipeline construction. Inspectors were also required to have the ability to understand and interpret construction drawings, maps and blueprints. Though not required, an ideal inspector would have had a minimum of ten years of experience in petrol chemicals and/or a bachelor's degree in mechanical, civil, or electrical engineering.

Kinder Morgan also had one of its own employees at the Walnut Creek project, who acted as a line rider. The line rider's primary function was to perform daily surveillance of the designated pipeline area, in order to protect and ensure the integrity of the pipeline system by avoiding third party damage. Part of the line rider's responsibilities involved pipeline identification, including locating and marking lines, as well as replacing damaged or missing markers. The job requirements included passing and maintaining "all applicable operator qualification requirements." A line rider needed to "quickly become knowledgeable of all applicable federal and state regulations, most notably Part 196 of the Code of Federal Regulations. Desired experience also included basic knowledge of cathodic protection, as well as knowledge of piping, valves, pressures, and pipeline operations."

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. The 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. Numerous wrongful death and personal injury lawsuits were filed against several defendants, including Kinder Morgan and Comforce. The underlying lawsuits 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. Additional theories of liability were asserted against Kinder Morgan, including premises liability, nuisance, trespass, and strict liability for ultra hazardous activities.

Kinder Morgan tendered the lawsuits to AEGIS and EIM and also under Comforce primary and umbrella CGL policies issued by ACE. AEGIS and EIM participated in Kinder Morgan's defense of the actions. ACE agreed to participate in Kinder Morgan's defense under the Comforce primary CGL policy, but under a reservation of rights. ACE declined coverage under Comforce umbrella policy, in part, on the grounds that the claims were excluded from coverage by the professional services exclusion in the policy.

All of the underlying lawsuits against Kinder Morgan were settled prior to trial. When the AEGIS policy limit was exhausted in payments for defense costs and settlements, EIM agreed to pay more than $30,000,000 to reimburse Kinder Morgan for the settlements resolving the underlying lawsuits. Thereafter, EIM commenced an action for contribution 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 $25,000,000 limit of the ACE umbrella policy. In its amended complaint, EIM alleged that Kinder Morgan was covered as an additional insured under Comforce umbrella policy.

Subsequently, ACE filed a motion for summary judgment arguing that the professional services exclusion in its policy barred coverage of Kinder Morgan for the pipeline explosion claims. The trial court agreed with ACE and granted its motion for summary judgment, finding that the claims in the underlying litigation fell within the ambit of the professional services exclusion in the umbrella policy.

In affirming the trial court 's decision, the Court of Appeal held as follows:

Here, Comforce's umbrella CGL policy obligated the insurer to pay, in part, "all sums that the INSURED shall become legally obligated to pay as damages because of BODILY INJURY . . . ." Our Supreme Court has said of similar language that it "connotes general protection for alleged bodily injury caused by the insured." (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 272.) "This language establishes a reasonable expectation that the insured will have coverage for ordinary acts of negligence resulting in bodily injury. [Citation.]" (MacKinnon, supra, 31 Cal.4th at p. 649, italics added.) Coverage will therefore be found unless the professional liability exclusion conspicuously, plainly and clearly apprises the insured that certain acts of professional negligence will not be covered. (Ibid.) While the absence of a definition can weigh in favor of finding an ambiguity, the term "professional services" — or, as in this case, "services of a professional nature" — does not lack a generally accepted meaning outside the context of the policy. (See Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 867; see also Powerine, supra, 37 Cal.4th at p. 390; Amex Assurance Co. v. Allstate Ins. Co. (2003) 112 Cal.App.4th 1246, 1252, 5 Cal. Rptr. 3d 744 (Amex).)

California courts have defined "professional services" as those "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." [Citation.] It is a broader definition than 'profession,' and encompasses services performed for remuneration. [Citation.]" (Tradewinds, supra, 97 Cal.App.4th at p. 713.) However, "it is the type of activity, rather than actual compensation, that controls whether the professional services . . . exclusion appl[ies]." (Amex, supra, 112 Cal.App.4th at p. 1252, italics added [no coverage under plumber's homeowner's policy for negligent work performed without charge for friend].)

. . .

Here, 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." (See Amex, supra, 112 Cal.App.4th at p. 1252 [noting that "[c]ontrasted to the minimal education required for ear piercing, a plumber has the equivalent of a Ph.D."]; Hollingsworth, supra, 208 Cal.App.3d at pp. 807-809.) 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. Similarly, line riders were required to have specialized knowledge in pipeline identification, including locating and marking lines; desired experience would have included knowledge of cathodic protection, piping, valves, and pressures.

The tasks assigned to construction inspectors and line riders reflect the professional nature of the services they were expected to render. These expectations are further reflected in Kinder Morgan's statutory obligations as a pipeline owner. Pursuant to Government Code section 4216.3 at subsections (a)(1)(A)(i) & (a)(2), Kinder Morgan was required to have a "qualified person" locate and mark the underground pipeline. (See also Gov. Code, § 4216, subds. (o) & (p).) For this purpose, "'qualified person'" means a person who completed a training program in accordance with the requirements of Section 1509 of Title 8 of the California Code of Regulations Injury and Illness Prevention Program, that meets the minimum locators training guidelines and practices published in the most recent version of the Best Practices guide of the Common Ground Alliance." (Gov. Code, § 4216, subd. (p); Cal. Code. Reg., tit. 8, § 1504 [defining qualified person as "[a] person designated by the employer who by reason of training, experience or instruction has demonstrated the ability to safely perform all assigned duties . . . .") The failure to mark the pipeline squarely falls within the ambit of the professional services exclusion.

The Court of Appeal also rejected EIM's contention that the Court of Appeal's decisions in North Counties Engineering, Inc. v. State Farm General Insurance Company, 224 Cal.App.4th 902 (2014) and Food Pro International, Inc. v. Farmers Insurance Exchange 169 Cal.App.4th 976 (2008) required the Court of Appeal to reverse the trial court's entry of judgment in favor of ACE. Essentially, EIM argued that these decisions found that if a complaint alleged ordinary acts of negligence unrelated to the performance of professional services, coverage is afforded under a liability policy.

The Court of Appeal distinguished the North Counties and Food Pro decisions as follows:

In any event, North Counties is distinguishable. To begin with, the policy in North Counties narrowly defined the term "'professional services,'" with "a definition that did not include 'construction' or 'labor' or some of the other things [the insureds] were accused of in of causing the damage." (North Counties, supra, 224 Cal.App.4th at p. 929.) As such, the exclusion was narrowly construed. (Ibid.) Here, "'professional services'" was not defined. Absent a specific policy definition, the "ordinary understanding of the term applies," (Amex, supra, 112 Cal.App.4th at p. 1252), and that understanding clearly includes "skilled services" (ibid.), such as mapping and marking an underground pipeline. Also, the alleged damage in North Counties occurred after the insureds' work was completed and based on work outside the scope of the engineering work. (North Counties, supra, 224 Cal.App.4th at p. 930.) Here, by contrast, the personal injury and wrongful death claims occurred during the project, as a result of the insureds' failure to properly mark the pipeline — the very thing they were supposed to perform. Finally, the instant case did not involve an issue of PCO coverage or exclusion.

. . .

Here, by contrast the underlying lawsuits allege that severe personal injuries and deaths arose from the failure to properly locate and mark the underground pipelines, which unquestionably involves more than the mere presence of Comforce and Kinder Morgan at the Walnut Creek site. EIM counters that the professional services exclusion does not apply because the underlying lawsuits alleged "ordinary, common law negligence," as well as "other actionable conduct," such as trespass and nuisance.

Although exclusions are generally construed narrowly (MacKinnon, supra, 31 Cal.4th at p. 648), California courts interpret the term "'"arising out of"'" broadly (Health Net, Inc. v. RLI Ins. Co., (2012) 206 Cal.App.4th 232, 262. As used in various types of insurance provisions, including exclusions, the term "'links a factual situation with the event creating liability and does not import any particular standard of causation or theory of liability into an insurance policy.'" (Health Net, Inc. v. RLI Ins. Co., supra, 206 Cal.App.4th at p. 262.) The term is generally understood to mean "'"originating from[,]" "having its origin in," "growing out of" or "flowing from" or in short, "incident to, or having connection with". . . . [Citation.]'" (Davis v. Farmers Ins. Group (2005) 134 Cal.App.4th 100, 107, 35 Cal. Rptr. 3d 738; see also Medill, supra, 143 Cal.App.4th at pp. 829-830 [interpreting exclusion of claims "'arising out of' breach of any contract" to preclude a duty to defend against tort and breach of fiduciary duty claims that were dependent on and inseparable from contract claims].)

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. (See Uhrich v. State Farm Fire & Casualty Co. (2003) 109 Cal.App.4th 598, 615, 135 Cal. Rptr. 2d 131.) In Medill, supra, 143 Cal.App.4th 819, for example, the court declined to find a duty to defend for tort and breach of fiduciary duty claims because the policy excluded claims arising out of breach of contract, and all of the claims alleged arose out of duties and obligations that the insured had assumed under bond contracts. (Id. at p. 830.) Although the court acknowledged that exclusions are construed narrowly, it nevertheless found that the "'arising out of'" language operated to take the claims beyond the scope of coverage. (Id. at p. 829.)

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