Sixth Circuit Enforces Professional Liability Exclusions

May 5, 2017 / Writing and Speaking

General liability insurers did not have a duty to defend insured engineering and architecture firm in underlying action alleging that insured was negligent in its duty to supervise construction operations, provide adequate safety supervision, and include in its project plans ways to ensure the safe removal of digester lids, because such allegations fell within the policies’ professional services exclusions. Orchard, Hiltz & McCliment, Inc., v. Phoenix Ins. Co., 2017 U.S. App. LEXIS 1089, 2017 Fed. App’x 0047N (6th Cir. 2017) (applying Michigan law).

Facts

The Village of Dexter, Michigan (“Dexter”), hired engineering and architecture firm Orchard, Hiltz & McCliment, Inc. (“OHM”) to provide “professional engineering services” in connection with upgrades to its wastewater treatment plant’s sludge-handling system. The project included a design phase and a construction phase. Initially, OHM agreed to prepare all contract and design documents for the project. During the construction phase, OHM was responsible for “contract administration, construction engineering, construction observation, and construction staking.” OHM agreed to provide daily observation of “significant construction work or testing,” prepare daily field reports, and check completed work for “compliance with contract documents.” OHM conducted progress meetings with Dexter staff and the project’s general contractor and subcontractors, and reviewed and approved all shop drawings. OHM also provided an engineer (“Nastally”) to monitor and document the general contractor (“Shmina”)’s activities at the construction site full time.

Dexter’s contract with Shmina (the “prime contract”) designated OHM as the project engineer and Dexter’s representative on the project. Under the prime contract, Shmina had to maintain liability insurance to protect Shmina, Dexter, and OHM from claims arising out of the work. Shmina obtained a CGL policy through defendant Phoenix. The Phoenix policy contains an additional insured endorsement extending CGL coverage to “any person or organization that you agree in a ‘written contract requiring insurance’ to include as an additional insured[.]” Excluded from this endorsement, however, is coverage for bodily injury, personal injury, or property damage “arising out of the rendering of, or failure to render, any professional architectural, engineering or surveying services, including”:

  1. The preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders or change orders, or the preparing, approving, or failing to prepare or approve, drawings and specifications; and
  1. Supervisory, inspection, architectural or engineering activities.

OHM’s project plan required the removal and replacement of two sludge digester tank lids. Shmina subcontracted with nonparty Platinum to provide all labor and materials for the digester cover installation. Platinum in turn subcontracted with nonparty Regal to remove both digester tank lids. Per its contract with Shmina, Platinum had to maintain a CGL insurance policy adding Shmina, Dexter, and any additional parties required by the Prime Contract Document as additional insured(s). Platinum’s CGL policy from Federated includes an additional insured endorsement extending coverage to “any person or organization, other than a joint venture, for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” No such contract or agreement exists between Platinum and OHM.

Like the Phoenix policy, the Federated policy contains a professional services exclusion limiting coverage provided for in the additional insured endorsement. The Federated provision similarly excludes coverage for bodily injury, property damage, or personal injury caused by:

[a]ny person or organization whose profession, business or occupation is that of an architect, surveyor or engineer with respect to liability arising out of the preparation or approval or the failure in preparation or approval of maps, shop drawings, opinions, reports, surveys, field orders, change orders, designs, drawings, specifications or the performance of any other professional services by such person or organization[.]

On April 22, 2013, Regal worker David McBride was using a cutting torch to remove bolts from a digester lid. Sparks from the torch ignited methane gas inside the digester tank and caused an explosion that injured McBride and killed Platinum pipefitter Michael Koch. Nastally was present at the scene of the accident taking photos of McBride as he removed bolts from the digester lid. McBride and Koch’s estate sued OHM for personal injuries and wrongful death, alleging negligence and gross negligence by OHM in the performance of its engineering duties. Plaintiffs alleged OHM breached its duty by failing to ensure that its engineering plans and specifications were complied with, and that related safety precautions, such as the use of methane detection devices, were implemented.

Although OHM’s professional liability insurer (XL Specialty) assumed it defense, OHM sought a declaratory judgment requiring defendants to defend and indemnify it in the McBride and Koch cases. On cross-motions for summary judgment, the district court granted summary judgment for defendants. The district court ruled that OHM was covered as an additional insured under the Phoenix policy, but not under the Federated policy. Neither defendant had a duty to defend or indemnify OHM, however, because there was no dispute of material fact that the professional services exclusion in both policies barred coverage. OHM appealed.

Analysis

The Sixth Circuit, applying Michigan law, affirmed the district court’s holding that the professional services exclusions barred coverage under both policies. The Court first considered whether any of the underlying allegations against OHM could fall outside these exclusions by implicating non-professional acts or omissions. Under Michigan law, “[w]hether a professional service is being rendered depends on the nature of the act or omission, not the character or title of the person who acted or failed to act.” Michigan appellate courts have defined “professional services” as those involving specialized skill of a predominantly intellectual nature. Consequently, not all acts performed by professionals constitute professional services. Michigan courts, however, have generally interpreted professional services exclusions broadly. They have even applied them to acts not involving a specialized skill if such acts reasonably related to the overall provision of professional services.

Citing the Michigan Court of Appeals decision in Hilderbrandt ex el. Estate of Hilderbrandt v. Rumsey & Sons Constr., No. 220340, 2001 Mich. App. LEXIS 1517 (Mich. Ct. App. June 5, 2001), the Sixth Circuit concluded that the underlying McBride and Koch allegations fall within the policies’ professional services exclusions. The Court explained:

Both underlying complaints allege that OHM, as the project’s consulting engineer, was negligent in its duty to supervise construction operations, provide adequate safety supervision, and to include in its project plans ways to ensure the safe removal of the digester lids. These acts are predominantly intellectual in nature, and both insurance policies exclude coverage for liability “arising out of” an engineer’s or architect’s failure to prepare or approve drawings and specifications, other “supervisory, inspection, architectural or engineering activities,” and indeed “any other professional services.” Assuming the underlying plaintiffs can show that OHM owed such duties, accounting for and ensuring the safe removal of the lids in its project plans and on site would require OHM to exercise the specialized knowledge and expertise in wastewater facility project design and supervision that Dexter hired it to provide.

The Court rejected OHM’s contention that the underlying plaintiffs would hold it liable for unskilled construction and accident prevention tasks such as failing to hold safety meetings, monitor methane levels, and post warning signs. The Court noted that even if some of the underlying factual allegations implicate tasks that do not, in and of themselves, involve a specialized skill, such acts and omissions are reasonably related to OHM’s overall provision of professional services. The Court stated:

Phoenix and Federated provided general liability policies that were never intended to cover professional negligence claims. Indeed, plaintiff’s professional liability insurer defended it in both underlying tort actions. OHM may dispute that it owed or breached the duties alleged in the underlying actions, but there is no dispute that if the underlying plaintiffs can prove their allegations, OHM’s liability is excluded from coverage under the Phoenix and Federated policies.

The Court also rejected OHM’s argument that the Court’s construction would render the policies illusory. “Because coverage could be triggered where OHM employees are exposed to liability for bodily injury or property damage caused by their ordinary negligence in performing some task that falls outside the provision of professional services,” the Court wrote, “our interpretation renders neither policy illusory.”

Learning Point: Under Michigan law, a professional services exclusion will apply where: (1) the allegedly negligent acts involve specialized skill of a predominantly intellectual nature; or (2) even if not involving a specialized skill, the acts are reasonably related to the overall provision of professional services.

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