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"Professional Services" Exclusion Bars Coverage for Pipeline Owner's Liability for Explosion Arising Out of Failure to Mark Pipeline

A commercial umbrella policy's "professional services" exclusion barred coverage for a pipeline owner's liability for an explosion that arose out of the pipeline owner's failure to properly mark a pipeline. (Energy Ins. Mut. Ltd. v. ACE American Ins. Co. (2017) WL 3476705)

Facts

East Bay Municipal Utility District (EBMUD) is a public utility district that provides water services in the east San Francisco Bay area. EBMUD hired Mountain Cascade, Inc. (MCI) as the general contractor for construction of a large water supply line in the area.

Kinder Morgan, Inc. (Kinder Morgan) owns and operates thousands of miles of gas pipelines, including gas pipelines in the east San Francisco Bay area. Kinder Morgan assigned one of its employees, known as a "line rider," to EBMUD's water supply line project in order to locate gas pipelines and mark them so that they would not be damaged during construction of the water supply line. A line rider's job responsibilities included having knowledge of pipeline operations and knowledge of regulations concerning protection of underground pipelines from excavation activity. In addition, Kinder Morgan hired two temporary employees through Comforce Corporation (Comforce), a temporary staffing company, to work as construction inspectors in connection with EBMUD's project. The construction inspectors' job responsibilities included ensuring compliance with engineering specifications, safety standards and industry codes, and understanding and interpreting construction drawings, maps and blueprints.

EBMUD's general contractor, MCI, was using an excavator at the water line project when the excavator punctured a high-pressured gas line owned by Kinder Morgan. Gasoline was released into the pipe trench and was ignited by the welding activities of an MCI subcontractor. The resulting explosion killed five employees, seriously injured four other employees, and caused extensive property damage. Following the explosion, state authorities conducted an investigation and concluded that Kinder Morgan personnel had failed to properly mark the gas pipeline prior to MCI's excavation activities to install the water line.

Numerous plaintiffs filed wrongful death and personal injury lawsuits against various defendants, including Kinder Morgan and Comforce. Among other things, the plaintiffs alleged that the pipeline rupture was caused by Kinder Morgan's and Comforce's negligence in failing to identify and mark the location of Kinder Morgan's gas pipeline.

At the time of the explosion, Kinder Morgan was the named insured on a $35 million first-layer excess liability policy issued by Associated Electric & Gas Insurance Services Limited (AEGIS), and was also the named insured on a $100 million second-layer following form excess policy issued by Energy Insurance Mutual Limited (EIM). In addition, Kinder Morgan was an additional insured on a $1 million commercial general liability policy that Comforce had through ACE American Insurance Company (ACE), and an additional insured on a $25 million commercial umbrella liability policy that Comforce had through ACE. The last policy – the ACE umbrella policy – contained an exclusion for liability "arising out of the providing or failing to provide any services of a professional nature."

AEGIS and EIM participated in Kinder Morgan's defense of the lawsuits. ACE also participated in Kinder Morgan's defense under Comforce's CGL policy, but ACE denied coverage under Comforce's umbrella policy, based in part on that policy's "professional services" exclusion.

The plaintiffs eventually settled their underlying lawsuits against Kinder Morgan. In connection with the settlements, AEGIS exhausted its $35 million policy limit on behalf of Kinder Morgan, and EIM paid more than $30 million on behalf of Kinder Morgan.

EIM then filed an equitable subrogation / contribution action against ACE with respect to the ACE $25 million umbrella policy. EIM alleged that Kinder Morgan was an additional insured on the ACE umbrella policy; that the ACE umbrella policy covered Kinder Morgan's alleged liability in the underlying actions; and that the ACE umbrella policy had to exhaust prior to, or at least concurrently with, the EIM excess policy. The trial court granted summary judgment to ACE, finding that the plaintiffs' claims against Kinder Morgan in the underlying lawsuits were barred from coverage by the "professional services" exclusion in the ACE umbrella policy. EIM appealed.

Holding

The California Court of Appeal affirmed the summary judgment in favor of ACE. According to the appellate court, Kinder Morgan's activities in mapping and marking an underground gas pipeline were "skilled services" and, hence, "professional services" within the meaning of the ACE umbrella policy. The court noted that pursuant to California Government Code section 4216.3, Kinder Morgan was required to have a "qualified person" locate and mark the underground pipeline. Pursuant to that same statute, a "qualified person" meant a person who had completed a training program in accordance with the "Best Practices" guide of the "Common Ground Alliance" (an association of organizations involved in the underground utility industry). The appellate court concluded that, under the circumstances, "the failure to mark the pipeline squarely falls within the ambit of the professional services exclusion" in the ACE umbrella policy. Neither Comforce (as named insured) nor Kinder Morgan (as additional insured) could reasonably expect that the ACE umbrella policy would cover claims of "professional errors." Thus, EIM was not entitled to equitable subrogation or contribution as against ACE.

Comment

The ACE umbrella policy's "professional services" exclusion stated that the policy did not apply "to any liability arising out of the providing or failing to provide any services of a professional nature." The policy did not further define the term "services of a professional nature." However, California courts have held that "professional services" are 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." (Tradewinds Escrow, Inc. v. Truck Ins. Exch. (2002) 97 Cal.App.4th 704, 713.) Notably, under California law, a liability policy's "professional services" exclusion does not apply only to insureds in so-called "learned professions," such as medicine, law or engineering. Rather, the exclusion can also apply to any insureds who render "skilled services" for pay.

Here, the appellate court concluded that Kinder Morgan's activities in mapping and marking its underground pipeline involved "skilled services" that fell within the scope of the "professional services" exclusion in the ACE umbrella policy. Thus, ACE did not provide coverage for the loss.

 

 

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