Avoiding Coverage Gaps from Professional Services
Commercial general liability (CGL) policies typically provide coverage for, among other risks, bodily injury, property damage and advertising/personal injury. Many CGL policies exclude coverage for liability stemming from an insured's "professional services." These exclusions are utilized because it is thought that such risks should, in theory, be covered under the insured's professional liability policies. Professional liability insurers, in turn, are careful not to accept coverage for risk they believe should be covered under the insured's CGL policy, so they sometimes exclude coverage for bodily injury and property damage.
While one would think that obtaining separate coverage for bodily injury, property damage and personal/advertising injury, on one hand, and professional liability, on the other, would eliminate any gaps in coverage, in practice the coverages do not always perfectly dovetail, nor is it always clear which coverage is applicable to a given situation. While these kinds of coverage issues are nothing new, they have become much more commonplace as companies have become more diversified, e.g., as product-driven companies seek to support sales by providing a broader range of technical services. And, such categorization issues can become critical where the company not only engages in activities that blur the distinction but has purchased coverage for only one of the risks, usually general liability coverage.
Companies that run into problems with the potential crossover of CGL and professional liability coverage generally fall into two basic risk profiles. The first profile includes those companies that acknowledge that their business activities involve risks covered by both CGL and professional liability policies and have therefore purchased both types of coverage, but whose policies have not been properly tailored to avoid gaps between the coverages. The second profile includes those companies whose business activities are evolving to become more or less akin to "professional services," but whose coverage has not adapted to reflect the changing nature of their activities.
Identifying these potential risks and finding solutions can help avoid unwanted surprises when a claim arises and also make sure that a company?s insurance will be available as intended.
A Malleable Concept
Outside of traditional categories of "professionals" like doctors, architects and engineers, no clear consensus exists as to what constitutes "professional services." Policies usually define "professional services" as "providing services to another for compensation," but that definition is far from universal and, in those instances when it is adopted, the scope of the definition is not always self-evident. Thus, the issue of whether an activity constitutes professional services boils down to a "you will know it when you see it" standard, offering little comfort to a policyholder. Examples from a sampling of industries illustrate the problem:
A company develops and sells to commercial airlines a device used to measure airspeed. In addition to the sale of the product, the company provides the airline with consulting services for an additional fee. The device is implicated in a large-scale disaster, and the passengers' families bring suit against the technology company.
2. Life sciences.
A pharmaceutical company enters a joint venture with a biotechnology company to perform a clinical trial of an HIV vaccine in Argentina. As a result of a data breach in the United States, all of the participants' names and contact information are published on the internet as persons infected with HIV. The plaintiffs file suit in the United States alleging defamation and breach of privacy under various common law and statutory theories.
A construction firm provides on-site construction management services. Following a request for information from the company doing the excavation work, the on-site team collectively decides additional shoring is needed. During the course of this work, there is a collapse which causes significant project delays and damage to an adjacent structure. The owner files suit for cost-overruns and delays and the adjacent property owner sues for damage to its building.
Each of these examples involves a risk covered under most commercial general liability policies. There also is, however, an element of "professional services" in each of the examples. Which program would respond to each of these losses? The CGL program? The professional liability program? Both? Neither? The answer of course depends on numerous factors, some of which are discussed below.
Why It Matters
Before discussing the factors that influence which coverage will respond to the loss, it is important to consider why it matters.
1. Loss of coverage.
While it is possible for a mixed professional services/general liability claim to fall completely into a gap between an insured's professional and general liability programs, the more likely cause of a total loss in coverage would be if the loss resulted from an insured acting in some capacity arguably not contemplated by its carriers. In that regard, it is possible for a professional service provider to lose coverage under its professional policy as a result of a business activity arguably not "professional" in character, such as an architecture firm that begins designing and selling furniture that causes bodily injury. In general, however, more professional service providers carry CGL coverage than non-professional service providers carry professional liability insurance. Therefore, problems are more likely to occur when a company not generally regarded as a professional services provider (e.g., a distributor) engages in some activity that arguably could be characterized as "professional" in nature (e.g., point-of-sale consulting services).
A total loss of coverage may also result if the insured fails to timely notify the appropriate carrier of its loss. The risk of a notice-related loss of coverage is much greater under a professional liability policy, as such policies are typically written on a claims-made or claims-made-and-reported basis (see additional discussion of this below). And, the risk of a notice-related loss is only exacerbated when the "professional services" aspect of the claim is subtle or the party responsible for notifying the carrier does not understand or appreciate the scope of coverage afforded under the company's professional liability policy.
2. Available limits/cost.
As a general matter, policyholders carry significantly higher limits for CGL coverage than for professional liability coverage, and typically secure the higher CGL limits at a relatively lower cost per dollar of coverage. If a professional liability program is the only source of insurance for a serious multiple-person bodily injury or large-scale property damage case, the limits of such policy therefore are likely to be insufficient unless the program was specifically designed to handle such losses.
3. Defense costs.
CGL policies frequently provide for supplemental defense costs, i.e., the payment of defense costs without eroding policy limits. Professional liability policies, by contrast, usually provide defense costs within the limits; these are often referred to as "burning limits" policies, as the payment of defense costs reduces (burns) the policy limits. With monthly defense costs often reaching $500,000 to $1 million in high-stakes cases, this difference can be substantial as many professional liability policies do not have sufficient limits to cover defense costs being incurred at these levels let alone subsequent adverse judgments or settlements.
4. Occurrence v. claims-made-and-reported.
CGL policies are typically written on an occurrence-basis, whereas professional liability policies are almost always written on a claims-made-and-reported basis. Therefore, prompt and timely reporting of claims or potential claims is typically much more important under professional liability policies than under CGL policies. This distinction could prove very important when, for example, a particular suit is initially identified as a CGL loss, but further review reveals a basis for coverage under the professional liability program. If sufficient time passed for the professional liability program in effect when the suit was filed to lapse and a new program to incept, the failure to provide notice might result in a lost opportunity for coverage under either year?s professional liability program.
Key Policy Provisions
1. Definition of professional services.
The definitions of "professional services" in a policyholder's CGL and professional liability policies should be coextensive to ensure perfect dovetailing of coverage. If, for example, the definition of "professional services" is narrower in the insuring provisions of the professional liability policy than in the exclusion in the CGL policy, a gap in coverage will likely result. Further, the definition in both policies should make clear the specific types of activities the insurer considers to be "professional services." Disputes frequently arise when a company traditionally regarded as a service provider (like an architecture firm) performs work not traditionally regarded as "professional services" (like construction work under a design-build contract), and is later sued in a claim involving property damage or bodily injury. In the absence of a clear definition of "professional services," the commercial general liability insurer will argue that the work was excluded "professional services" while the professional liability insurer will argue that the work was non-covered bodily injury or property damage, resulting in a gap in coverage for the policyholder.
2. Nexus wording.
Both CGL and professional liability insurers can alter the scope of coverage for a mixed risk by making seemingly imperceptible changes to the policy wording concerning the nexus required between two concepts, and the concepts between which there must be a nexus.
- The nexus required: The phrase "damages because of bodily injury or property damage arising from your professional services" is susceptible to being construed more broadly than "damages because of bodily injury or property damage caused by your professional services" because "caused by" is frequently considered to require a closer nexus to the loss than "arising from."
- The concepts linked: The phrase "damages because of bodily injury or property damage arising from your professional services" differs from "bodily injury or property damage that results in liability arising from your professional services" in that the former requires a connection between the "bodily injury or property damage" and the "professional services" rendered while the latter requires a connection between the "liability" and the "professional services."
These slight differences can have a significant impact on the scope of coverage for a given claim. Oftentimes, liability is imposed on an insured even when the insured?s conduct giving rise to liability is remote from the actual cause of bodily injury or property damage (e.g., in strict liability or conspiracy claims). In these situations, an insuring agreement that requires a close nexus between the conduct of the insured (i.e., the professional services rendered) and the bodily injury or property damage might not be triggered. Conversely, an exclusion that provides for a broad nexus between the insured?s liability and the bodily injury or property damage can bar a broader scope of claims. In simpler terms, even a minute asymmetry in these provisions could result in purported gaps in coverage.
Professional services exclusions in CGL policies, while common, are not a mandatory feature. Insurers sometimes will agree to remove such an exclusion. If the carrier is unwilling to entirely remove the professional services exclusion, it may be amenable to issuing conditional limitations on coverage for claims involving "professional services," such as provisions specifying that the commercial general liability policy is excess to or not applicable when coverage exists under the insured?s professional liability policy.
Some professional liability insurers include in their policies limitations or exclusions for bodily injury or property damage. Although these exclusions can be absolute, they most often reflect an attempt by professional liability insurers to merely ensure that the CGL carrier is assuming primary responsibility for general liability exposures like bodily injury and property damage. These limitations or exclusions should be avoided at all costs, unless the CGL carrier has clearly acknowledged that its policy covers mixed claims involving, on the one hand, bodily injury or property damage, and, on the other, professional services. That said, and all else being equal, it is generally better for mixed claims to be covered under CGL policies than professional liability policies as the market for the former typically has greater capacity at a lower price.
Monitoring Your Coverages
For the reasons highlighted above, it is imperative that companies consistently reassess the mix of their business activities and make sure their insurance matches that risk profile. As for those companies already aware of the risk of mixed professional and general liability claims, close attention should be paid to policy language to ensure that their coverage programs actually dovetail as intended. And, lastly, it is important to keep in mind that having the best coverage program in the world does no good if there is not an effective system for providing timely notice of claims to the appropriate carriers.
Jeffrey A. Kiburtz is an associate with Shapiro, Rodarte & Forman LLP. He represents policyholders in insurance coverage matters, with a significant portion of his practice devoted to the life sciences industry.