The United States Court of Appeals, Fifth Circuit, has rendered a decision pertaining to the professional services exclusion that offers a thorough review of just what professional services are in connection with commercial general liability insurance coverage. The case is Cochran v. B.J. Services Company, USA, 302 F.3d 499 (5th Cir. 2002).

Drillmark Consulting Company contracted with Union Pacific Resources Company to perform various functions on an oil drilling operation. Drillmark was to supervise the site overall and was to report back to Union Pacific regarding the work of other contractors; Drillmark assigned Springfield to be the overall supervisor. Cochran, a derrick hand employee, was injured while removing a cement head owned by B.J. Services from the head's casing on top of the drilling rig. Cochran filed a personal injury lawsuit alleging negligence, and part of that lawsuit was the claim that Springfield was not present at the scene of the accident and his absence constituted failure to supervise. Drillmark presented the lawsuit to its insurer but coverage was denied based on a provision in the policy that excluded coverage for any obligations that arose from professional services. The insurer moved for summary judgment and the district court granted the motion.

Upon appeal, the circuit court found that the district court had applied Louisiana law to hold that the professional services exclusion in the general liability policy released the insurer from any liability arising from Cochran's lawsuit as a matter of law. However, the circuit court said that the Louisiana Supreme Court had yet to interpret the scope of the precise type of professional services exclusion provision implicated in this case in like circumstances. The circuit court said that a court has to look to the nature of the particular service allegedly negligently provided to determine whether that service was recognized as a professional service. To aid in the process of determining whether services are professional in nature, the court outlined a test: are special knowledge and technical expertise required to perform the service as opposed to an act being done by an unskilled or untrained employee? Professional services involve discretion acquired by special training and the exercise of special judgment. Based on those criteria, the service provided by Drillmark in this case was not a professional service.

Drillmark was not hired in its capacity as an engineering firm per se; it was hired to be the overall supervisor of company operated drilling, completion, and workover activities, and was charged only with monitoring the progress of other contractors. Moreover, Springfield testified that he was a non-engineer with a high school education and that he did not provide any instruction to contractors on how to accomplish any particular job. The court found further that the removal of a cement head itself was a routine task that did not require specialized instructions. Therefore, the supervision provided by Drillmark in this operation did not meet the test of a professional service and the professional services exclusion was not applicable. The ruling of the district court was reversed.

A California Case on Professional Services

Tradewinds Escrow, Inc. v. Truck Insurance Exchange, 118 Cal.Rptr.2d 561 (Cal. App. 2002) offers a discussion on the professional services exclusion, the no voluntary payments provision of the CGL form, and coverage under an auto policy. Briefly, the no voluntary payments provision was upheld by the court; the insured was held liable for a voluntary payment that it made without the insurer's consent. As for the auto policy, the court said that in order to invoke the coverage of the auto policy, an auto had to be a substantial factor or predominating cause of the alleged injury; that was not the case in this instance. The court's opinion on the professional services exclusion follows.

Feltus sued Tradewinds and contended that Tradewinds's failure to close escrow on her house caused Feltus to lose her financing and be evicted from the house. Tradewinds tendered the lawsuit to its insurer, Truck Insurance. Truck refused to defend on the grounds that the lawsuit arose out of the failure of the insured to render professional services and this was subject to a specific policy exclusion for professional services. Tradewinds filed a lawsuit against Truck for breach of contract and breach of the covenant of good faith and fair dealing. Truck moved for summary judgment based on the professional services exclusion and the trial court found for the insurer. Tradewinds appealed.

The appeals court noted that professional services are defined as those arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill; the labor or skill involved is predominantly mental or intellectual, rather than physical or manual. The court said that the unifying factor behind all the cases it reviewed on the meaning of professional services was whether the injuries claimed occurred during the performance of the professional services. In this case, all of the claims made by Feltus fell within the professional services exclusion because all the alleged wrongful acts of Tradewinds were committed during the performance of professional services, namely, the rendering of escrow services. The trial court's opinion was affirmed.

Advertising Injury Claim in Florida

In Vector Products, Inc. v. Hartford Fire Insurance Company, 2005 WL 161166 (11th Cir. Fla.), the insured brought an action against its liability insurer, alleging that the insurer had a duty to defend the insured in a false advertising lawsuit. The United States District Court for the Southern District of Florida granted summary judgment in favor of the insurer. The Eleventh Circuit Court of Appeals then reviewed the case.

The appeals court said that it had to determine whether insurance policy exclusions for knowledge of falsity or intent to injure apply to relieve Hartford of its duty to defend; the court noted that this was an issue of first impression in Florida law.

The facts of the case were as follows: Vector was charged with false advertising, unfair competition, and deceptive trade practices by a competitor in the business of manufacturing and selling battery chargers. One of the allegations against Vector was that its false statements were made willfully and intentionally and with full knowledge of the falsity of the statements. When Vector tendered the lawsuit to Hartford, coverage was denied based on this factor. Vector contended that even though the complaint against it contained allegations of willfulness and knowledge of falsity, it was entitled to a defense because the complaining party could recover on at least one claim without proving intent or knowledge. Hartford countered that since an allegation of willfulness and knowledge of falsity was incorporated into each count of the complaint, the exclusions on the policy triggered the denial.

The appeals court acknowledged the difficulties posed by a recent explosion of advertising injury litigation in federal courts because most such cases are controlled by state law. For this reason and since Florida had no case law on the issue herein, the appeals court certified the question to the Florida Supreme Court. The court did say that the personal and advertising injury clause on the CGL form does provide coverage for false advertising claims. But as for whether the intent to injure exclusion or the knowledge of falsity exclusion prevented coverage in this case, the appeals court felt that the Florida court should decide.

Advertising Injury Claim in Illinois

In Skylink Technologies, Inc. v. Assurance Company of America, 2004 WL 42365 (N.D. Ill.), the insured filed an action against the insurer seeking a declaration that the insurer had a duty to defend the insured against claims based on advertising injury. Chamberlain Group sued Skylink, alleging copyright infringement, false description, unfair competition, patent infringement, and violations of various Illinois statutes. Skylink tendered the lawsuit to Assurance which denied coverage. Assurance said that the allegations of Chamberlain do not constitute advertising injury as defined in the CGL form. The U.S. District Court ruled in favor of the insurer.

These are the facts of the dispute: Chamberlain manufactures and sells garage door openers and remote controls. Skylink is a competitor and distributes universal remote control devices that operate many different brands of garage door openers, including Chamberlain's. Chamberlain developed an item called the rolling code technology, and it alleged that Skylink infringed upon Chamberlain's copyright when it marketed and offered to the public a devise designed and produced solely to circumvent the rolling code technology. Chamberlain also accused Skylink of false and misleading advertisements. Skylink wanted its insurer to defend it against the claims, but Assurance denied coverage.

When the dispute between the insured and the insurer went before the court, Skylink asserted that Assurance had a duty to defend under the advertising injury insuring agreement. The court reviewed the policy provisions and said that in order for Skylink to establish a duty to defend, it had to show three things: it was engaged in advertising activity or used another's advertising idea in its advertisement; the underlying complaint contains allegations that fit one of the enumerated offenses; and the injury to the plaintiff arose out of an offense that the insured committed while engaging in advertising or business activity. The court found that Skylink failed to establish any of these requirements.

The court said that Chamberlain's complaint was based on the manufacture, use, and sale of an allegedly infringing product by Skylink. The infringement was not caused by an advertising activity on the part of Skylink, but on its manufacturing of a product. Chamberlain did not allege an injury that resulted from Skylink's advertising, but from the creation and sale of an infringing devise. In fact, the court found that none of the complaints filed by Chamberlain had a basis in advertising by Skylink. And, the court noted, advertising activities must cause the injury for the insurance coverage to apply. That did not happen in this instance and so, the insurer had no duty to defend.

One More Advertising Injury Claim

In Interface, Inc. v. The Standard Fire Insurance Company, 2000 WL 3319455 (N.D. Ga.), both the insured and the insurer filed motions for summary judgment concerning a dispute over coverage for an alleged advertising injury.

Collins & Aikman Floor Coverings (CAF), a competitor of Interface, filed a lawsuit against Interface for alleged copyright infringement in carpet patterns. CAF alleged infringement through design, production, distribution, and sale of carpets utilizing CAF's patterns. Interface sought coverage and defense under its insurance policy with Standard Fire. The insured said Standard Fire had a duty to defend because CAF alleged infringement of copyright not only through production and sale, but also through the promotional reproduction and display of carpets (that is, marketing and advertising). Standard Fire contended that the injury alleged by CAF is not advertising injury, but is really loss of sales due to infringement.

The court found that advertising activities are not defined in the policy. However, the court said it was clear that Interface advertised the products bearing the allegedly infringing patterns. The key issue, then, was whether there was a causal connection between the advertising activities of Interface and the advertising injury claimed by CAF. The court decided that the advertising itself infringed on the copyrights because the ads bore images of the copyrighted patterns. The injury emanated within the advertisements themselves and no further conduct was required.

Standard Fire contended that even if this was a case of advertising injury, there were exclusions on the policy that would prevent coverage. The insurer cited the knowledge of falsity exclusion and the breach of contract exclusion. Both exclusions were dismissed by the court. The court held that whether Interface knowingly manufactured infringing carpets or publications displaying the carpets does not make the carpets or publications false; knowledge of falsity has nothing to do with copyright infringement. As for breach of contract, Interface had no contractual relationship with CAF; the breach of contract exclusion was intended to preclude coverage for ordinary breach of contract lawsuits against an insured, not claims like this one where the insured is not even a party to the contract.

The motion by Interface for summary judgment was granted.

Case of Note:

A potential coverage gap is highlighted in Allstate Insurance Co. v. Massre et al., 2004 WL 3131281 (N.Y.A.D.2 Dept.). Here, the insured was injured in a collision between her vehicle and one driven by another party, who apparently intentionally collided with Massre's vehicle. When Massre turned to the carrier for payment for her injuries, the insurer denied coverage on the basis of there having been no accident.

The Personal Auto Policy (PAP) promises to pay “'damages' for 'bodily injury' … for which any 'insured' becomes legally responsible because of an auto accident.” And, of course, an accident is something unforeseen, unexpected, and unintended.

Massre then turned to her own carrier, Allstate, to collect under uninsured motorists coverage.

Again, no coverage. The insuring agreement for uninsured motorists coverage will respond to “compensatory damages which an 'insured' is legally entitled to recover from the owner or operator of an 'uninsured motor vehicle' because of 'bodily injury' …. caused by an accident.” No accident, no coverage.

Between a (Solid) Rock and a Hard Place

Or, when is an employee an independent contractor? Or, can an illegal alien be an employee? According to a recent Ohio case, the answer to the first question is “It depends on the facts;” the answer to the second is “Yes.”

Delfino Mendoza worked on a horse farm. The farm's owner and his wife, the Bishops (yes, that's their real name) were joint pastors at the Solid Rock Ministries International. Mendoza began working at the farm in 1994, and received a salary and a rent-free apartment. In 2000, Bishop drove a truck titled in Solid Rock's name to the farm and began to hook up wagons to the truck. Mendoza came over to help, and was seriously injured when Bishop backed into him.

Mendoza brought a personal injury action against Mr. Bishop, and named Solid Rock as a defendant based on an allegation that Mr. Bishop was an employee of Solid Rock and the church negligently entrusted the truck to Mr. Bishop. Mendoza included Mrs. Bishop as well, based on her negligently failing to train him to properly attach the wagon to the truck.

The Bishops had a personal liability policy in force, and the church had a business auto policy.

Both insurers filed for declaratory judgment based on Mendoza's status as an employee, which was granted. The Bishops and Solid Rock appealed on three assignments of error: (1) the trial court erred in not reserving the issue of employment status for the jury, arguing that Mendoza was an independent contractor; (2) the trial court erred in concluding Mendoza was an employee of the Bishops and Solid Rock Ministries; and (3) the trial court erred in concluding that no genuine issue of material fact existed as to whether Mendoza was an employee of the Bishops and Solid Rock Ministries.

The court looked at each issue, particularly the exclusions in the personal liability policy and the business auto policy for bodily injury to an employee. The court said without doubt Mendoza was an employee, even though he was an illegal alien and the Bishops were aware of it. Mr. Bishop directed his employment, set his hours, and paid him a salary. However, Mendoza was an employee of the farm, which was a sole proprietorship. Therefore, the personal liability policy should have responded.

As for the second and third assignments of error, it was clear from Mendoza's duties that he was not an employee of Solid Rock. Looking at the business auto policy exclusion or injury to an employee, the court said that because Mendoza was not an employee of Solid Rock Ministries, the business auto policy should have responded to the claim.

However, the court agreed with the trial court in granting summary judgment to the personal liability insurer on the duty to defend Mr. Bishop, since it was clear that the exclusion for injury to an employee applied.

This case is Mendoza et al. v. Bishop et al, 2005 WL 123982 (Ohio App. 12 Dist.).