Service enterprises have been taking over the U.S. employment market for decades. Some predict that in a few years they will account for roughly 80 percent of domestic jobs. Courts and insurance professionals advise service providers to purchase professional liability or errors and omissions (E&O) coverage in addition to general liability and business management policies because such policies typically include an exclusion for claims “arising out of professional services.”
A professional services exclusion takes away the coverage otherwise provided by a policy when a claim is made for damages allegedly caused by the insured while the insured was performing services requiring specialized skill and knowledge. They often state that the policy does not apply to claims “arising out of the rendering of or failure to render professional services.” Some versions list, briefly or at great length, the type of services meant to be excluded. Others create exceptions for certain situations, allowing coverage for the insured’s usual line of business but not for other services. The requirement that the claim be “arising out of” the services means that the professional services do not have to be the direct cause of the claimed damages. Some causal link suffices, as seen in the case discussed here.
These exclusions once were limited to the work of doctors, lawyers, accountants and similar learned occupations, but courts now explain that “professional services” include all paid services “arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill . . . [that is] predominantly mental or intellectual, rather than physical or manual.” Hollingsworth v. Commercial Union Ins. Co. , 208 Cal. App. 3d 800, 806 (1989). Claims arising out of consulting, property management, construction oversight and scheduling, escrow accounts, business administration and other commercial operations can fall within a professional services exclusion. Seemingly physical or manual activities such as plumbing installation or ear piercing may be professional activities if sufficient skill and judgment is required. The dividing line between an ordinary laborer and a specialist or professional is sometimes hard to see.
Judge Wilkins, a federal judge in the Northern District of California, recently ruled that insured HotChalk, Inc. had no coverage under a business management and indemnity policy issued by Scottsdale. HotChalk Inc. v. Scottsdale Ins. Co., 2016 U.S. Dist. LEXIS 163046 (No. 4:16–cv-03883–CW, N. D. CA, Nov. 15, 2016). HotChalk provided assistance to universities creating and expanding online degree programs, including the promotion and administration of those programs and the recruitment of students. When former employees sued for violation of the federal False Claims Act by the payment of illegal incentives to employees who enrolled students for client universities, HotChalk tendered the lawsuit to Scottsdale, which denied coverage based on a professional services exclusion. The judge decided that HotChalk provided professional services, and that if it had not provided those services it would not have been subject to the underlying False Claims Act lawsuit. Therefore, the exclusion applied and Scottsdale did not have to defend or indemnify HotChalk, even though the compensation scheme was not a professional service provided to customers.
It will be interesting to see if courts continue to expand the application of the Professional Services Exclusion in light of the ever growing number and diversity of commercial services available. In the meantime, it is worth thinking about how the provision might apply to your own business or that of your clients, customers or insureds. Consider taking steps to ensure coverage is available when you or they face a problem.
