In this preview of the article “‘Trust Me, I’m a Professional:’ Analysis of Recent Case Law Addressing Coverage Under Professional Liability Policies” from Volume XXVI, issue 6 of the PLUS Journal (June 2013) author Christopher Ferragamo analyzes recent case law pertaining to professional liability coverage.
Clerical, Ministerial and Administrative Tasks Performed by Professionals
In determining whether activities of professionals constitute “professional services,” courts have been reluctant to conclude that activities are “professional” in nature merely because they were performed by a professional. [iii] Instead, courts carefully analyze the underlying allegations to determine whether all of the activity undertaken by the professional required specialized skill, knowledge, or expertise. [iv] Common examples where courts have refused to stretch the application of the term “professional services” involve cases where the claims at issue involve clerical, ministerial, administrative or support functions performed by professionals. To the extent some part of the conduct giving rise to the claim is of a general, rather than a professional nature, or if the conduct alleged is merely “incidental to” the work as a professional, then the claim may fall outside of the scope of coverage of the professional liability policy. [v]
By way of example, Courts in a number of states have concluded that claims involving billing and fee practices of professionals do not constitute “professional services.” In this regard, when not specifically excluded from coverage, Courts view billing and fee practices of professionals as ministerial or professional tasks inherent in all businesses and, thus, falling outside of coverage. [vi] Interestingly, at least one Court has reached a different conclusion when addressing a bid proposal prepared by a professional. [vii] When addressing claims involving the handling of client funds which, at first blush, also appear ministerial and/or administrative in nature, Courts have likewise concluded that such claims involve the rendering of “professional services.”
The Supreme Court of New York, County of New York recently addressed this issue in a coverage lawsuit involving a claim asserted by a bank against a law firm for breach of contract, breach of warranty and negligence when the law firm deposited a fraudulent check from a Korean entity. [viii] The law firm’s professional liability insurer denied coverage for the bank’s claim on the grounds that the suit did not “arise out of” the “rendering or failure to render professional legal services.” [ix] In relying on a similar case decided by the Third Department of the New York Supreme Court’s Appellate Division, the Court concluded that the insurer was obligated to defend the lawsuit because an overdraft claim is “based on” and “arises out of” the provision of legal services because those terms “require only that there be some causal relationship between the injury and the risk for which coverage is provided.” [x]
The United States Court of Appeals for the Eleventh Circuit, applying Florida law, reached the same conclusion in a case decided in May, 2011 involving a suit brought by the firm’s clients to recover funds lost in a similar fraudulent check scheme. [xi] The appellate court concluded that the deposit of clients’ funds into a trust account creates a fiduciary relationship between the clients and the law firm. [xii] The court further explained that the management of funds held in trust constitutes a “professional services” as defined in the policy. [xiii]
‘Failure to Warn’ Cases
Other instances that give rise to coverage uncertainty involve situations where the claimant alleges that a professional failed to warn or made some type of misrepresentation relating to the work performed by the professional. For example, in a 2010 decision from the United States District Court for the Eastern District of Texas, an insurer commenced a declaratory judgment action seeking a determination as to its rights and obligations, to defend and indemnify its insured, a land surveying firm, and three individuals in thirteen lawsuits pending in state court. [xiv] In the underlying actions, thirteen homeowners sued the insured and generally alleged that the insured’s surveys erroneously certified higher elevations than actual elevations, and that the insured learned of these errors prior to Hurricane Ike, but failed to disclose the errors to the homeowners. [xv] Hurricane Ike subsequently hit the area and caused extensive flood damage to the claimants’ homes. [xvi] The insurer issued a claims-made and reported “Architect and Engineers Professional Liability Policy” to the insured whereby it agreed to pay “all sums that the Insured becomes legally obligated to pay as Damages… arising out of a negligent act, error or omission… in the rendering or failure to render professional services as described in the Declarations…” [xvii] The insurer asserted that it had no duty to defend or indemnify the insured under the policy for the underlying actions, in part, because the alleged wrongful or negligent failures to disclose surveying errors do not, as a matter of law, constitute failures to render a “professional service.” [xviii] In so arguing, the insurer contended that disclosing a subsequently-discovered surveying error is distinct from the error itself, that disclosing information that could harm another does not require special knowledge or training of a professional, and that the failure to disclose, therefore, cannot be a surveying and civil-engineering professional service. [xix] The Landmark Court struggled with the issue and noted that determining whether the failures to warn of the subsequently-discovered errors fell within the coverage provided by the policy was “close” and that the insurer’s arguments had “considerable logical appeal.” [xx] The Court noted, however, that establishing accurate elevations required specialized surveying education, training, knowledge and experience and that discerning an error in the elevations required the same, or perhaps more, expertise. [xxi] The Court ultimately concluded that allegations of negligence in performance of these activities implicate a professional service and, thus, the allegations triggered the insurer’s duty to defend. [xxii]
In a more recent case decided in December, 2011, in the context of a professional services exclusion, a New Jersey Appellate Court concluded that the failure to report suspected sexual abuse by a community mental health facility constituted “professional services” and, thus, was excluded under the facility’s commercial general liability policy. [xxiii] In Cumberland County, the parents and younger siblings of a former patient of the insured facility filed suit alleging that the siblings were abused by their older brother following his discharge from the facility. [xxiv] The plaintiffs alleged that the older brother had been molested by another patient at the facility, which caused him to abuse his younger siblings. [xxv] In their complaint, the plaintiffs alleged that the facility staff had reason to believe that the older brother had been molested at the facility but failed to report the abuse to the state authorities. [xxvi] Because the claim was barred under the facility’s professional liability policy based upon the retroactive date in the policy, the facility sought coverage under its commercial general liability policy. [xxvii] The CGL policy, however, contained a professional services exclusions that precluded coverage for injury “due to the rendering or failure to render professional services. [xxviii] The insured argued that the injury did not fall within the exclusion because the injury allegedly resulted from the failure to report, which was an omission by, among others, “an aide with a high school education.” [xxix] In analyzing the issue, the Court noted that “it is the act itself” and “not the title or character or the party performing the act” that determines whether services fall within the exclusion. [xxx] The Court concluded that the conduct at issue “related directly to” the provision of the mental health services provided to the older brother (including the conduct of the aide in assisting a mental health professional) and, thus, fell within the professional services exclusion of the policy. [xxxi]
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