January 22, 2014 Articles

Evaluating Whether the Insured Was Performing "Professional Services"

When and whether an insured is engaged in a professional service is a threshold issue in determining whether coverage exists and under which type of policy

by Mark E. Cohen, Rina Carmel, and Suzanne Whitehead

Professional liability policies, also known as errors and omissions (E&O) policies, are designed to provide coverage for the acts, errors, or omissions of professionals in performing professional services. Conversely, commercial general liability (CGL) and homeowners’ policies typically exclude coverage for professional services. When and whether an insured is engaged in a professional service is thus a threshold issue in determining whether coverage exists and under which type of policy.

Complicated issues can arise in determining whether the insured was performing “professional services.” This is especially so if the insured allegedly engaged in illegal activity that was somehow related to the legitimate professional activity. For example, a frequent claim is that a medical professional sexually molested a patient during an examination. Whether the molestation is part of the insured’s professional services is determined by  a case-by-case evaluation of the facts.

Policy Language

Most general liability policies bar coverage for “professional services.” Some CGL policies contain a broadly worded exclusion for “‘[b]odily injury’ or ‘property damage’ arising out of the rendering or failure to render professional services.”[1] The most recent Insurance Services Office (ISO) CGL main form limits the definition of “insured contract” by providing that it does not include “that part of any contract or agreement: . . . Under which the insured, if an architect, engineer or surveyor, assumes liability for an injury or damage arising out of the insured’s rendering or failure to render professional services. . . .”[2] The definition specifies a number of activities that constitute such professional services, including “supervisory, inspection, architectural or engineering activities.”[3] This CGL form’s “who is an insured” provisions provide that the insured’s “volunteer workers” or employees are not insureds for allegations of bodily injury or personal and advertising injury “[a]rising out of his or her providing or failing to provide professional health care services.”[4]

Homeowners’ policies often contain broadly worded professional services exclusions. Exclusion d in the HO-3 form excludes coverage for bodily injury or property damage “[a]rising out of the rendering of or failure to render professional services.”[5]

Unlike most general liability policies, professional liability policies are not written on standardized forms. Thus, the definition of “professional services” varies widely.

Some professional liability policies contain a more generalized, broadly worded definition of the term. For example, one lawyer’s professional liability policy defined the term to refer to any claim “arising out of any act or omission of the insured in rendering or failing to render professional services for others in the insured’s capacity as a lawyer.”[6]

Other policies contain more specific definitions. The following examples, taken from policies designed for a range of professions, are illustrative:

  • A hospital professional liability policy defined the term to mean any act or omission “[i]n the furnishing of professional health care services, such as: medical, surgical, dental or nursing treatment to such person by the covered person inflicting the injury.”[7]

  • One currently available architects and engineers professional liability policy defines “professional services” to mean “performance of services for others as an architect, engineer, construction manager, golf course designer, interior designer, land surveyor, landscape architect, LEED accredited professional, scientist, or technical consultant.”[8]

  • A recently filed complaint alleges that the professional liability policy at issue defines “professional services” to mean “outpatient drug and alcohol rehabilitation and counseling.”[9] The insurer’s complaint seeks a declaration (among other relief) that no coverage exists because the insured was actually operating a residential facility and was thus not performing professional services as defined in the policy.

Courts have also interpreted the term “professional services.” Under the majority view, it “unambiguously refers to services unique to a specific profession and excludes the business aspects of a professional practice that a professional happens to perform . . . . [T]asks performed by a professional are not covered if they are ‘ordinary’ activities ‘achievable by those lacking the relevant professional training and expertise.’”[10]

The Marx Rule

The standard for determining what constitutes a professional service is set forth in the seminal decision Marx v. Hartford Accident & Indemnity Co.[11] Although this decision is now 45 years old, it continues to provide the standard in most states.

In Marx, the insured employee, a technician, was refilling a hot water sterilizer but mistakenly poured benzine instead of water into the container. Fumes exploded, causing a fire, which caused extensive damage to the building. The court noted that “[n]o patient was present or being treated.”[12] The coverage issue under the hospital’s professional liability policy was whether the technician was performing a professional service. Holding that the employee was not performing a professional service because any untrained, unskilled person can pour water into a container, the court set forth the standard for “professional services”:

Something more than an act flowing from mere employment or vocation is essential. The act or service must be such as exacts the use or application of special learning or attainments of some kind. The term “professional” in the context used in the policy provision means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities. A “professional” act or service is one 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. In determining whether a particular act is of a professional nature or a “professional service” we must look not to the title or character of the party performing the act, but to the act itself.[13]

Thus, not all services performed by a professional are professional services, and conversely, a nonprofessional employee can sometimes be said to engage in professional services.

Recent Cases Push the Envelope

Our digital society has given rise to new risks and emerging case law on whether digital activities, such as fax blasting, can constitute professional services. More traditional risks continue to pose challenging issues for courts as well, such as swindling, alleged violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act, and a medical professional’s sexual molestation of a patient during an examination.

BCS v. Big Thyme Enterprises. Fax blasting continues to be a prominent coverage issue, in this instance in the professional liability context. In BCS Insurance Co. v. Big Thyme Enterprises, Inc.,[14] the policyholders, who were insurance agents, were sued in an underlying action that alleged that they sent advertisements to non-clients via facsimile, in violation of the Telephone Consumer Protection Act.[15]

The insureds’ Agents and Brokers Professional Liability Policy defined “professional services” as “specialized services rendered to a Client as a licensed Life, Accident and Health Insurance Agent.”[16] The insureds argued that their activities qualified as professional services because it required professional skill “to design and/or approve an advertisement that complies with laws and rules governing his or her profession and further to determine how to best disseminate the information the targeted audience.”[17]

The insurer argued that fax blasting is not a professional service performed by insurance agents. Rather, according to the insurer, the following activities are examples of what would constitute professional services of insurance agents:

[M]eeting with clients to discuss their insurance needs; counseling clients on the products best suited to such needs; obtaining competing bids from insurance companies; completing insurance applications with clients; procuring coverage; and renewing, cancelling, or consulting about premium charges.[18]

The court held that the policy language was unambiguous and that “the act of sending unsolicited faxes does not qualify as ‘specialized services rendered to a Client as a licensed Life, Accident and Health Insurance Agent.’”[19] Thus, fax blasting was not a professional service, and the policy afforded no coverage.[20]

O’Brien & Wolf v. Liberty. In O’Brien & Wolf, L.L.P. v. Liberty Insurance Underwriters, Inc.,[21] the insured law firm was the “victim of a devious” swindling scheme, and a substantial amount of money was swindled from its clients fund account. The firm, upon discovering that the money had been lost, contacted the state disciplinary agency to report the incident and promptly replaced the money from its own funds. By doing so, the firm avoided disciplinary action and claims by its clients.

The firm then sought reimbursement from its lawyer’s professional liability insurer. The insurer disclaimed coverage because, among other things, the money was not lost as a result of the law firm’s professional services. The court held that although a non-attorney firm employee conducted the transactions that led to the loss of client funds, the policy could cover services performed by non-lawyers. The court supported its reasoning by noting that the Minnesota Rules of Professional Conduct “require all transactions involving a trust account be approved by a licensed attorney.”

Navigators v. Beltman. In Navigators Specialty Insurance Co. v. Beltman,[22] the insured environmental research and consulting firm allegedly committed conspiracy and RICO violations in order to manufacture evidence and thereby subject third-party claimant Chevron to environmental liability for its activities in Ecuador. The court explained:

Here, the Chevron claims against the Stratus Parties [the insureds] are premised on their provision of “various environmental consulting services” to the U.S. plaintiffs’ attorneys in the Ecuadorian litigation. Chevron alleges that the Stratus Parties provided “various environmental consulting services,” and “ghostwrote” the purportedly independent Cabrera Report filed in the Ecuadorian litigation. The purpose of the report produced by the Stratus Parties was “to provide expert technical assistance to the Court,” and was described as the “single most important technical document for the case.” The Stratus Parties allegedly were able to perpetrate the fraud precisely because of their professional status, utilizing the professional jargon of their specialized field to generate a convincing, albeit fraudulent, expert report. They further traded off of their status as professionals by allegedly offering “commentary” on the ghostwritten report, claiming to endorse the conclusions contained in the report based on their independent exercise of professional judgment.

The Stratus Parties’ provision of professional services was an integral part of the alleged fraud scheme, and was not some incidental or irrelevant factor in the commission of the alleged fraud.[23]

Therefore, the court held that the professional services exclusion in the directors’ and officers’ policy barred coverage.

The insured’s CGL policy contained two exclusions that the court held also barred coverage. The “Engineers, Architects or Surveyors Professional Liability” exclusion, which excluded coverage for injury “arising out of the rendering of, or failure to render, any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity,” was held to bar coverage because the underlying action arose out of the insured’s rendering of professional services to the plaintiffs’ lawyers in the Ecuador lawsuit.[24]

The CGL policy also contained an exclusion for “Testing Or Consulting Errors and Omissions,” which barred coverage for the following:

1. An error, omission, defect or deficiency in: a. Any test performed; or b. An evaluation, a consultation or advice given, by or on behalf of any insured; 2. The reporting of or reliance upon any such test, evaluation, consultation or advice; or 3. An error, omission, defect or deficiency in experimental data or the insured’s interpretation of that data.

The court held that this exclusion precluded coverage because the underlying claims arose out of the “evaluation” or “consultation” provided in an environmental report and related documentation that were allegedly created to manufacture liability against Chevron.[25]

National Fire v. Lewis. The court in National Fire Insurance Co. of Hartford v. Lewis[26] came to an unusual conclusion, in construing coverage for an underlying action that involved the alleged assault of female patients by the insured cardiologist. The crux of the coverage issue was that part of the cardiologist’s examination could have legitimately involved touching the patients’ breasts, but not other body parts. The patients alleged that the insured sexually assaulted them during examinations by inappropriately touching their breasts, hair, throat, vagina, and buttocks.

The businessowners’ general liability policies at issue contained an exclusion for “‘[b]odily injury’ . . . caused by the rendering or failure to render any professional service.”[27] Although these policies did not define “professional services,” they stated that the exclusion “includes but is not limited to . . . Medical [or] surgical . . . services treatment, advice or instruction; [and] any health or therapeutic service treatment, advice or instruction.”[28] The court stated that the relevant inquiry was as follows:

Whether the acts of molestation fall within the professional services exclusion thus depends on whether those acts can be viewed separately under Arizona insurance law from the medical services provided by [the insured].
. . . . 
[S]exual assault during medical treatment is not in itself sufficient to qualify as a professional service. Some connection between the type of treatment and the type of molestation is required.[29]

The court reasoned that because cardiology can involve examining a patient’s chest area, the causal link between examining the chest and inappropriately touching a patient’s breasts is “rather direct” and therefore constitutes professional services, such that the professional services exclusion bars coverage.[30] On the other hand, allegations of inappropriate touching of other body parts gave rise to issues of fact because “the relation between the sexual assault and the type of medical service offered matters when determining whether an act constitutes a professional service.”[31]

Conversely, under the insured’s professional liability policy, the inappropriate touching of the patients’ breasts constituted professional services. However, an issue of fact existed as to whether inappropriate touching of other areas of the patients’ bodies constituted professional services.[32]

Saint Consulting Group v. Endurance. In our electronic age, spoliation of evidence is a hot issue, as legislatures, courts, and businesses have become more conscious of issues related to preservation of evidence and the consequences of spoliation. Physical evidence and documents can still be spoliated, of course, and the recent case of Saint Consulting Group, Inc. v. Endurance American Specialty Insurance Co. held that the insured consulting firm did not perform a “professional service” in discarding old physical files.[33]

In that case, the court held that alleged spoliation of evidence did not involve a professional service. The professional liability policy defined the insured’s services to consist of “[a]dvocacy consulting services including: analysis, strategic planning, research, recommendations, recruiting, organizing, support management and media communication.”[34]

The court stated that in Massachusetts, “the ‘professional services’ language is read to cover only claims involving the exercise or failure to exercise professional judgment; and, critically here, even tasks performed by a professional are not covered [by a professional services policy] if they are ‘ordinary’ activities achievable by those lacking the relevant professional training and expertise.”[35]

The court noted, in dicta, that if the insured were a document storage and disposal firm, the discarding of documents entrusted to it would be a professional service.[36] Insureds are likely to rely on the court’s dicta in seeking coverage for spoliation.

Practical Tips

  • Insureds should be accurate in filling out policy applications, especially in describing the professional services they perform.
  • If a broker fills out the application on behalf of the insured, the insured should read what the broker has written and correct it if it is not accurate.
  • Insureds should read their policies and understand the scope of coverage provided.
  • On receipt of notice, insurers should review all coverage parts under all policies under which the insured has tendered, in order to determine whether coverage potentially exists.
  • Insurers should keep in mind that because a coverage provision for professional services is broadly construed, while a professional services exclusion is narrowly construed against the insurer, it is possible that coverage could exist under both a general liability policy and a professional services policy. For the same reason, insureds should tender to both their professional liability insurer and general liability insurer if there is any doubt as to which policy might provide coverage—especially because professional liability policies are often written on a claims-made or claims-made-and-reported basis, such that failure to timely report a claim is usually grounds for the insurer to disclaim coverage.
  • In evaluating coverage, professional liability insurers should review the definition of “professional services” carefully in conjunction with the allegations in the complaint, to determine whether the insured’s act, error, or omission was in the course of performing a professional service as defined in the policy.
  • Insurers should consider reviewing the underwriting file and the policy application, to determine whether the insured accurately disclosed its professional services. If the insured did not do so, rescission may be an option.
  • Whether the insured was performing professional services is just one among many coverage issues presented under a professional liability policy. Professional liability claims can be complicated and involve many issues, so insurers and policyholders alike should evaluate all of the coverage issues presented.

Keywords: insurance, coverage, litigation, professional liability, errors and omissions, malpractice insurance, professional services

Mark E. Cohen is a partner and Suzanne Whitehead is a senior associate in Zelle McDonough & Cohen LLP, Boston.

Rina Carmel is a partner in Zelle McDonough & Cohen LLP, Los Angeles.


[1] Atlantic Mut. Ins. Co. v. Gula2007 PA Super 139, ¶ 3, 926 A.2d 449, 452 (Pa. Super. Ct. 2007).
[2] ISO Form No. CG 00 01 04 13.
[3] ISO Form No. CG 00 01 04 13.
[4] ISO Form No. CG 00 01 04 13.
[5] ISO Form No. HCPC HO 03 12 10.
[6] Lyons v. Am. Home Assurance Co.354 N.W.2d 892, 894 (Minn. Ct. App. 1984).
[7] Emp’rs Reinsurance Corp. v. Newcap Ins. Co., Ltd.209 F. Supp. 2d 1184, 1189 (D. Kan. 2002).
[8] Ironshore Architects and Engineers Professional Liability Insurance Policy, Form No. AEL-10003-POL (04-2010).
[9] Evanston Ins. Co. v. Narconon of Ga. Inc., No. 1:13-cv-02871 (N.D. Ga. filed Aug. 28, 2013).
[10] St. Paul Fire & Marine Ins. Co. v. ERA Oxford Realty Co. Greystone, LLC,572 F.3d 893, 898–99 (11th Cir. 2009) (Alabama law) (citations omitted).
[11] 183 Neb. 12, 13–14, 157 N.W.2d 870, 871–72 (Neb. 1968).
[12] Marx183 Neb. at 13, 157 N.W.2d at 871.
[13] Marx, 183 Neb. at 13–14, 157 N.W.2d at 871–72 (citations omitted).
[14] C/A No. 3:12-CV-933-JFA, 2013 U.S. Dist. LEXIS 20051 (D.S.C. Feb. 14, 2013).
[15] 47 U.S.C. § 227.
[16] BCS, 2013 U.S. Dist. LEXIS 20051, at *7.
[17] BCS2013 U.S. Dist. LEXIS 20051, at *8.
[18] BCS, 2013 U.S. Dist. LEXIS 20051, at *7–8.
[19] BCS, 2013 U.S. Dist. LEXIS 20051, at *9.
[20] BCS, 2013 U.S. Dist. LEXIS 20051, at *9–10.
[21] Civil No. 11-3748 (JNE/SER), 2012 U.S. Dist. LEXIS 109089, at *1 (D. Minn. Aug. 3, 2012).
[22] Civil Action No. 11–cv–00715–RPM, 2012 U.S. Dist. LEXIS 156666 (D. Colo. Nov. 1, 2012).
[23] Beltman2012 U.S. Dist. LEXIS 156666, at *21.
[24] Beltman2012 U.S. Dist. LEXIS 156666, at *24.
[25] Beltman, 2012 U.S. Dist. LEXIS 156666, at *28–30.
[26] 898 F. Supp. 2d 1132 (D. Ariz. 2012).
[27] Lewis, 898 F. Supp. 2d at 1142.
[28] Lewis, 898 F. Supp. 2d at 1142.
[29] Lewis, 898 F. Supp. 2d at 1142–43 (relying on St. Paul Fire & Marine Ins. Co. v. Asbury149 Ariz. 565, 566, 720 P.2d 540, 541 (Ariz. Ct. App. 1986)).
[30] Lewis, 898 F. Supp. 2d at 1144.
[31] Lewis898 F. Supp. 2d at 1145.
[32] Lewis898 F. Supp. 2d at 1155.
[33] 699 F.3d 544 (1st Cir. 2012) (Massachusetts law).
[34] Saint Consulting Group699 F.3d 544 at 554.
[35] Saint Consulting Group, 699 F.3d 544 at 554–55 (citations and some internal punctuation omitted).

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