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District Court Rules “Professional Services” Exclusion means Professional Services

2017 Case Notes

June 29, 2017

Recently, the United States District Court for the District of South Carolina granted judgment in favor of an insurance carrier, finding the carrier did not owe a duty of defense or a duty to indemnify the insured in an underlying professional malpractice claim. In State Farm Fire and Casualty Company v. Morningstar Consultants, Inc., State Farm initiated a declaratory judgment action against Morningstar Consultants, Inc. (MCI). MCI was the defendant in eight separate tort suits alleging, in effect, that MCI had negligently inspected several construction projects, which were rife with construction defects. State Farm had issued two policies to MCI seriatim, which were the subject of the declaratory action. Each policy contained an exclusion for damage resulting from “the rendering or failure to render any professional services.” During the policies’ effective periods, MCI provided professional building inspection services.

MCI advanced two theories in support of coverage: (1) MCI holds no professional licenses, such that it could not render “professional” services within the meaning of policies; and (2) application of the exclusion would render the two policies meaningless.

Unfortunately, MCI did not articulate a basis for the first argument. In fact, MCI did not provide any facts or legal precedent in support of the argument that the lack of a professional license moves the provision of inspection services beyond the ambit of “professional services” as described in the policy. In the words of the district court “[n]o one, of course, would suppose, suggest, or suspect it is within the purview of this Court to take a single simple sentence in a counseled case, fashion an argument, adorn it with legal citations, and then judge the strength of its own argument.” As such, the district court summarily rejected MCI’s argument on this point. Moreover, the insurance policies at issue defined “professional services” to specifically exclude “inspection services.” So, not only did MCI fail to provide facts to support its argument, the only facts discussed by the court on this point directly contradicted MCI’s position.

The district court then moved to MCI’s “futility” argument, and soundly rejected it as well. In support of its second argument, MCI relied on the case of Isle of Palms Pest Control Co. v. Monticello Ins. Co.  In Monticello, the Court of Appeals held that the exclusion (extermination services) sought to bar coverage for the very operations the insured meant to be covered. The district court distinguished Monticello because that policy did not define “professional services,” unlike the MCI policy. Second, the district court found that not all claims were barred by the policy language in the MCI policy. Quoting from the insured’s deposition, the district court found that MCI’s owner did not seek coverage under the subject policies for mistakes in his “written [inspection] reports,” but rather for other risks associated with visiting properties during inspection appointments. Finally, the district court found that the Monticello policy premiums were based in part on the gross receipts from that insured’s exterminating business, whereas MCI’s policy premiums were de minimus.

While Morningstar presents a vindication for clarity and contractual interpretation, it contains three reminders for practitioners in the insurance realm. First, if you advance a position, you better support it with factual and legal arguments. Second, do not suggest a defined term in a policy means the opposite of its plain meaning. Finally, consider and articulate the risks insured versus the premium paid as a whole to assist the court in determining whether the exclusion swallows the allegedly covered risks.

Bruce Wallace practices with Nexsen Pruet’s business and consumer litigation group in Charleston. He represents a variety of banking and financial institutions in real estate litigation, commercial litigation, and mortgage foreclosures. He also represents insurers and corporate clients in bad faith and coverage issues, professional liability, business litigation (including disputes involving partnerships, limited liability companies, and closely held companies), and probate litigation matters (including trusts and estates).