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“One cannot be a construction contractor without a construction contract”: Professional Liability Exclusion Precludes Coverage Under CGL Policy”

On June 27, 2018, Judge Oetken of the SDNY issued a decision in Liberty Ins. Corp. v. WSP USA, Inc., Case No. 17-cv-4398(JPO), holding that coverage under a CGL Policy was excluded by a professional liability exclusion.

The insured, WSP, was hired by the Washington State Department of Transportation to “evaluate the repair or replacement of the Alaskan Way Viaduct, a highway project in Seattle.” WSP “agreed to develop an environmental impact statement and to perform ‘associated design work’ for the viaduct project." WSP was sued for negligence by a contractor that worked on a new tunnel to replace the viaduct, and submitted a claim to its CGL carrier (Liberty).  The policy’s “professional liability exclusion” precluded coverage for claims “arising out of the rendering or failure to render any professional services” with respect to “providing engineering, architectural or surveying services to others in your capacity as an engineer, architect or surveyor.”  The exclusion had an exception, however, that carved out from the definition of “professional services” any “services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor.” Liberty initially agreed to contribute to the defense of the claim subject to a reservation of rights, but ultimately filed an action for a “declaratory judgment as to whether the [negligence lawsuit] is excluded from coverage under the professional-liability exclusion.”  The principal issue on summary judgment was whether the construction contractor exception to the professional liability exclusion applied.

Judge Oetkin found that the exception was inapplicable and that the professional liability exclusion barred coverage, explaining:

The construction contractor exception exempts “[1] services within construction means, methods, techniques, sequences, and procedures [2] employed by you in connection with your operations [3] in your capacity as a construction contractor.” The [ ] complaint alleges, among other things, that WSP “[f]ailed to remove or otherwise properly decommission [Test Well #2] following its abandonment or discontinued use.” WSP argues that this allegation falls within the construction contractor exception because it relates to work done as a construction contractor.

For the construction-contractor exception to apply . . . WSP must have been acting in “its capacity as a construction contractor.” That term is not defined by the policy. Consequently, the meaning of that term is a matter of law for the court to decide. When attempting to define a term, the insurance policy should be read in light of common speech and the reasonable expectations of a businessperson.

. . .

The term “construction contractor” has an unambiguous plain meaning, which is generally understood. Put simply, a construction contractor is “a person or company that agrees to do work . . . for another company” that involves “act[s] of building.” See Contractor, Black’s Law Dictionary (10th ed. 2014); Construction, Black’s Law Dictionary (10th ed. 2014).

. . .

The Court concludes that, under the plain meaning of “construction contractor,” the absence of any contract between WSP and any other entity under which WSP was hired to build something precludes WSP from invoking the construction-contractor exemption: one cannot be a construction contractor without a construction contract.

. . .

WSDOT engaged WSP “to assist in the process of evaluating the repair and/or replacement of the Viaduct, including the preparation of conceptual engineering studies.” WSP and WSDOT entered into two agreements[.] . . . Neither the agreements nor the task orders obligated WSP to build or construct anything; in other words, none of these contracts required WSP to act in the capacity of a construction contractor.

WSP contends that it was acting as a construction contractor when it allegedly failed to remove or otherwise decommission Test Well #2. But even if this alleged failure to act constitutes “services within construction means, methods, techniques, sequences, and procedures”, the fact that construction methods may have been involved is insufficient, by itself, to bring these allegations within the purview of the construction contractor exemption. The exemption also requires that any construction-related services be “employed . . . in connection with your operations in your capacity as a construction contractor.” WSP’s interpretation of the exemption, which makes its applicability wholly contingent on the kinds of services performed, would render the phrase “capacity as a construction contractor” superfluous. The Court therefore rejects WSP’s strictly work-based interpretation of the exemption.

Given the nature of the Agreements and Task Orders issued by WSDOT, the Court concludes that WSP was acting in a professional engineering capacity. . . . The absence of a contract between WSP and any other entity in which WSP is hired to build anything confirms that it was not acting in the capacity of “construction contractor.”

This decision underscores the need for an insured to obtain the right kind of insurance for its business activities.  The reference in the decision to Liberty "contributing" to the defense suggests that WSP may have had another source of coverage for this claim.  If not, the CGL policy wasn't doing much for it, given the professional services it was performing.

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