Professional Liability Exclusion Precluded Coverage for Suits against Inspection Company

June 21, 2017 | Robert Tugander | Insurance Coverage

A federal district court in South Carolina has ruled that a professional liability exclusion in insurance policies issued to an inspection services company precluded coverage for lawsuits alleging that the company had been negligent.

The Case

Eight state lawsuits against Morningstar Consultants, Inc. (“MCI”) alleged property damage to certain construction projects for which MCI allegedly had provided inspection services. In the state lawsuits, the plaintiffs alleged that MCI had been negligent in its rendering of, or in its failure to provide, inspections of the building units.

MCI notified its insurer, which then asked a federal district court in South Carolina to declare that it owed no duty to defend or indemnify MCI against the state lawsuits.

The insurer moved for summary judgment, asserting that the professional liability exclusion in its policies defeated any coverage claim because MCI’s acts of inspecting the work of others and preparing reports were professional services.

MCI insisted that the exclusion was inapplicable because it held no professional licenses. It also contended that applying the exclusion would render the policies meaningless.

The District Court’s Decision

The district court granted summary judgment in favor of the insurer.

In its decision, the district court first rejected MCI’s contention that the exclusion was inapplicable because it held no professional licenses. The district court also did not accept MCI’s position that enforcing the exclusion would render the policies meaningless.  First, the exclusion was not ambiguous; it expressly identified “inspections” as professional services not covered by the policies.  Second, the exclusion did not “annul the risk” envisioned by the policyholder when it purchased the policies.  Third, no premium was calculated based on receipts from the insured’s inspection business.

The court concluded that the “plain meaning of the inspection exclusion” negated any coverage for the state lawsuits that had been filed against MCI.

The case is State Farm Fire and Cas. Co. v. Morningstar Consultants, Inc., No. 6:16-01685-MGL (D.S.C. May 24, 2017).

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