Engineering Firm Gets Soaked By Professional Services Exclusions in Water Treatment Plant Claim

Posted by

In an unpublished decision, the Sixth Circuit affirmed a lower court’s decision judgment in favor of two insurers. Specifically, the Sixth Circuit broadly construed professional services exclusions to preclude coverage.

As background, the Village of Dexter in Michigan hired an engineering and architecture firm, Orchard, Hiltz, & McCliment, Inc. (OHM), to oversee the upgrade of a wastewater treatment plant. The project included both the design and construction phases. Notably, Dexter approved three OHM proposals for professional engineering services. In addition, during the construction phase, OHM was responsible for the administration, construction engineering, and construction observation of the project. OHM also agreed to provide daily observations, to generally ensure compliance with the contract documents, and to monitor and document the general contractor’s activities. OHM was designated at the project engineer.

Dexter also hired a general contractor, A.Z. Shmina, Inc, which subcontracted with another entity, Platinum Mechanical, Inc., to provide all labor and materials. Both Shmina and Platinum obtained commercial general liability insurance containing additional insured endorsements that initially provided coverage for OHM. Yet, both of the policies also contained professional services exclusions.

The insurance dispute arose when an employee of a sub-subcontractor caused an explosion by igniting methane gas inside a digester tank, killing an employee of Platinum and injuring the sub-subcontractor’s employee. Personal injury and wrongful death actions ensued. They each alleged, in pertinent part, that OHM was negligent in the performance of its engineering duties by failing to ensure compliance with engineering plans and safety protocols.

Although OHM’s professional liability insurer undertook its defense, OHM also initiated a declaratory judgment action seeking coverage as an additional insured under the CGL policies issued to Shmina and Platinum. On cross-motions for summary judgment, a Michigan federal district court determined neither insurer had the duty to defend due to the professional services exclusions.

On appeal, the Sixth Circuit focused solely on the application of the professional services exclusion and affirmed the lower court’s ruling. OHM contended the professional services exclusions did not bar coverage because the underlying allegations only implicated “general project operations and work place safety concerns” for which OHM was not responsible pursuant to its contract with Dexter. The Sixth Circuit disagreed. First, it noted that Michigan courts construe professional services exclusions broadly to bar coverage for services that require specialized skill of an intellectual nature or acts reasonably related thereto. Further, it reasoned the allegations of negligently supervising the construction operations and failing to provide adequate supervision and safety procedures were predominantly intellectual in nature. Finally, the Sixth Circuit determined it was of no consequence that some of the allegations concerned unskilled construction because the substance of the claims against OHM was for failing to take preventive measures to ensure the safe removal of the digester lids, which reasonably related to OHM’s overall provision of professional services.

This decision is notable for its broad application of professional services exclusions. Indeed, it appears courts are willing to include within the exclusions’ auspices not only high-level or specialized services, but also services that may not be inherently specialized in nature yet are intertwined with the overall provision of professional services.

Orchard, Hiltz & McCliment, Inc. v. Phoenix Insurance Co., Ns. 16-1176, 16-1231, 2017 U.S. App. LEXIS 1089 (6th Cir. Jan. 30, 2017).