In my experience, companies (and people) who buy insurance often do not understand what they bought.  Policyholders often confuse directors and officers insurance with professional liability insurance.  The assumption is that the purchase of insurance (often through a broker) should cover all of the policyholder’s risks.  Sadly, that is not the case.  In a recent case, a security company found out the hard way that its commercial general liability policy did not cover it for a breach of contract and negligence claim.

In The Burlington Insurance Co. v. German Motors Corp., no. 18-15835 (9th Cir. Dec. 17, 2019) (Not for Publication), an auto dealership hired a security company to provide guards for the dealership. The security company purchased a commercial general liability insurance policy (“CGL”).  While a security guard was on duty, the dealership was broken into causing significant damage.  The dealership sued the security company for breach of contract and negligence.  The security company tendered the claim to the insurance company.  A coverage dispute arose.

The district court granted summary judgment to the insurance company based on an exclusion in the CGL policy.  The circuit court affirmed.  In affirming, the court commented that the insurance company conceded that absent the exclusion, the policy would have covered the claim.  But, the policy had a Professional Services Exclusion, which provided that “[t]his insurance does no apply to ‘any injury or damage’ arising out of the rendering or failure to render any professional services by or for you.”

In holding that the exclusion applied, the circuit court found that the security company’s services fell within the commonly understood meaning of professional services: those 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 (citations omitted).  The court specifically held that the work of a security guard involved specialized knowledge and training and was predominantly mental (watching, monitoring live surveillance footage, and remaining vigilant for signs of suspicious activity). The court noted that the security company required its employees to have specialized knowledge, training and qualifications.

Additionally, the court commented that CGL policies typically do not cover professional negligence.  Because the security company’s work was a professional service, the court affirmed the grant of summary judgment in favor of the insurance company based on the exclusion.

Query whether the broker that placed the CGL policy explained the exclusion and suggested purchasing security E&O insurance or whether the policyholder did not want to spend more money on additional insurance.  The lesson here is that professional services firms, no matter what the professional service, need to have professional liability or E&O insurance depending on the profession.  A CGL policy generally just won’t cut it.