Friday, July 20, 2012

California Court Holds No Coverage Under GL Policy for Professional Advice

In its recent decision in Aquarius Well Drilling, Inc. v. Am. States Ins. Co., 2012 U.S. Dist. LEXIS 9854 (E.D Cal. July 16, 2012), the United States District Court for the Eastern District of California had occasion to consider whether a claim for damages arising out of the insured’s bad professional advice triggered coverage under a general liability policy.

Aquarius Well Drilling, a well drilling and well testing company, was sued for its alleged failure in properly testing a water well that “suddenly and unexpectedly ceased producing water” after purchased by Aquarius’ client.  The underlying complaint alleged that Aquarius “falsely represented the productivity of the well, and fraudulently concealed the actual condition of the well.”  The complaint also contained various allegations of negligence.  Aquarius’ general liability insurer, American States, denied coverage for the suit on the basis that it did not allege “property damage” arising out of an “occurrence.”  In particular, American States took the position that bad professional advice cannot constitute an occurrence under a general liability policy.  Aquarius, on the other hand, contended that American States at least had a duty to defend since the underlying complaint contained allegations of negligence; specifically, allegations of inadequate well testing and negligence misrepresentation.

The court observed that the underlying complaint alleged that Aquarius misrepresented the viability of the well and its history of water production.  The court further observed that the complaint contained allegations of fraud and of negligence.  These negligent claims, however, were for negligent misrepresentation and the theory that “Aquarius had a duty to perform a thorough test of the well, but failed to do so and failed to disclose the [well’s] actual condition.”  The court agreed with American States that the fraud claims did not allege an occurrence.  It also agreed that the negligence claims did not constitute an occurrence, explaining:

Similarly, the negligence claims allege that Aquarius's act of testing the well and reporting that it was producing twelve gallons per minute were deliberate and wilful acts, but, for the purposes of those claims, the Manleys assume Aquarius made honest mistakes. However, even if Plaintiffs' alleged errors were the result of simple negligence, the acts of testing and reporting the results of those tests were still deliberate and wilful acts and the Manleys' reliance was foreseeable: there was no "accident" or otherwise unexpected, unusual, and unforeseen result that accrued as the result of Aquarius's tests and report.

Additionally, citing to Ray v. Valley Forge Ins. Co., 77 Cal. App. 4th 1039 (Cal. App. 1999), the court agreed that a general liability carrier has no duty to defend claims for bad professional advice, since Aquarius intentionally gave the advice, even if unintentionally erroneous.  As the court explained:

Here, the Manleys allege that Aquarius was acting in its professional capacity by performing a well test and preparing a report that indicated the well produced twelve gallons of water per minute. As alleged, Aquarius intended that the Manleys rely on this information, even if it turned out later (as it apparently did) that the professional advice that Aquarius provided was in error. Because Aquarius's acts were deliberate, there was no accident, and therefore no duty to defend.

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