California Court Reaffirms Negligent Professional Advice Not An Occurrence

by Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in Aquarius Well Drilling, Inc. v. American States Insurance Co., 2012 U.S. Dist. LEXIS 172770 (E.D. Cal. Dec. 4, 2012), the United States District Court for the Eastern District of California had occasion to consider whether an insured’s professional negligence constituted an occurrence for the purpose of triggering coverage under a general liability policy.
The insured, Aquarius Well Drilling, was a well drilling and testing company. In 2007, it was hired by a title company to test a well on a property that was in escrow and pending sale. The purchasers of the property later brought suit against Aquarius, alleging that the company erred in performing the tests, which resulted in inaccurate information being disclosed regarding the well. Aquarius’ general liability insurer, American States, denied coverage for the underlying suit on the basis that it did not allege property damage arising out of an occurrence. Aquarius filed a declaratory judgment action against American States, which was dismissed earlier this year, although the court granted Aquarius leave to file an amended complaint. Aquarius subsequently filed an amended complaint which American States moved to dismiss on the same grounds; namely, that the underlying suit did not allege an “occurrence.”
Aquarius claimed that its negligence in testing the well was an occurrence, defined in pertinent part as an accident, because it did not intend for the unintended consequences of the well testing, i.e., harm to the underlying plaintiffs. American States, on the other hand, argued that Aquarius’ testing of the well was intentional, and as such could not be considered an occurrence regardless of the unexpected and unanticipated consequences of its negligence. In considering the issue, the Eastern District acknowledged that under California law, the term “accident” as used in the standard general liability policy definition of occurrence “refers to the nature of the act giving rise to liability; not the insured's intent to cause harm.” The only exception to this rule is when “some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.”
Aquarius argued that despite this body of case law, its conduct in testing the well should nevertheless be considered an occurrence because it provided its client with objective information concerning the well, and because it did not offer any opinions as to the condition or future viability of the well. In other words, Aquarius argued that it was not giving professional advice, and as such, cases addressing whether an insured’s professional services can be an occurrence were distinguishable. The court did not find this to be a relevant distinction, explaining that the key consideration is whether the insured’s conduct can be considered accidental:
California courts have stated "accident" refers to the nature of the insured's conduct, not his state of mind or to the consequences of the conduct … Thus, whether Aquarius' well testing was done negligently or not, regardless of the unintended consequences, "the insured's conduct alleged to have given rise to claimant's injuries is necessarily non-accidental, not because any 'harm' was intended, but simply because the conduct could not be engaged in by 'accident'." … Plaintiffs could not have engaged in the well testing by "accident
Thus, the court concluded, the insured’s degree of knowledge concerning its negligence, and the content of its report, were irrelevant. Instead, because the insured intentionally tested the wells and provided information to its client in its professional capacity, such could not be considered an accident for the purpose of a general liability policy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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