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Crum & Forster Specialty Insurance Company v. DVO, Inc.

United States Court of Appeals, Seventh Circuit

September 23, 2019

Crum & Forster Specialty Insurance Company, Plaintiff-Appellee,
v.
DVO, Inc., formerly known as GHD, Inc., Defendant-Appellant.

          Argued January 16, 2019

          Appeal from the United States District Court for the Eastern District of Wisconsin. No. l:16-cv-01619-WCG - William C. Griesbach, Chief Judge.

          Before Bauer, Rovner, and Hamilton, Circuit Judges.

          ROVNER, CIRCUIT JUDGE.

         This appeal arises from a diversity action for declaratory relief brought by Crum & Forster Specialty Insurance Company ("Crum") against GHD Inc., now known as DVO Inc. ("DVO"), seeking a determination that Crum does not have a duty to defend DVO in a state court action filed against DVO. Crum provided insurance to DVO, and the question is whether the Errors & Omissions ("E&O") coverage of the primary and excess insurance policies it provided to DVO, along with any exceptions in the policies, covers the state court claim for a contract violation such that it imposes a duty for Crum to defend DVO in that action.

         The underlying contract claim was brought by WTE-S&S AG Enterprise, LLC ("WTE") against DVO. DVO designs and builds anaerobic digesters, which use microorganisms to break down biodegradable materials to create biogas. DVO and WTE entered into a Standard Form Agreement, created by the Engineers Joint Contract Documents Committee, under which DVO was to design and build an anaerobic digester for WTE. The digester was to be used to generate electricity from cow manure which would then be sold to the electric power utility. WTE sued DVO for breach of contract, alleging that DVO failed to fulfill its design duties, responsibilities, and obligations under the contract in that it did not properly design substantial portions of the structural, mechanical, and operational systems of the anaerobic digester, resulting in substantial damages to WTE. It sought over $2 million in damages and fees.

         Crum initially provided a defense to DVO under a reservation of rights, but a couple of months later advised DVO that it would no longer provide a defense. WTE later filed for bankruptcy and the case was transferred to the United States Bankruptcy Court for the Northern District of Illinois. Following a trial, that court found in favor of WTE and ordered DVO to pay over $65, 000 in damages and $198, 000 in attorney's fees.

         Crum issued primary and excess insurance policies to DVO for periods of time spanning from June 2011 until April 2014. Those policies provided coverage including commercial general liability (CGL) coverage, pollution liability coverage, E&O coverage, third party pollution coverage, and onsite cleanup liability coverage. The issue in this appeal concerns two provisions. The first is the provision in the E&O professional liability coverage, under which Crum is required to pay "those sums the insured becomes legally obligated to pay as 'damages' or 'cleanup costs' because of a 'wrongful act' to which this insurance applies." Dist. Ct. Decision and Order ("Dist. Ct.") at 3. The second relevant provision is the breach of contract exclusion that was added by an endorsement, which provides that the Policy does not apply to claims or damages based upon or arising out of breach of contract. Id. DVO argued that the breach of contract exclusion was so broad as to render the E&O professional liability coverage illusory, and therefore could not be enforced to preclude the duty to defend. The district court held that the professional liability coverage was not illusory because it would still apply to third party claims, and that even if it was determined to be illusory, the remedy would be to reform the contract to allow coverage to third party claims, not to allow coverage for all professional liability claims.

         A determination of a duty to defend under an insurance policy involves a three-part inquiry: first, whether the type of claim asserted against DVO is the type for which coverage is provided by the policy; second, whether an exclusion provision in the policy precludes coverage; and third, if an exclusion applies, whether that exclusion contains any exceptions that would reinstate coverage. Marks v. Houston Cas. Co., 881 N.W.2d 309, 322-23 (Wis. 2016); Am. Family Mut. Ins. Co. v. American Girl Inc., 673 N.W.2d 65, 73 (Wis. 2004). There is no disagreement as to the first part. The state court claim against DVO involves allegations that DVO entered into a contract with WTE to construct an anaerobic digester which would generate electricity from cow manure, and that DVO failed to fulfill its design duties because it did not properly design substantial portions of the structural, mechanical, and operational systems of the anaerobic digester causing damages. Under the E&O coverage of the primary and excess insurance policies from Crum to DVO, Crum agreed to pay those sums that the insured becomes legally obligated to pay as damages or cleanup costs because of a wrongful act to which the insurance applies. "Wrongful act" is defined to include a failure to render professional services, and "professional services" is defined as "those functions performed for others by you or by others on your behalf that are related to your practice as a consultant, engineer, [or] architect ... ." Such a provision is a common one, and essentially provides coverage for professional malpractice. See Marks, 881 N.W.2d at 324, quoting Grieb v. Citizens Cas. Co. of New York, 148 N.W.2d 103, 106 (Wis. 1967) ("[a]n errors-and-omissions policy is professional-liability insurance ... designed to insure members of a particular professional group from liability arising out of the special risk such as negligence, omissions, mistakes and errors inherent in the practice of the profession"); 1325 North Van Buren, LLC v. T-3 Group. Ltd., 716 N.W.2d 822, 836 n. 13 (Wis. 2006) (same). All parties agree that the alleged conduct here falls within that provision.

         The parties also agree, however, that the exclusion clause added as an endorsement to the contract, applies to preclude coverage. That provision states that:

This Policy does not apply to "damages", "defense expenses", "cleanup costs", or any loss, cost or expense, or any "claim" or "suit":
Based upon or arising out of:
a. breach of contract, whether express or oral, nor any "claim" for breach of an implied in law or an implied in fact contracts [sic], regardless of whether "bodily injury", "property damage", "personal and advertising injury" or a "wrongful ...

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