Crum & Forster Specialty Insurance Company, Plaintiff-Appellee,
DVO, Inc., formerly known as GHD, Inc., Defendant-Appellant.
January 16, 2019
from the United States District Court for the Eastern
District of Wisconsin. No. l:16-cv-01619-WCG - William C.
Griesbach, Chief Judge.
Bauer, Rovner, and Hamilton, Circuit Judges.
ROVNER, CIRCUIT JUDGE.
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.
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.
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
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.
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.
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
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