Insurance – Duty to Defend – Breach of Contract Exclusion

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7^th Circuit Court of Appeals

Case Name: Crum & Forster Specialty Insurance Company v. DVO, Inc., formerly known as GHD, Inc.,

Case No.: 18-2571

Officials: BAUER, ROVNER, and HAMILTON, Circuit Judges.

Focus: Insurance – Duty to Defend – Breach of Contract Exclusion

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 pro‐ vided 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, un‐ der 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.

The breach of contract exclusion is set forth in an endorsement. The endorsement modifies the insurance provided under the following Parts:   Commercial General Liability Coverage Part Contractors Pollution Liability Coverage Part Errors and Omissions Liability Coverage Part Third Party Pollution Liability Coverage Part Onsite Cleanup Coverage Part. App. at A119. As such, it replaces the standard Contractual Liability provision. Because the breach of contract exclusion renders only the E&O coverage illusory, one possible reformation would be to delete the applicability of the endorsement only as to the E&O Part, and contractual liability under that Part would then revert back to the terms of the original Contractual Liability provision.

But we need not determine precisely what reformation is appropriate here. DVO did not file a cross‐motion for summary judgment. The district court on remand may consider DVO’s reasonable expectations in securing the coverage, and can reform the contract so as to give effect to that expectation. The focus, however, must be on that reasonable expectation, which was upended by the breach of contract exclusion that rendered it illusory. The availability of third‐party claims is irrelevant unless it is determined to be a part of DVO’s reasonable expectation of coverage. The decision of the district court is REVERSED and the case REMANDED for further proceedings consistent with this opinion.

Reversed and remanded

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.