The Seventh Circuit reversed and remanded for consideration of reformation of the professional liability policy after the district court found there was no coverage. Crum & Forster Spec. Ins. Co. v. DVO, Inc., 939 F. 3d 852 (7th Cir. 2019).
WTE-S&S AG Enterprise, LLC sued DVO for breach of contract. DVO designed and built machinery for generating electricity from cow manure which would then be sold to the electric power utility. DVO and WTE entered a Standard Form Agreement for such machinery. DVO allegedly did not properly design substantial portions of the systems, resulting in substantial damages to WTE.
Crum defended under a reservation of rights, but later withdrew its defense. In the underlying suit, the court found in favor of WTE and ordered DVO to pay over $65,000 in damages and $198,000 in attorneys' fees.
Crum issued primary and excess policies to DVO, including E&O professional liability coverage. Crum agreed to pay "damages" or "cleanup costs" because of a "wrongful act." An exclusion added by endorsement precluded coverage for damages arising out of breach of contract. DVO argued the breach of contract exclusion was so broad as to render the E&O professional liability coverage illusory. The district court held the coverage was not illusory because it would still apply to third party claims.
The underlying complaint alleged that DVO was contracted to design and construct the machinery and, because of its faulty design, damages were incurred. That alleged claim arose out of the contract and therefore fell within the exclusion. The sole issue was whether the language in the breach of contract exclusion rendered the exclusion broader that the grant of coverage, and therefore rendered the coverage illusory. If the purported coverage proved to be illusory, a court could reform the policy to meet the insured's reasonable expectation of coverage.
Based upon Wisconsin law, the Seventh Circuit found the policy illusory. There was no reason to believe that DVO in purchasing the coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties. Because the breach of contract exclusion made the professional liability coverage ilusory, the contract should be reformed so as to meet the reasonable expectations of DVO as to the E&O policy's coverage for liability arising out of negligence, omissions, mistakes and errors inherent in the profession.
On remand, the district court was directed to consider DVO's reasonable expectations in securing the coverage, and the court could reform the contract so as to give effect to that expectation.
