Seventh Circuit Finds Coverage “Illusory” in Commercial E&O Policy

In an opinion handed down on September 23, 2019, the United States Court of Appeals for the Seventh Circuit has held that an exclusion for professional malpractice that applied to claims or suits “based upon or arising out of” a breach of contract was so extremely broad as to render the coverage illusory, requiring a remand to the district court to determine the reasonable expectations of the insured.

The carrier involved, Crum & Forster Specialty Insurance company, had 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.”  In the policy, “Wrongful act” was defined to include a failure to render professional services, and “professional services” was 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 … .”

The Seventh Circuit observed that “such a provision is a common one, and essentially provides coverage for professional malpractice.”

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But under the circumstances of the case, which was governed by Wisconsin law dealing with the interpretation of insurance contract language, the exclusion was deemed to be so broad as to completely eliminate the insured’s reasonable expectation of coverage.

The opinion may have far-reaching implications for other E&O policies that contain exclusions that include the “based upon or arising out of” language involved in this case.

A complete copy of the opinion is available here.

Questions about the coverage afforded in your E&O policy?  Contact the policyholder attorneys at Parr Richey

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