Vermont Supreme Court holds that lying in order to undermine a competitor is not a “professional service” within the meaning of an E&O policy

On August 9, 2019, the Vermont Supreme Court held that an E&O liability insurer properly disclaimed coverage regarding acts of an engineering and project-management firm because allegations in the underlying Complaint were not “related to” professional engineering or consulting services. Integrated Techs., Inc. v. Crum & Forster Specialty Ins. Co., 2019 VT 53 (Vt. Aug. 9, 2019).

In the underlying case, the GOAD Company (“GOAD”) alleged that in 2012, the U.S. Army requested proposals for an energy project. Honeywell Building Solutions bid for the job, and asked GOAD to work with it to support its bid. GOAD agreed, and it then retained ITI to provide engineering and project management services.

The underlying Complaint went on to allege that over the course of its work, ITI “repeatedly undermined” GOAD, “falsely represent[ing]” to Honeywell that GOAD’s work “was not industry standard” and “did not reflect best practices.” Further, ITI suggested to Honeywell that Honeywell could save significant money by removing GOAD as the sole-source subcontractor. ITI schemed to perform work directly for Honeywell, and not as a subcontractor of GOAD.

ITI notified the insurer, CFSIC, of the GOAD Complaint and CFSIC disclaimed coverage, leading to a suit by ITI against CFSIC. ITI and CFSIC filed cross-motions for summary judgment.

ITI asserted that the definition of “professional services” under the E&O Part of the policy issued by CFSIC – “those functions performed for others by you . . . that are related to your practice as a consultant, engineer, . . . or construction manager” – encompassed any act having a “nexus” to ITI’s professional activity. ITI contended that GOAD alleged ITI used its professional skill and judgment to tell Honeywell how it could lower its costs on the project.

CFSIC argued that all counts of the GOAD Complaint rested on allegations that ITI used deception and misrepresentations to steal GOAD’s client, and that as a result it had no duty to defend or indemnify ITI because such claims did not involve ITI’s provision of “professional services.”

The trial court granted summary judgment to CFSIC, generally finding that the wrongful act or omission had to be “inherent” in the profession in order to be a “professional service”. On appeal, ITI argued that the policy language was broader than the trial court had interpreted it, in part, because the definition of a “wrongful act” includes “acts” as well as “errors or omissions” and because “professional services” is defined as “functions performed for others by you . . . related to your practice as a consultant, engineer . . . or construction manager.”

The Vermont Supreme Court rejected ITI’s suggestion that the words “related to” in the policy meant merely “connected to” or “associated with.” The Court explained that GOAD’s allegation that ITI breached an agreement “not to solicit or compete directly or indirectly with GOAD” . . . “by soliciting work directly from Honeywell” did not arise from “an act, error or omission in the rendering or failure to render ‘professional services’ by any insured.”

The Court stated that “[a]lthough the breach occurred broadly in the context of ITI’s provision of consulting and project-management services to Honeywell, this attenuated connection is not sufficient to convert a breach of ITI’s business agreement with GOAD into an act, error or omission in the rendering or failure to render ‘professional services’ by any insured.” The Court found “it is the source from which the plaintiff’s injury originates rather than the specific theories of liability alleged in the complaint which determines the insurer’s duty to defend.”

The court stated “[t]he crux of GOAD’s complaint is that ITI ‘pulled a bait and switch by convincing Honeywell to remove GOAD,’ through various improper means, ‘so that ITI could increase the scope of its own role at Honeywell's expense’ and at GOAD’s expense. Although ITI’s provision of professional consulting services provided the backdrop for its alleged publication of injurious falsehoods, the gravamen of GOAD's claim is a tortious injury to GOAD, not malpractice in the provision of consulting services.” Accordingly, the Vermont Supreme Court affirmed the grant of summary judgment for CFSIC.

CFSIC was represented by Gary S. Kull of Kennedys LLP.

Read other items in Coverage Digest - September 2019