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After its engineering firm performed design services for a wastewater treatment plant, the municipal project owner (Orland, Indiana) and a citizens group became concerned about cost projections and certain technical aspects of the design.  The Town suspended all activities on the project while it evaluated various options.  During the delay, the engineer filed suit against the town for the unpaid fee for the services it had rendered.  After settlement negotiations, the town consented to an entry of judgment against it for the fees, plus prejudgment interest.  Because the town’s errors and omissions insurance carrier refused to defend or indemnify the claim, the town sued the carrier for breach of its coverage obligation. The court held that because the engineer’s claim was based on the town’s intentional business decisions, there was no negligent act, error or omission to which the town’s e&o policy would apply.

When it was sued by the engineer, the town notified its insurance company (“carrier”) on a Local Government General Liability Policy which contained Errors and Omissions Liability Insurance. The carrier refused to defend or indemnify the town.  The town then sued the carrier to recover under the terms of the E&O insurance.   In reviewing the coverage dispute, the court observed that the language of the policy stated that it specifically excluded “any loss to the insured or for any loss caused intentionally by or at the direction of the insured.”  The town argued that this provision should not bar coverage because it believes a fair reading of the engineer’s suit was that the relief sought by the engineer against the town was based upon its “perceived mismanagement of the sewer and water projects.”

The policy provided coverage for “any claim for breach of duty made against the insured by reason of any negligent act, error or omission. . . .”  In analyzing this language, the court found that it provides coverage only for breaches of duty by the town “that arise from a negligent act, negligent error or negligent omission.  Thus, clearly not all breaches of duty are covered by the clause.”  In this case, the court found that the town’s conduct was not a matter of negligent performance but consisted rather of  “deliberately made business decisions which caused [Engineer] to question Orland’s commitment to the contract and, thus, bring the federal lawsuit.  We hold that such conduct does not result in liability under the Errors or Omissions Clause.”  Town of Orland v. National Fire & Casualty, 726 N.E.2d 364 (Ind. App. 2000).

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 2, No. 12 (Dec 2000).

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