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An Engineering firm (“GOAD”) had a client (Honeywell) that it was working with to submit a bid to a federal agency. GOAD decided it needed some technical assistance itself and found ITI, Inc. to provide certain engineering services as its subcontractor. At some point, GOAD decided to enter into a teaming agreement with ITI to work together to assist Honeywell. By this agreement, ITA promised not to solicit or compete directly or indirectly with Goad for the Honeywell business. GOAD claims that ITI violated the agreement by making misrepresentations and falsehoods to Honeywell for the purpose of steeling its business. In any event, Honeywell decided to contract directly with ITI, and not use GOAD.

GOAD filed suit against ITI for breach of the teaming agreement, breach of a commission agreement, tortious interference with business expectancy, and injurious falsehood. ITI tendered these claims to its insurance carrier, Crum & Foster, which had issued a policy that provided professional liability (errors & omissions), and commercial general liability (CGL). The carrier declined coverage on the basis that the claims did not arise out of professional services and professional liability. Summary judgment was granted in favor of the insurance company by the trial court and affirmed by the Vermont Supreme Court, which concluded that the GOAD complaint contained no claims that fall within the language of the policy because the claims didn’t arise from acts taken in the course of rendering professional services. Integrated Technologies, Inc. v. Crum & Foster, 217 A. 3d 528 (Vermont 2019).

Breach of Contract Claim

The way the court explained it is as follows:

“This breach-of-contract claim does not arise from “an act, error or omission in the rendering or failure to render ‘professional services’ by any insured.” ITI’s alleged breach of its contract with GOAD did not arise in the course of ITI’s provision of professional services to GOAD; rather, ITI was providing professional project-management services to Honeywell while acting as a business associate of GOAD. While ITI is alleged to have taken actions in rendering advice to Honeywell that breached its obligations to GOAD, such a breach of ITI’s business promises to GOAD cannot reasonably be likened to professional malpractice against GOAD.”

Tortious Interference Claim

The way the court explained it as follows:

“GOAD asserted in its complaint that “ITI intentionally interfered with GOAD’s valid business expectancy”; that it “lacked justification for intentionally interfering with GOAD’s valid business expectancy”; and that, “[a]s a result of ITI’s intentional interference, GOAD has suffered damages.” GOAD further alleged that “ITI knew of GOAD’s valid business expectancy”; it “intentionally interfered with GOAD’s valid business expectancy by causing Honeywell to remove GOAD from its role”; and it accomplished this by “misrepresent[ing] facts and breach[ing] its obligations to GOAD.”

As with GOAD’s claim for breach of contract, its claim for tortious interference arises from actions ITI took in the course of providing project-management services for Honeywell. The alleged breached of duty was not ITI’s duty of care to the client to whom it was providing professional project-management services—Honeywell—but, rather, was its common law duty to GOAD as a business competitor. “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.”(citation omitted) … Like GOAD’s breach-of-contract claim, its tortious-interference claim does not arise from acts undertaken in the course of rendering professional services to GOAD, and cannot be likened to a malpractice claim.

The court stated that the insurance policy here obligates Crum & Foster to pay damages “because of” and “resulting from” a “Wrongful Act.” It is not enough to show “an act flowing from mere employment of vocation.” “The policy cannot be construed so broadly as to encompass the alleged conduct here.   It does not cover ‘the risk of conducting one’s business in an unfair and tortious manner.’”

Injurious Falsehood Claim

The court also found that the injurious falsehood didn’t rest on a claim of sub-par ITI professional services to Honeywell but rather on alleged false statements about GOAD. The crux of GOAD’s claim, states the court, 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.” The provision of professional services was a mere backdrop for ITI’s 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.”

For these reasons, the court found no coverage. As stated by the court, “The policy does not cover the risk of intentionally making false representations to undermine a competitor.”

 

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 3 (March 2020).

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