Insurer Must Defend Insured in Claim Alleging Use of Counterfeit Materials Because “Professional Services” Definition Was Ambiguous and No Exclusion Barred Coverage

Applying New York law, a Delaware state court has held that an insurer owed its insured a duty to defend because the factual allegations in two underlying lawsuits arguably involved the insured’s performance of “Professional Services” and no exclusion applied to otherwise bar coverage.  Steadfast Ins. Co. v. DBI Servs., LLC, 2019 WL 2613195 (Del. Super. Ct. June 24, 2019).

The insured, a highway operations and maintenance services provider, was sued in two lawsuits for allegedly installing counterfeit delineator posts while passing those delineators off as another brand, when performing its services pursuant to a contract with the Florida Department of Transportation (FDOT).  The insurer denied coverage for the lawsuits on the ground that the insured’s installation activity and routine, periodic maintenance did not constitute “Professional Services,” which the policy defined to mean “those services that [the insured] . . . is qualified to perform for others in [its] capacity as an architect, engineer, landscape architect, inspector, land surveyor or planner, [or] construction manager.”  The insurer further asserted that coverage was precluded by a fraud exclusion and an exclusion for the design or manufacture of goods sold or supplied by the insured.  The insurer then filed a declaratory judgment action against the insured.

On cross-motions for summary judgment, the court ruled in favor of the insured and held that the insurer had a duty to defend because the underlying lawsuits included factual allegations involving the insured’s “Professional Services” and the exclusions did not bar coverage.  As an initial matter, the court concluded that the policy’s definition of “Professional Services” was ambiguous because there were varied reasonable constructions of the definition regarding the scope and type of activities that might comprise the insured’s performance as an architect, engineer, inspector, land surveyor or planner, or construction manager.  The court thus construed the term in favor of the insured, explaining that the underlying complaints’ allegations regarding the insured’s duties to oversee the selection and installation of materials used to maintain a highway related to the insured’s professional services as an inspector or construction manager under the insured’s contract with FDOT.

The court further held that the asserted exclusions did not apply.  The court interpreted the exclusion for the design or manufacture of goods sold or supplied by the insured to apply only to design flaws or manufacturing defects—not to the insured’s use of goods in carrying out its duties; thus, the exclusion did not preclude coverage  The court also held that the fraud exclusion did not apply because both the FDOT Office of Inspector General and the insured submitted documentation attesting that the insured had not knowingly or intentionally purchased counterfeit goods.