Gary,
No I haven't tried it but will be making an insert for one of my hatches in my Coho for a small dog to ride. GASP has a web page on carrying dogs on kayaks.

http://www.gasp-seakayak.org/poochyak.html

I think your idea of using an insert is better. Obviously a rectangular hatch opening is simpler to accommodate.

I am surprised you chose the Pygmy Double for carrying pets. I am saving my pennies up to buy a Pygmy Triple, which I feel is the ultimate pet water taxi. There is more space between the two end cockpits to accomodate the third passenger.

For a Pygmy Double I would consider a hatch between the two cockpits. If the dog got tired he could simply curl up on the floor between the legs of the rear paddler with his head resting on the cockpit rim. I have had my dog jump out of the small hatch in the front of my kayak, and swim to my cockpit. He prefered to just lie between my legs looking out of the boat. See

http://users.ev1.net/~spituch/family2/Family2.html

Please reinforce the hatch cutout. Pygmy decks are built very strong, but making an opening requires reinforcement. See my construction link at:

http://users.ev1.net/~spituch

Let me know how it works out.

Steve Pituch
Corpus Christi