How are you implementing Duo? If you are using the Duo Access Gateway, we don’t have application specific password functionality but we do have a way to permit basic authentication for client applications that don’t support modern auth. That option is described here.
If you are using AD FS with O365 then you can craft an additional authentication rule for the Office 365 relying party to exclude basic auth clients from MFA (or apply MFA only to web endpoints like oauth2). We have a guide to advanced AD FS MFA configuration here.
If you are using Duo’s custom control for Azure conditional access, unfortunately there is not yet a solution from Microsoft for applying these controls to clients that don’t support Modern Authentication.
Thanks for trying Duo!