October 15, 2019

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Breach of Contract Exclusion Precludes Coverage

Liability insurance policies are meant to cover claims brought against insureds by third-parties alleging a fortuitous event that causes damages.  But most liability policies have exclusions that preclude coverage for certain events.  For example, many policies exclude coverage for property damage to property owned by the insured.  Another exclusion precludes coverage for damages resulting from the assumption of liability in a contract or agreement.  And the one we will concentrate on in this post is the exclusion for breach of contract claims.  The Sixth Circuit Court of Appeals recently addressed these exclusions. 

In Maxum Indemnity Co. v. The Robbins Co., No. 18-3776 (6th Cir. Aug. 12, 2019) (Not Recommended for Publication), the policyholder leased a tunnel boring machine to a third-party for a construction project.  The machine apparently failed.  The lessee brought an arbitration under the lease against the policyholder for breach of contract.  When the policyholder asked its insurance company to defend and indemnify, the insurance company brought a declaratory judgment action claiming that it owed neither a duty to defend nor a duty to indemnify.  The district court granted the insurance company’s motion for judgment on the pleadings.  The Sixth Circuit affirmed.

The policyholder’s main argument was that it was impossible to tell from the arbitration demand all the allegations and damages and that the court should have looked at additional evidence to determine if there was a duty to defend.  In granting judgment on the pleadings to the insurer, the district court had focused on several exclusions, including the owned-property/work exclusion and the assumption of liability exclusion, but also found that the insurance policy specifically excluded contractual damages, which is what the lessee was seeking.

In affirming, the circuit court noted that the exclusions relied upon by the district court were not applicable, but that reliance was harmless error.  First, the exclusion for damages as a result of an assumption of liability in a contract was irrelevant, said the court, because neither the lessee or the insurer argued that the policyholder assumed liability under the lease.  Second, the exclusion for damages to property owned or rented was inapplicable according to the court, because even though the policyholder owned the tunnel boring machine, the lessee was not seeking damages for the machine, but was seeking damages for the policyholder’s failure to provide a working machine as promised in the lease.

The affirmance, instead, was based on the breach of contract exclusion.  That exclusion specified that the insurance policy did not apply to any claim or suit for breach of contract, regardless of the nature of the damages.  The exclusion also stated that no duty to defend arose for excluded claims for breach of contract.  The circuit court rejected the policyholder’s argument that the difference between pleadings in arbitration and litigation required the district court to consider additional documents.  The court was not persuaded that the differences between arbitration and litigation were as stark as the policyholder alleged.  Nevertheless, the court reviewed the evidence provided by the policyholder and found that none of it described damages outside breach of contract damages.

Notably, the court declined to consider an itemized list of damages required by the arbitration panel because the policyholder had that list before the district court decided the insurance company’s motion and failed to provide that list to the court.  While it is possible, said the court, that the district court might have found a duty to defend based on certain descriptions that could be seen as consequential property damage, the policyholder was the victim of its own delay.  “[A]n appellate court does not exist to give litigants a second bite at the apple.”

Accordingly, the district court’s judgment was affirmed and no insurance coverage was available to the policyholder.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Larry P. Schiffer Commercial Insurance Reinsurance Litigation Lawyer
Partner

Larry Schiffer practices in the areas of commercial, insurance and reinsurance litigation, arbitration and mediation. He also provides advice on coverage, insurance insolvency, and contract wording issues for a wide variety of insurance and reinsurance relationships. 

Larry is active in legal and insurance industry associations where he has held various leadership positions. He has lectured in the US, Bermuda and the UK, and has been widely published on reinsurance and other insurance, litigation and technology topics in various national and...

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