July 3, 2022

Volume XII, Number 184

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June 30, 2022

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Broad Contract Exclusion Dooms Investment Firm’s $8.5 Million D&O Claim

Policyholders must be mindful of expansive causation language in policy exclusions that could pose significant—and sometimes unforeseen—hurdles to obtaining coverage for D&O claims. In TriPacific Capital Advisors, LLC v. Federal Insurance Co., a California federal court recently ruled that a D&O insurer had no duty to defend an investment firm’s $8.5 million employment suit because coverage was barred by the policy’s broad contract exclusion, which applied not only to breach of contract claims but also any claims “arising from” contractual liability owed by the company.

A former employee filed an arbitration demand against TriPacific Capital, a financial services company, alleging that he was owed $8.5 million and asserting causes of action for breach of fiduciary duties and breach of contract, among others. TriPacific Capital submitted a claim to its insurer, Chubb, under the company’s asset management liability policy that included a D&O liability coverage part with $5 million limits.

Chubb denied coverage under the policy’s “Contract Exclusion,” which barred coverage for loss on account of any claim “based upon, arising from, or in consequence of any Insured’s liability under any contract or agreement regardless of whether such liability is direct or assumed.” The Contract Exclusion did not apply to “liability that would attach to an Insured even in the absence of a contract or agreement.”

In the ensuing coverage litigation, TriPacific Capital argued that the Contract Exclusion did not apply to the employee’s breach of fiduciary duty claim because the suit did not conclusively establish that the tort claim was based upon, arose from, or was in consequence of liability under the employment agreement. The court disagreed. It recognized California’s broad interpretation to the terms “arising out of” and “arising from” in insurance provisions, concluding that it requires only a minimal causal connection or incidental relationship.

Because the only potential sources of the alleged fiduciary duties were the parties’ written and oral employment agreements, the complaint presented the “minimal causal connection” required to be considered as “arising from” the contractual liability owed under the agreements. Even the fiduciary duty claim arising from the employee’s claimed ownership interest did not fall within the exclusion’s carve out because that interest also allegedly originated from the same contracts.

Contract exclusions are often litigated because they are ubiquitous in standard private-company D&O liability policy forms.  So what is a policyholder to do to try and avoid an outcome like TriPacific Capital? The good news is that there are several ways to minimize the impact of a contractual liability exclusion.

If an insurer is not willing to eliminate the exclusion entirely, policyholders can often negotiate modified exclusionary language to limit its reach. One example is to narrow broad causation language like “arising out of” to limit the exclusion to claims “for breach of contract.” This modification should ensure that the exclusion applies only to direct contract claims and not to tort claims (like for breach of fiduciary duty) with more attenuated connections to the underlying contract or agreement. Careful analysis of the trigger in contract exclusions is critical, especially for claims against directors and officers, who may be subject to separate tort claims (fiduciary duty, negligent supervision, etc.) that are alleged to flow from those individuals’ involvement in the underlying transaction at issue.

Short of limiting the insurer’s ability to trigger the exclusion, policyholders may also seek modifications to lessen its effects when triggered. One way is to negotiate language stating that the exclusion applies only to claims against the company (not to individual insureds). Another is to modify the exclusion so it applies only to indemnity for settlements or judgments and not to reimbursement of defense costs.

Finally, even though each inquiry will turn on the specific policy wording and facts giving rise to the claim, interpretation of contract exclusions, like all exclusions, will often vary widely by state law in the event that a disputed claim proceeds to litigation or some other formal dispute resolution. Unlike the court in TriPacific Capital, some courts have interpreted contract exclusions narrowly in the context of the duty to defend or refused to construe the exclusion in a manner that conflicts with the insured’s reasonable expectations of coverage.

These distinctions highlight the importance of choice-of-law, forum-selection, or similar provisions in policies that may steer claims to states with less favorable precedent on interpretation of broad triggers in exclusions or other critical coverage issues. Retaining experienced coverage counsel, brokers, and other risk professionals can help navigate these hurdles to help structure a D&O program that maximizes coverage in the event of a claim involving contractual liability.

 

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XII, Number 38
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About this Author

Geoffrey B. Fehling Associate Washington, DC Insurance Coverage Litigation
Partner

Geoff dedicates his practice to advising corporate policyholders and their directors and officers in complex insurance coverage matters, from placement of sophisticated insurance programs and policy reviews to claim advocacy through arbitration, litigation, trials, and appeals. As part of Hunton Andrews Kurth’s full-service insurance coverage practice, he works with clients to maximize insurance recoveries through policy analysis and audits, claims presentation and negotiation, alternative dispute resolution, and litigation.

Geoff regularly...

617-648-2806
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