A typical D&O policy's Contract Exclusion readily applies to an insured's potential liabilities for any breach of contract claims. However, for insurers seeking a broadly worded Contract Exclusion (for example, applying to "any Claim against any Insured based upon, arising out of, or in any way involving1 any actual or alleged liability or obligation under any contract or agreement"), the exclusion can extend well beyond simple breach of contract claims, and even bar coverage for underlying lawsuits2 (1) not containing any contractual causes of action, (2) involving contracts to which the insured is not a party, and (3) involving conduct that occurred prior to the contract itself.
- First, in order to apply to tort claims (and beyond) the Contract Exclusion cannot be limited to claims "for any contractual liability,"3 but instead needs at least "arising out of" language, or other similarly broad language (see, Endnote 1).
- Second, the exclusion also needs "actual or alleged" language, or it may be limited to situations involving actual contractual breaches.4
- Third, the "contract" language should not be modified by "of any Insured," or the exclusion may be restricted to the Insured's contracts.
- Lastly, the Contract Exclusion should not be limited to claims solely under section I.C., but it should be applicable to all coverage provisions Drafted with such language, the Contract Exclusion will have broad exclusionary powers that should be interpreted to extend beyond merely contractual liability claims For example, the Ninth Circuit has twice held that a Contract Exclusion applies despite the absence of a breach of contract cause of action in the underlying lawsuit. In Office Depot, Inc. v AIG Specialty Ins. Co., 829 Fed. Appx. 263, 264 (9th Cir. Nov 13, 2020), the Ninth Circuit held that a broadly worded Contract Exclusion barred coverage for an underlying lawsuit that contained a single cause of action for violation of California's False Claims Act. So long as the underlying lawsuit "arose out of ... contractual obligations," the exclusion should apply.
Similarly, in AKN Holdings, LLC v. Great Am. E & S Ins. Co., 2022 U.S. App. LEXIS 18903 (9th Cir. July 8, 2022), the Ninth Circuit held a Contract Exclusion applied despite the underlying lawsuit seeking damages solely for fraud representations and fraudulent concealment.5 Indeed, if properly worded, the insured need not even be a party to the contract for the exclusion to apply.
In Radianse, Inc. v. Twin City Fire Ins. Co., 2010 U.S. Dist. LEXIS 106778, *6 (D. Mass. Oct. 6, 2010), the court held it was "of no consequence that [the insured] was not a party to [the] contract" since the contract...
