As a general rule, a liability insurance policy does not provide coverage for a breach of contract claim. Such policies typically contain a contractual liability exclusion, which provides that there is no coverage for defense costs or liability arising out of the alleged breach of a contract or other agreement. The reason behind such an exclusion is that a breach of contract is considered a business risk that is within the control of the party that breaches the contract. It is well established, however, that a contractual liability exclusion will not apply to tortious acts independent of the contract, even if those acts arose out of a contractual relationship. In many cases, especially construction defect cases, there is a fine line between what constitutes liability arising out of a breach of contract, which is not covered, and liability arising out of negligence or some other tort, which typically is covered.
In PNY Technologies, Inc. v. Twin City Fire Insurance Company, 2015 WL 3622933 (3d Cir. June 11, 2015), the Third Circuit Court of Appeals affirmed a decision by the trial court granting summary judgment in favor of an insurer on the basis of a contractual liability exclusion. There, the Chief Financial Officer (“CFO”) of the insured entered into foreign exchange contracts with a number of banks. The banks demanded payment from the insured after incurring substantial losses in connection with the contracts. The insured notified its insurer of the demands and requested coverage under its liability policy.
The insurer denied coverage on the basis of the contractual liability exclusion. As noted by the Third Circuit:
That exclusion bars coverage for any claim “based upon, arising from, or in any way related to any actual or alleged . . . liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.”
Id. at *1. The insured subsequently sued its insurer, seeking a declaration that the insurer was obligated to provide coverage for the claims. The insured argued that the contractual liability exclusion did not apply because the CFO did not have authority to enter into the contracts and, therefore, the contracts were not valid.
The trial court rejected the insured’s argument and granted summary judgment in favor of the insurer. On appeal, the Third Circuit affirmed. According to the court:
[T]he exclusion applies to “any actual or alleged . . . liability under any contract.” The exclusion thus encompasses any alleged liability under any contract. PNY’s alleged liability stems from the contracts and, even if those contracts were deemed invalid, PNY’s liability would still have been alleged under the contracts and the contractual liability exclusion would still apply.
The insured further argued that liability was based on the CFO’s malfeasance, which is a tort claim, and not breach of the contract. As noted, contractual liability exclusions typically do not apply to tortious conduct, even if that conduct arguably arose out of a contractual relationship. The court rejected the insured’s argument, finding that the insured’s liability “relates solely to losses under the contracts,” and not any tortious acts. Id. at *2. Thus, the exclusion clearly applied.
The PNY Technologies case shows that when the language of an insurance policy is clear and unambiguous, it will be enforced as written and courts will not strain to find coverage where none otherwise exists. The only thing surprising about the case is the fact that the insured decided to appeal to the Third Circuit given that the case involved a fairly straightforward application of a contractual liability exclusion to bar coverage.
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