Ninth Circuit Concludes Breach of Contract Exclusion is Enforceable

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No Coverage for Defense of Indemnity of Suit Arising Out of Liability Under any Contract or Any Breach of Contract

Courts dealing with insurance issues often issue opinions that are lengthy and convoluted before getting to the point. In Office Depot, Inc. v.  AIG Specialty Insurance Company, FKA American International Specialty Lines Insurance Company, No. 19-55819, United States Court Of Appeals For The Ninth Circuit (November 13, 2020) the Ninth Circuit Court of Appeal changed the process by issuing a clear, concise and easy to understand opinion.

FACTS

The district court held that AIG did not have a duty to defend or indemnify Office Depot in a 2011 California False Claims Act lawsuit. The court reasoned that the claims alleged in the underlying lawsuit (the“Sherwin lawsuit”) do not fall within the scope of the relevant insuring agreement and, even if they did, multiple policy exclusions precluded coverage.

THE CONTRACT EXCLUSION

The “Contract Exclusion” of the insurance agreement precludes coverage of any claim “alleging, arising out of or resulting, directly or indirectly, from any liability or obligation under any contract or agreement or out of any breach of contract.” This exclusion does not apply to liabilities or obligations “an insured would have in the absence of such contract or agreement.”

Under California law, the term “arising out of” requires “only a minimal causal connection or incidental relationship.” Travelers Prop. Cas. Co. v. Actavis, Inc., 225 Cal. Rptr. 3d 5, 21 (Cal. Ct. App. 2017) This broad interpretation of “arising out of” applies to both coverage provisions and exclusions. These clauses also exclude coverage of tort claims which could not exist without the relevant underlying contracts.

Here, the allegations of the Sherwin lawsuit, directly, and indirectly, arose out of Office Depot’s contractual obligations under the Master Agreements. This suit is based primarily on two contracts between Office Depot and Los Angeles County. In Office Depot’s own words “[t]he heart of this suit is the contention that Office Depot overcharged California government entities under the terms of particular contracts.”

Office Depot’s in-house counsel testified that “the claims are related to [Office Depot’s] performance or nonperformance under [Office Depot’s] government contracts . . . this is a complaint for violation of the False Claims Act, but the claims and the allegations that he made were related to our performance or nonperformance of our government contracts.”

The Ninth Circuit, in clear and easy to understand language concluded, noting the uncomfortable breadth of such contract exclusions, that the allegations in the Sherwin lawsuit are premised directly or indirectly on Office Depot’s contractual obligations and therefore the lawsuit is precluded from coverage under the contract exclusion.

Since an insurer’s duty to indemnify arises when there is coverage of the claim determined in light of the facts the analysis of a contract exclusion, the Sherwin lawsuit is not covered under Office Depot’s policy with AIG. Therefore, AIG did not have a duty to indemnify Office Depot and the Ninth Circuit affirmed the district court. Because there was no duty to defend or indemnify Office Depot, the Ninth Circuit found no reason to consider the other exclusions raised by the insurer.

ZALMA OPINION

Insurance, by definition, provides coverage only for property damage or bodily injury resulting from a contingent or unknown event. Contract damages are excluded, as part of the insuring agreement and specific exclusions, since they do not cause property damage, bodily injury or the Personal Injury offenses, just contract damages. Contract damages, for breach, are a cost of doing business and simply – as the Ninth Circuit found – cannot, and should never, be insured.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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