Seventh Circuit: A Breach of Contract is Not a “Negligent Act”

The United States Court of Appeals for the Seventh Circuit has affirmed a ruling holding that an underlying action alleging only breach of contract did not allege a negligent act, error, or omission required to trigger coverage under the policy at issue. Hartford Cas. Ins. Co. v. Karlin, Fleisher & Falkenberg, LLC, 2016 WL 2849449 (7th Cir. May 16, 2016).

A former employee of a law firm sued the firm for breach of contract and violations of the Illinois Wage Payment and Collection Act. The complaint generally alleged that the law firm was required to pay the former employee for his accrued vacation and sick leave when he left the firm, but that the firm did not do so. The law firm held an employee benefits liability policy that provided specified coverage for “employee benefits injury,” which was defined to mean “injury that arises out of any negligent act, error or omission in the ‘administration’ of your ‘employee benefits program.’” The insurer denied coverage on several grounds, including that a breach of contract was not a “negligent act” as that term is used in insurance policies.

In the ensuing coverage litigation, the Seventh Circuit affirmed the trial court’s grant of summary judgment to the insurer. The court of appeals agreed that the insurer owed no duty to defend or indemnify against the underlying complaint, explaining that insurance policies are “presumed” not to insure against breaches of contract due to moral hazard problems.

The complaint alleged a cause of action for violation of the Illinois Wage Collection and Payment Act (IWPCA), which the insured argued sounded in negligence and therefore triggered a duty to defend. The court disagreed, explaining that “the only violation of the Act that they alleged is the breach of contract.” The policyholder also argued that the insurer was estopped from denying coverage under the doctrine announced in Employers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1135 (Ill. 1999) because the insurer took seven months to respond to the request for coverage. The court of appeals disagreed, stating that “a delay in such a response can’t create coverage when there clearly was no duty to defend.”