Contract Exclusion Bars Coverage for Negligence Claims Arising From Insured’s Alleged Breach of Contract

Applying Louisiana law, a Louisiana court of appeals has held that a contractual liability exclusion in a directors and officers liability policy precluded coverage for an insured’s alleged tortious conduct on the basis that the torts would not have occurred “but for” an alleged breach of contract by the insured.  Perniciaro v. McInnis, 2018 WL 4403981 (La. Ct. App. Sept. 7, 2018).

The insured, a parish government, contracted with a vendor for information technology (IT) services.  The IT vendor alleged that the parish council wrongfully terminated the contract in favor of a different IT service provider and that council members defamed the vendor by discussing the dispute with news agencies.  The IT vendor filed suit against the parish government, asserting claims of breach of contract and defamation.  The complaint also stated a general allegation of “[a]ny and all other negligent and/or intentional acts[.]”

The insured’s liability carrier denied coverage for the lawsuit on the basis that the claims were not timely reported to the carrier and that the policy excluded coverage for breach of contract, defamation, and mental anguish.  The district court agreed.

The appellate court focused on the policy’s contractual liability exclusion, which excluded liability “under or pursuant to any contract or agreement.”  The insured argued that the plaintiff’s claims for negligence and non-contractual liability fell within a carve-out to the exclusion, which restored coverage when “such Insured would have been liable in the absence of such contract or agreement.”

Applying a “but for” test, the appellate court held that the contract exclusion barred coverage for the lawsuit.  The court reasoned that “[t]he negligent and intentional torts alleged by Plaintiffs stem from the contract [between the IT vendor and insured].  These alleged claims would not have occurred but for the breach of contract by the Parish, and the claims are not separate and distinct from the breach of contract.”  The court also held that the policy “expressly excluded” coverage for defamation and emotional distress claims.