Breach of Contract Exclusion Does Not Bar Coverage for Underlying Arbitration Award Against an Insured for Negligent Misrepresentation

The First District Court of Appeal for the State of Florida, applying Texas law, affirmed a trial court’s order that held a breach of contract exclusion does not bar coverage for an underlying arbitration award against an insured for negligent misrepresentation premised on conduct occurring before execution of a contract. See Carolina Cas. Ins. Co. v. Spicer, 2021 WL 2659551, at *1 (Fla. Dist. Ct. App. June 29, 2021).

The insured, a medical device distributor, sold distribution rights to another distributor under an Asset Purchase Agreement (“APA”). Several years later, the purchasing distributor filed a Chapter 11 petition for bankruptcy relief, and the case was converted to a Chapter 7. In the bankruptcy proceeding, the appointed bankruptcy trustee filed an adversary proceeding against the insured asserting, inter alia, a count for negligent misrepresentation under the theory that the debtor was fraudulently induced into purchasing distribution rights based on pre-contractual representations. The parties agreed to arbitration on the negligent misrepresentation claim, and the arbitration panel entered an award for the bankruptcy trustee.

The insurer denied coverage for the award, asserting that a breach of contract exclusion applied. The breach of contract exclusion precluded coverage for claims “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any actual or alleged breach of any oral or written contract or agreement.” The breach of contract exclusion also included an exception that applied “to the extent that an Insured Entity would have been liable in the absence of the contract or agreement.”

The bankruptcy trustee subsequently filed coverage litigation, standing in the shoes of the insured under a third-party beneficiary theory. The trial court granted the trustee’s motion for summary judgment, holding that the breach of contract exclusion was inapplicable. The insurer appealed.

The Florida District Court of Appeal affirmed the trial court’s ruling and “[wrote] only to address [the insurer’s] argument that the breach of contract exclusion applies to bar coverage for the underlying arbitration award against [the insured].” The court reasoned that “[b]ecause the [bankruptcy trustee’s] claim sounds in tort [(negligent misrepresentation)] rather than contract, the breach of contract exclusion cannot apply.” The court also relied on the exception to the exclusion, reasoning that the claim against the insured did not arise from or relate to the parties’ duties under the APA, but rather was solely based upon conduct that occurred before the APA was executed.