Contractual Liability Exclusion Bars Coverage Where Lawsuit Against Insured Arises Out of a Contractual Obligation

The Appellate Court of Maryland, applying Maryland law, has held that an insurer had no duty to defend or indemnify an insured under a professional liability policy containing a contractual liability exclusion for a lawsuit alleging breach of contract, despite the fact that the allegations against the insured and his role with regard to the contract at issue were allegedly erroneous. Zarrelli v. Hiscox Ins. Co., Inc., No. 486771V, 2024 WL 3635576 (Md. App. Ct. Aug. 2, 2024).

The named insured, a technology company, entered into an agreement with a vendor to supply copper tubing to one of the company’s customers as part of an ongoing project. The company maintained professional liability insurance that extended to the company’s specialist working on the project. The order for copper tubing was not paid, and the vendor sued the company, the company’s principal who signed the agreement, and the specialist. The vendor’s lawsuit, which included causes of action for breach of contract, alleged a single cause of action against the specialist for breach of statutory and common law trust, based on the vendor’s erroneous belief that the specialist was the chief financial officer of the company and that the company held the vendor funds in trust. The company tendered the action for coverage under the company’s policy. The insurer denied coverage based on the policy’s contractual liability exclusion, which barred coverage for any claim “based upon or arising out of any actual or alleged liability of others assumed by the insured under any contract or agreement unless such liability would have attached in the absence of such contract or agreement.”

The specialist sued the insurer, and the trial court granted summary judgment to the insurer. The specialist appealed, arguing that his role as specialist was limited to inventory control services, constituting professional services under the policy, and therefore the lawsuit fell within the policy’s coverage grant. 

The appellate court affirmed the trial court’s grant of judgment to the insurer. The appellate court determined that the underlying action alleged that the vendor had a contract with the company to supply copper tubing and the specialist allegedly had a duty to pay the funds received for the copper tubing held in trust by the company to the vendor. Therefore, the court concluded that the lawsuit against the specialist arose out of a contractual obligation, even if the allegations against the specialist were based on an erroneous assumption about the company’s services and the specialist’s role. Because the underlying action—the “claim” at issue—was based entirely on the vendor’s allegations regarding the unpaid supply order, the contractual liability exclusion barred coverage.