A Breach of Contract is not a “Negligent Act”

An Illinois federal court has held that an underlying complaint alleging breach of contract did not allege injury arising out of “any negligent act, error or omission” necessary to trigger employee benefits liability coverage, citing the “well-recognized line of demarcation between negligent acts and breaches of contract.” Hartford Cas. Ins. Co. v. Karlin, Fleisher & Falkenberg, LLC, 2015 WL 5766110 (N.D. Ill. Sept. 30, 2015).

A former employee of a law firm sued the firm for breach of contract and violations of the Illinois Wage Payment and Collection Act (IWPCA). 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 is not a “negligent act” as that term is used in insurance policies.

In the ensuing coverage litigation, the court granted the insurer’s motion for summary judgment, holding that the insurer owed no duty to defend or indemnify against the underlying complaint. The court noted the “well-recognized line of demarcation between negligent acts and breaches of contract,” concluding that a breach of contract does not sound in negligence. Additionally, the court determined that an “intentional policy determination, including the establishing of a vacation or sick pay policy, is not a negligent act.”

The complaint alleged a cause of action for violation of the IWPCA, which the insured argued sounded in negligence and therefore triggered a duty to defend. The court agreed that “[a] violation of the IWPCA need not involve an intentional act.” However, the court nonetheless held that “even the IWCPA sounds in contract, not in negligence,” the defendants’ decision not to follow their alleged policy of paying accrued sick leave was not a “negligent act.”