Fifth Circuit Holds Carve-Back Provision Could Not Overcome Breach of Contract Exclusion for Louisiana Wage Payment Act Claim
The United States Court of Appeals for the Fifth Circuit, applying Louisiana law, has held that a breach of contract exclusion barred coverage for a judgment awarded to two employees who were not paid severance as required under their employment agreements, concluding that a carve-back to the exclusion did not apply because the insured’s liability would not have existed but for the employment agreements. AIG Specialty Ins. Co. v. Agee, 2025 WL 655069 (5th Cir. Feb. 28, 2025).
After the insured dismissed two of its employees without cause, the employees were denied severance pay, including quarterly bonuses and monthly commissions that they were owed, in breach of their employment agreements. The employees brought suit in Louisiana state court seeking recovery under a breach of contract theory and the Louisiana Wage Payment Act (“LWPA”). After the employees were awarded a judgment, the insurer brought a declaratory judgment action to establish that the policy did not cover the judgment based upon two substantively similar contract exclusions in the policy’s Directors and Officers Coverage Section—precluding coverage for “any Claim made against an Insured: … for any actual or alleged contractual liability of the Company under any express written contract or agreement”—and the Employment Practices Liability Coverage Section—precluding coverage for “a Claim made against an Insured: ... alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of any Company under any express contract or agreement” (the “Contract Exclusions”). The district court held that coverage was precluded by the Contract Exclusions and rejected the employees’ argument that the insured’s liability would have arisen independent of a breach of contract, triggering a carve-back to the Contract Exclusions which restored coverage for “liability which would have attached in the absence of such express contract or agreement” (the “carve-back” provision).
On appeal, the Fifth Circuit affirmed, first concluding that the Contract Exclusions clearly applied to bar coverage for the employees’ claims. The employees both signed employment agreements, and the judgment constituted a loss in connection with a claim that arose out of the employer’s contractual liability to the employees. The Fifth Circuit then held that the carve-back provision could not operate as a workaround to the Contract Exclusions, rejecting the employees’ argument that the carve-back provision applied because they could still have prevailed on their LWPA claim as a statutory tort claim even without an express contractual agreement.
In rejecting the employees’ argument, the Court explained that to succeed under the carve-back provision, the employees needed to show a tort claim that (1) was “separate and distinct and not arising from the breach of contract claim,” and (2) “ar[o]se from a duty other than the one imposed by the contract.” The employees could not make this showing, however, because it was their employment agreements that set forth the employees’ entitlement to the commissions and bonuses that comprised the judgment. Moreover, because the LWPA claims were necessarily derived from and dependent on the employment agreements, those claims were made in connection with the agreements, and thus the carve-back provision did not apply.
