Insurance Agent Left Bare by Breach of Contract Exclusion in E&O Policy

A breach of contract exclusion in the errors and omissions policy purchased by an insurance agent that held binding authority for a property insurer was applied recently to bar the agent from receiving any E&O coverage when it was sued for having, apparently negligently rather than purposefully, issued two property policies that were beyond the scope of its binding authority.


The case was decided last month by the U.S. Court of Appeals for the Fifth Circuit, applying Louisiana law and affirming the same conclusion that had been reached by the trial court in deciding a motion for summary judgment.


Axis Surplus Insurance Co. granted a binding authority to RODCO Worldwide, Inc. to underwrite, bind and issue policies covering property located in Louisiana, but not including greenhouses. Axis later discovered three policies issued outside Louisiana and notified RODCO, which cancelled two of them but failed to cancel the third. Axis did not immediately detect that another policy had been issued that insured greenhouses, and that policy also remained in effect. Hurricane Katrina caused damage that generated claims under the two surviving policies. Axis paid about $1.3 million in honoring the claims and then demanded RODCO reimburse it for having breached the terms of the binding authority agreement and/or having negligently placed the risks.


RODCO submitted the claim to Arch Specialty Insurance Co., it’s E&O insurer. The policy contained this exclusion: “The insurance does not apply to any claim based upon, arising out of, or in any way involving… any actual or alleged breach of any contract… unless liability would have attached to the insured even in the absence of such contract…”


Arch rejected the claim, at least based in part on the exclusion, and RODCO filed a declaratory judgment action against Arch. On motions by each party for summary judgment, the district court found for Arch. RODCO appealed.


RODCO, apparently focusing on the last phrase of the exclusion, argued that contract liability exclusions apply only to a specific assumption by the insured of liability that solely results from the negligence or contractual breach of a third party.” It cited two earlier cases as support, but the appeals court readily found that the policy language in those two earlier cases was different than in the Arch exclusion. The language in one of the earlier cases said, for example, “this policy does not apply… to liability assumed by the insured under any contract…”


The Arch policy, on the other hand, excluded coverage for claims “based upon, arising out of, or in anyway involving” RODCO’s breach of the binding authority agreement.


RODCO argued that its actions gave rise to claims based on breach of contract and based on the tort of negligence and that the exclusion applied only to preclude coverage for breach of contract. Again, the court noted the Arch policy excluded claims “based upon, arising out of, or in anyway involving” RODCO’s breach of a contract.


RODCO also argued that the district court’s interpretation of the Arch policy should be rejected because it “produces absurd results as it would cause the operation of an exclusion to hinge upon the identity of the person asserting the professional liability claims against the insured.” Apparently RODCO argued that no claim by a party with which it had a contract would be covered, as if only claims brought by non-contracting parties could be covered. The appeals court did not indicate whether it agreed with such a premise, but it responded that the argument “is without merit.” The contractual exclusion in the Arch policy, like all exclusions, creates a potential gap in coverage, “but it leaves intact substantial coverage for negligence… in the rendering or failure to render professional services.”


The court concluded by citing from an earlier Louisiana case: “When the words of any insurance contract are clear and explicit and lead to no absurd consequences, courts must enforce the contract as written.”


For more on contractual liability in E&O policies, read Q&A: Do E&O Policies Cover Contractual Liability?