The U.S. Court of Appeals for the 11th Circuit determined that National Union Fire Insurance Company of Pittsburgh, PA (National Union) owed no duty to indemnify a $40 million settlement reached by its former insured in an underlying action. The court found the action arose out of a breach of a contract, and therefore, clearly fell within an exclusion in the D&O insurance policy. Bond Safeguard Insurance Co, et al. v. National Union Fire Insurance Company of Pittsburgh, PA., No. 14-15233, 2015 U.S. App. LEXIS 17471 (11th Cir. Oct. 5, 2015).

Developer Land Resource, LLC (LRC) organized subdivision improvements, including utilities and roads. LRC and its subsidiaries had a Directors, Officers and Private Company Liability Insurance Policy (the Policy) issued by National Union Fire Insurance Company of Pittsburgh, PA (National Union) for the policy period of March 31, 2008, to March 31, 2009. The Policy provided coverage for each and every director, officer and employee of the company arising from a claim made against LRC during the policy period for any actual or alleged wrongful act in their respective capacities as directors, officers or employees of LRC. The Policy also contained an exclusion exempting LRC from coverage for any loss in connection to a claim “arising out of” any actual or alleged contractual liability of LRC under any express contract or agreement. LRC filed a voluntary Chapter 11 bankruptcy petition in October 2008 that was later converted to Chapter 7.

The municipalities where the subdivisions were located required LRC to obtain surety bonds to guarantee its performance. Bond Safeguard Insurance Company and Lexon Insurance Company (Bond-Lexon) issued subdivision bonds on behalf of LRC as principal beginning in 2003. The bonds functioned as a guarantee of LRC’s timely completion of the subdivision improvements and required Bond-Lexon to complete the improvements or pay the municipalities the principal bond amount if LRC defaulted. Prior to issuing the bonds, Bond-Lexon required LRC and Robert Ward, LRC’s CEO, to execute a General Agreement of Indemnity (GAI), indemnifying and holding Bond-Lexon harmless from every claim Bond-Lexon may pay in consequence of having executed the bonds.

In August and September of 2008, Bond-Lexon received notice that LRC had defaulted on its contractual agreements with the municipalities. As a result of LRC’s breaches of its contractual obligations, Bond-Lexon paid to settle the municipalities’ claims on the bonds.

Bond-Lexon filed its first complaint against Ward and other directors and officers from LRC in April 2011 in the U.S. District Court for the Middle District of Florida. The complaint was premised on Ward’s breach of contractual duty to indemnify Bond-Lexon pursuant to the GAI, and negligence by Ward and other defendants. Ward demanded coverage from National Union under LRC’s policy, but National Union denied coverage, asserting that Bond-Lexon’s claims arose out of LRC’s and Ward’s contractual liability, thereby falling within the contractual-liability exclusion in the policy.

The parties negotiated a settlement and Ward assigned his rights to Bond-Lexon to assert any of his claims against National Union regarding the Policy and coverage denials under the Policy. The parties further agreed to the filing of an amended complaint in the underlying action, with Bond-Lexon abandoning its contractual indemnification claim against Ward and asserting only a negligence claim against him. Ward also stipulated to a $40.4 million judgment in favor of Bond-Lexon if National Union declined to defend Bond-Lexon’s lawsuit against him.

In December 2012, Bond-Lexon filed its amended complaint, bringing one count of negligence against Ward, asserting that he was negligent in managing the design and construction of the subdivision improvements and LRC’s financial resources, that he misrepresented LRC’s financial condition, and that as a result of Ward’s negligence, Bond-Lexon suffered at least $40.4 million in losses. Ward again demanded coverage from National Union and National Union denied coverage based on the contractual-liability exclusion in the policy.

In January 2013, the District Court entered a stipulated final judgment for Bond-Lexon against Ward for $40.4 million. Bond-Lexon then brought a coverage suit against National Union in Florida state court for breach of the Policy. After the case was removed to federal court, the parties cross-moved for summary judgment.

The District Court granted National Union’s motion for summary judgment, determining the language in the contractual-liability exclusion, “arising out of, based upon or attributable to any…contractual liability,” was unambiguously broad and precluded coverage for tort claims depending on LRC’s contractual liability. Bond-Lexon asserted that coverage was not barred by the contractual-liability exclusion in the Policy and argued that its claim for fraudulent inducement was grounded entirely in tort, and arose out of Ward’s misrepresentations that predated the bonds.

On appeal, the appellate court granted National Union’s motion for summary judgment and determined that “Bond-Lexon’s pleading of its claim in tort does not alter the fact that all of its asserted losses arose from Ward’s and LRC’s contractual breaches of the development contracts and GAI.” The court also acknowledged the Florida Supreme Court’s broad interpretation of the phrase “arising out of” in determining that there was a sufficient causal connection between Bond-Lexon’s negligence claim and Ward and LRC’s contractual liability to enforce the policy’s exclusion.

Tressler Comments

The 11th Circuit’s decision illustrates the extensive scope of the contractual-liability exclusion containing the language “arising out of” and the effect this language can have when determining an insurer’s coverage obligations. Despite Bond-Lexon’s attempt to amend its initial contract-based claims to allege solely tort claims, the court still determined the contractual-liability exclusion was enforceable.