A thing that we all generally know and accept is that, typically, a commercial general liability insurance policy doesn’t cover breaches of contract. But, there are exceptions to that rule, and according to one recent decision those exceptions include breach of warranty claims. Considering that warranties generally are treated as contracts, that seems strange! The outcome makes some rough sense though.
Here’s the quick summary of what happened. A raw beef supplier sold a bunch of tainted beef to a wholesaler. The supplier gave a “product guarantee” to the wholesaler which is not reproduced in the court opinion, but probably said something to the effect of “our beef doesn’t have e. coli.” The wholesaler predictably sued, asserting claims for breach of contract, breach of express warranty (premised on the product guarantee), and breach of the implied warranties of merchantability and fitness for particular purpose.
The supplier tendered the claim to its CGL carrier. The CGL carrier filed a suit in federal court seeking a declaration it wasn’t obligated to defend or indemnify the supplier. The supplier made a motion to dismiss the suit for failure to state a claim, insofar as it sought a declaration the CGL carrier wasn’t required to tender a defense.
The CGL carrier argued that the relevant insurance policy included a “Contractual Liability Exclusion.” Basically speaking, the Contractual Liability Exclusion just set out the general rule described above – CGL policies don’t cover claims arising from liability “assumed” by contract. But, the Exclusion contained some exceptions, including one for liability the supplier “would have [even] in the absence of the contract or agreement.”
The Court found that the Contractual Liability Exclusion didn’t apply and, even if it did, the exception to the Exclusion applied. As to the Exclusion, the Court found it didn’t apply because the supplier didn’t “assume” with the product guarantee any liability it didn’t already have. The Court held the term “assume,” as used in CGL policies, refers to assumption of the liability of third parties. On that basis, the Court concluded the Exclusion had no application, because the supplier was sued for its own acts and omissions, not for those of a third party which the supplier had agreed to indemnify or hold harmless.
The Court went on to hold that, even if the Exclusion applied, so did the exception to the Exclusion. Specifically, the Court found that even if the supplier had not given the product guarantee, it still would have been liable for breach of implied warranties which, by their nature, attach even in the absence of express promises or agreements. Thus, the liability was not (at least entirely) liability the supplier would have faced even “in the absence of the contract or agreement.”
This presents a question and a lesson. The lesson is obvious: make a demand on your insurer if you are faced with substantial breach of warranty liability! In fact, I think it prudent to make a demand on insurers for any significant claims unless coverage clearly does not apply (which, in practical terms, is virtually never). It's what you're paying for, after all.
The question is interesting and warrants careful consideration. Imagine the supplier had effectively disclaimed all implied warranties and gave an express warranty instead. That’s a thing I advocate for a lot in this column. The disclaimer, of course, would have the effect of precluding implied warranty liability, and the express warranty arguably could constitute taking on liability the supplier would not have faced “in the absence of the contract or agreement.” Might your warranty disclaimers impact insurance coverage?
I think the better answer is “no,” because the disclaimer of implied warranties and grant of express warranty typically will occur in a single contract, and it seems a peculiar outcome that a seller’s entry into a contract that will reduce its exposure could lead to an absence of coverage. But the question might reasonably be resolved the other way if one took a strictly literal view of the insurance contract.
In any event, if you find yourself faced with a warranty claim and your insurer is balking at tendering a defense, you have some case law on your side.