Why it matters

Narrowly interpreting a policy's breach of contract exclusion, a federal court judge in California ruled that the exclusion applied only to actual breaches of contract and that an alleged breach in the underlying complaint against the policyholder was insufficient to eliminate coverage. A competitor filed suit against the insured, charging the policyholder with making disparaging comments so that its offer of employment would appear more attractive and "to solicit [the competitor's] employees in breach of a written and implied contract." The insurer rejected the policyholder's request for defense, relying on a breach of contract provision in its commercial liability policy. But the court said the allegation was just that—an allegation—and not an actual breach of contract. Other policy exclusions used the term "actual or alleged," the court noted, implying that the insurer knew how to include and elected not to use such language for the breach of contract provision.

Detailed discussion

Federal Insurance Company provided coverage to financial performance analytics software provider MedeAnalytics under two commercial liability insurance policies that provided the insurer would "pay damages that the insured becomes legally obligated to pay by reason of liability … imposed by law … for … personal injury to which this coverage applies." The term "personal injury" was defined to include "injury, other than bodily injury, property damage or advertising injury, caused by an offense of … electronic, oral, written or other publication of material that libels or slanders a person or organizations (which does not include disparagement of goods, products, property or services)."

Importantly, the policy also contained an exclusion stating: "This insurance does not apply to advertising injury or personal injury arising out of breach of contract."

Two Ukrainian corporations sued MedeAnalytics in California federal court alleging five claims: breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contract, intentional interference with prospective economic advantage, and negligent interference with prospective economic advantage.

Specifically, the complaint alleged that MedeAnalytics solicited the plaintiffs' employees to work directly for MedeAnalytics in an attempt to drive the plaintiffs out of business and in breach of a nonsolicitation clause found in an agreement between parties. The complaint further alleged that MedeAnalytics "ma[d]e disparaging comments about [the plaintiffs] and [their] directors and officers."

These allegations triggered at least the potential for coverage under the personal injury coverage for libel and slander provided by the policy, U.S. District Court Judge Jon S. Tigar said. "While the allegations in the underlying complaint did not provide factual support for each element of a libel or slander claim, because 'the underlying complaint alleged publication to third persons, and the content of the statements were allegedly disparaging[,] [t]hese allegations sufficed to give rise to a potentially covered claim' for libel and slander," he wrote.

The court rejected each of Federal's counterarguments. Under California law, a plaintiff pleading a claim of libel or slander is not required to specifically allege the statements were false, the complaint did not suggest that the allegedly disparaging statements made by MedeAnalytics were merely statements of opinion, and more detail about content of the allegedly disparaging statements was not necessary, the court said.

Having established that Federal owed a duty to defend MedeAnalytics because the underlying complaint showed that a potential for personal injury coverage existed under the policy, Judge Tigar turned to potential exceptions.

Federal told the court that any potential for coverage based on libel or slander was eliminated by the express exclusion for personal injury arising out of breach of contract. MedeAnalytics responded that the exclusion was not applicable because Federal failed to demonstrate that a breach of contract actually occurred.

The court agreed. The exclusion could have been written more broadly so as to cover all claims for injury arising out of any "alleged" breach of contract in addition to all claims arising out of actual breaches of contract, Judge Tigar said.

"Indeed, other exclusions in the policy here incorporate such 'actual or alleged' language," the court said. "As Mede notes, '[i]f Federal had intended its Breach of Contract exclusion to apply to an "alleged" breach of contract, then it certainly knew how to say so.' The fact that Mede did not include the 'actual or alleged' language in the breach of contract exclusion therefore 'implies a manifested intent not to do so.' "

"Because the Court must strictly construe the breach of contract exclusion, the Court holds that 'to avoid its duty to defend, [Federal] must point to "conclusive evidence" establishing that any potential liability that the insured faced for allegedly defaming [the underlying plaintiffs] necessarily arose out of an actual breach—not an alleged breach—of the [agreement between the parties] or some other contract,' " Judge Tigar wrote, granting summary judgment in the insured's favor on the duty to defend. "Federal does not argue that it has 'conclusive evidence' of an actual breach of contract. Accordingly, the Court concludes that the breach of contract exclusion does not apply, and that Federal had a duty to defend Mede against the underlying action."

To read the order in MedeAnalytics v. Federal Insurance Company, click here.