Why it matters: In a decision involving coverage for a lawsuit against a city and two city officials, a federal court in Illinois ordered an insurer to provide defense to the city officials, but held that coverage was not available to the city. The underlying dispute involved a plan to build a baseball stadium that fell through. The team sued the city and two city officials for breach of contract as well as fraud and civil conspiracy. When the city and officials tendered defense of the suit to their insurer, the carrier denied the request and filed a declaratory judgment action. The insurer argued that the policy contained multiple exclusions precluding coverage, including a breach of contract exclusion. The court held that the exclusion applied to allegations against the city, but that other allegations against the city officials fell outside of the exclusion and mandated coverage.

Detailed discussion: Grand Slam Sports & Entertainment (GSSE) operated a minor league baseball team known as the Lake County Fielders. In 2006 the director of economic development for Zion, Illinois, approached the company about developing a stadium in the city. GSSE worked with the director, as well as the mayor, to negotiate the terms of the deal.

The parties reached an agreement to construct a stadium for the Fielders. The City of Zion Council approved the sale of bonds to finance the project and entered into a construction contract in 2011. But progress on the stadium then stalled.

According to the subsequent lawsuit filed by GSSE, the director and the mayor determined that the project was too risky and decided not to pursue the bond sale or build the stadium. However, the defendants kept their decision quiet, despite knowing that it would have negative consequences for GSSE. Instead, they engaged in knowingly false representations and material omissions to conceal that the stadium would not be built, GSSE alleged.

GSSE claimed that it relied upon the officials' misrepresentations in deciding to field a team for the 2011 season, losing approximately $500,000 in revenue. The officials also attacked the reputation of GSSE, the suit alleged, making false public statements about the reasons that the project was delayed. But as to the city, GSSE's lawsuit alleged only breach of contract.

OneBeacon America Insurance Company insured the city and the city officials. OneBeacon denied coverage to all of them, arguing that a breach of contract exclusion precluded coverage for all of the defendants, and that other exclusions applied to the city officials as well.

U.S. District Court Judge Charles P. Kocoras ultimately split the baby. The court first considered the effect of the breach of contract exclusion, which applied to "[a]ny 'claim' arising directly or indirectly out of, or in any way related to liability assumed under any contract or agreement of breach of contract to which the insured is a party or a third-party beneficiary, or any representations made in anticipation of such contract or agreement of any 'claim' against any insured arising directly or indirectly out of, or in any way related to tortious interference with a contract or business relations." However, the exclusion "does not apply to liability the insured would have in the absence of the contract or agreement."

As to the city, "it is clear and free from doubt that the breach of contract claim in the Underlying Complaint would necessarily fall within the Contracts Exclusion so as to preclude coverage of the City of Zion," the court wrote. "The alleged wrongful acts of the City of Zion described in the Underlying Complaint would not exist but for the breach of contract." Notably, the court did not even decide whether the CGL policy provided coverage for a personal and advertising injury based on the city officials' public comments about the GSSE deal because "the breach of contract exclusion would nevertheless preclude OneBeacon's duty to defend the City of Zion." The remaining allegations against the city would not trigger coverage by themselves, the court added, because "they explicitly rely on the breach" of the contract, and "[i]t is clear that the breach of contracts exclusion . . . applies to all the allegations in the Underlying Complaint that involve the City of Zion, eliminating OneBeacon's duty to defend the City."

However, the court opined, the applicability of the exclusion to the city officials was "less straightforward." OneBeacon argued that the counts for fraud and civil conspiracy reference the contract, and the complaint should be read as a whole. The city officials, on the other hand, pointed to the last sentence of the exclusion to argue that, if the contract references were removed from the counts against them, the allegations would still exist for wrongful acts unrelated to any contract.

The court agreed with the city officials. The complaint alleged "numerous" other wrongful acts, including disparaging publications about GSSE to the public and misrepresentations about the bonds, "none of which" relied on any provision in the contract. "The Court cannot conclusively determine that such alleged wrongful acts would not have arisen but for a breach of contract," the court wrote. "Accordingly, there remains sufficient uncertainty as to the applicability of the Contracts Exclusion to the [city officials], and we, therefore, cannot decisively apply the Contracts Exclusion to the claims against them."

A second exclusion for Profit, Advantage or Remuneration similarly did not preclude coverage for city officials, the court held, despite OneBeacon's argument that the complaint was "saturated with the illegal financial motivations" of the city officials. The exclusion prohibited coverage for "[a]ny 'claim' arising directly or indirectly out of, or in any way related to any insured gaining any profit, advantage or remuneration to which that insured is not legally entitled." It is "evident that GSSE could still have pleaded fraud and civil conspiracy claims regardless of whether the city officials gained a profit, advantage or remuneration in which they were not legally entitled," the court opined. "Nowhere is profit, advantage or remuneration a requisite element of either cause of action."

Likewise, the profit exclusion was not "sufficiently triggered," the court held. "We do not find OneBeacon's contention that at least some of the allegations in the forty-two page Underlying Complaint fall in the Profit Exclusion to be very convincing. There must be more than sporadic general allegations to convince us to apply this exclusion."

Accordingly, OneBeacon's motion for summary judgment was granted as to the city but denied as to the city officials.

To read the opinion in OneBeacon America Insurance Co. v. City of Zion, click here.