The United States District Court for the Northern District of California, applying California law, has held that a construction company is not entitled to coverage under its D&O policy because the underlying claim sought recovery for breach of contract and was based on alleged representations by an officer made outside the scope of his authority. S.J. Amoroso Const. Co., Inc. v. Executive Risk Indem. Inc., 2007 WL 3231741 (N.D. Cal. Oct. 30, 2007).
The insurer issued a D&O policy to a construction company. The policy provided coverage for claims made during the policy period for a "Wrongful Act," which was defined as "any error, omission, neglect, or breach of duty committed or attempted" by the "Insured Organization." The policy defined "Insured Organization" as the construction company. The policy excluded coverage for claims "based upon, arising from, or in consequence of any actual or alleged liability of an Insured Organization under any written or oral contract or agreement," unless the "Insured Organization would have been liable in the absence of the contract or agreement."
The underlying action arose from a contract originally entered into by an unrelated construction company and its customer. That company subsequently sought to assign its obligations under the contract to another company it co-owned with the policyholder. In seeking to persuade the customer to accept the assignment, the policyholder's president purportedly made representations regarding the policyholder's financial status on which the customer allegedly relied in accepting the assignment. The customer later discovered construction defects and filed the underlying litigation, in which it named the policyholder as a defendant and asserted the following causes of action against the policyholder: (1) breach of contract; (2) breach of the implied covenant of good faith; (3) negligent construction; (4) breach of implied and expressed warranty; (5) negligent or intentional misrepresentation regarding, inter alia, the benefit from the assignment of the contract; (6) gross negligence and willful misconduct regarding the construction; (7) indemnity and defense under the construction contract; (8) vicarious liability on an alter ego theory; and (9) promissory estoppel based on the officer's representations. The insurer denied coverage for the underlying action, and the construction company filed the instant action seeking coverage.
The insurer filed for summary judgment, arguing first that the policy did not apply to the causes of action for negligent or intentional misrepresentation, gross negligence and willful misconduct, and promissory estoppel because the alleged statements by the officer were not made in his official capacity as president of the construction company. The court agreed, reasoning that, in the underlying action, the construction company had vehemently contended that the officer was not authorized to make the statements at issue. The court also relied on the recent decision of the California appellate decision in August Entertainment, Inc. v. Philadelphia Indemnity Insurance Co., 146 Cal. App. 4th 564, 52 Cal. Rptr. 3d 908 (2007), which held that a D&O policy does not provide coverage for an entity and its officer sued for breach of a contract that the officer entered into without authorization. [The August Entertainment decision was summarized in the February 2007 issue of the Executive Summary.] The court concluded that "[t]he D&O policy here provides coverage for a wrongful act committed by the Insured Organization," and because "it is [the construction company's] contention that the alleged wrongful act was not committed by it, but rather [the officer], there is no coverage under the policy."
The court also determined that the "contract or agreement" exclusion applied to preclude coverage for the remaining causes of action asserted against the construction company in the underlying action. The court held that the breach of contract, breach of the implied covenant of good faith, breach of warranty, and indemnity and defense causes of action were "clearly based on allegations of [the construction company's] failure to meet alleged obligations under the . . . construction contract" and were thus "squarely within" the scope of the exclusion. With respect to the tort claims asserted in the underlying action, the court stated that the insured's claim failed both because of the breadth of the exclusion (applying to claims "arising from" a contract) and because California courts had previously "rejected similar attempts to separate tort claims from contract claims in similar D&O coverage cases."
The court also rejected the construction company's contention that the exclusion only applied to contracts to which the construction company was a party. In doing so, the court noted that the construction company cited no case law in support of this proposition and reasoned that "if the insurer sought to narrow coverage by excluding liability resulting from the insured's contractual obligations, it is unreasonable to infer that it nonetheless intended to provide coverage for liability flowing from a third party's contracts." Accordingly, the court concluded that the plain language of the exclusion encompassed both the insured's contracts and the contracts of third parties.