Coverage for attorney’s fees could not be bootstrapped onto an underlying contract claim that was not covered by the policy, a U.S. District Court in California recently determined.

Ken Osmond – better known as Eddie Haskell of “Leave it to Beaver” fame – filed a class action against the Screen Actors Guild. He alleged that SAG had collected more than $8 million in “foreign levy funds” (monies due to actors from various foreign countries), and failed to distribute them to SAG members. Osmond claimed SAG had held the funds for an unreasonably long amount of time and asked for an accounting as well as damages, injunctive relief, and attorney’s fees.

SAG reached a settlement with the class, agreeing to pay 90 percent of the funds within a three-year period and to continue paying the foreign funds on a regular basis going forward. The deal was approved by a state court, with the judge adding $330,000 in counsel fees and an incentive payment to Osmond.

Under a D&O policy issued by Federal Insurance Company, SAG sought coverage for the $330,000 awarded to Osmond. The insurer refused to indemnify SAG, arguing that because the underlying complaint did not trigger coverage, payment of this award was similarly not required.

U.S. District Court Judge Dolly M. Gee sided with the insurer. Because the insured was paying an amount it previously had agreed to pay through a contractual obligation, the underlying settlement was not covered.

She cited to Health Net, Inc. v. RLI Ins. Co., 206 Cal. App. 4th 232 (2012), where the court held that “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.”

Under California law – even in the absence of an express exclusion – “a claim alleging breach of contract is not covered under a professional liability policy because there is no ‘wrongful act’ and no ‘loss’ since the insured is simply being required to pay an amount it agreed to pay,” she added. “This policy makes sense when considered in practical terms: if a contracting party fails to pay amounts due under a lawful contract and is sued for that failure to pay, it cannot then obtain a windfall by having its payments covered by an insurance policy covering only ‘wrongful acts.’”

SAG itself explained that it collected the foreign funds on behalf of its members but did not distribute the monies due to the lack of an automated system, Judge Gee noted. It also acknowledged that it “will continue to distribute funds to performers on whose behalf it collects foreign royalties.”

“SAG’s own coverage position and assertions lead to but one result, which is that, insofar as SAG is and was, prior to the Osmond action, obligated to account for and distribute the foreign levy funds to the plaintiff class, SAG fails to establish that the $330,000 award arises from a ‘covered’ claim under the policy,” Judge Gee said, concluding that Federal owed no duty to indemnify SAG for the amount.

To read the decision in Screen Actors Guild v. Federal Ins. Co., click here.

Why it matters: The SAG decision provides a valuable lesson for policyholders: a claim for coverage of damages under a professional liability policy needs to allege a wrongful act against the policyholder and cannot be based upon a breach of contract. The underlying complaint in SAG was not covered because the contract dispute was not a “wrongful act” as defined by the policy, the judge determined – leaving SAG on the hook for the cost of the class action settlement as well as the $330,000 in attorney’s fees.