In two separate cases, federal courts have upheld the carrier’s denial of coverage for claims by an employer alleging that the insured induced a breach of their former employee’s employment contract. Both courts concluded that coverage was excluded for both defense and indemnity under the policies’ exclusions for claims “arising out of”a breach of contract.

In October 2010, EAPD attorneys obtained the dismissal of a declaratory judgment suit brought in the U.S. District Court for the District of Massachusetts, Radianse, Inc. v. Twin City Fire Ins. Co., No. 1:10-cv-10120-RGS (Oct. 6, 2010). The insured was sued by an accounting temporary employment agency for hiring one of the agency’s former employees in violation of the employee’s non-compete clause. The agency sued the insured for tortious interference with contractual relations and violation of the Massachusetts consumer protection statute.

The insured sought coverage under its Directors and Officers Liability policy. However, that policy contained an exclusion for claims “based upon, arising from, or in any way related to any liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.” Citing this exclusion, the insurer denied coverage.

In his decision, District Judge Richard G. Stearns granted summary judgment to the insurer. He rejected the insured’s argument that the exclusion could only apply to claims that the insured breached its own contract. He noted that the exclusion applied to claims “in any way related to” “any” liability under “any” contract or agreement, not only contracts to which the insured was a party. The insured did not appeal.

More recently, the Sixth Circuit was confronted with similar facts in Capitol Specialty Ins. v. Indus. Electronics, LLC, No. 09-6368 (6th Cir. Jan. 12, 2011), although under a CGL policy. There, the claimant alleged that the insured, after hiring the former employee, induced him to breach the provision in his employment contract protecting the claimant’s confidential information. The Sixth Circuit declined to decide whether the alleged conduct constituted “advertising injury,” and held that coverage was in any case excluded under an exclusion for advertising injury “arising out of a breach of contract.” As in Radianse, the court noted that although the insured was not a party to the contract and did not itself breach the contract, the exclusion applies to any claim “arising out of” a breach of contract. Since the claims arose out of the former employee’s alleged breach, the exclusion applied.