The United States District Court for the Central District of California, applying California law, has held that a breach of contract exclusion bars coverage for fraud claims against an insured advertising agency. Axis Ins. Co. v. Inter/Media Time Buying Corp., 2015 WL 3609300 (C.D. Cal. June 8, 2015).

The insured advertising agency brought suit against one of its customers to collect debts owed for advertising services. The customer then filed a cross-complaint against the agency, alleging breach of contract, fraud, and unfair business practices. The customer alleged that the agency had violated provisions in its contract requiring the agency to purchase all media time itself rather than through brokers, and to fully disclose actual media costs. The customer alleged that it had relied on these misrepresentations in choosing to do business with the agency. The agency tendered the cross-complaint under its multimedia liability policy, which provided coverage for advertising services errors and omissions.

In this coverage action, the court granted summary judgment in favor of the insurer, finding that there was no potential for coverage under the policy for the customer’s claims. First, the court determined that the claims fell within the policy’s insuring agreement. The insurer argued that the alleged fraudulent misrepresentations by the agency were not made in the performance of advertising services but rather to induce the customer to enter into a contractual relationship in the first place. However, the court found that the scope of the customer’s fraud claims were broader than merely fraud in the inducement—for example, the customer’s allegations that the agency had failed to provide accurate information regarding the actual costs incurred in placing advertisements concerned services that were rendered in the performance of advertising services. The insurer also argued that the customer’s claims involved the agency’s billing practices and administrative activities rather than the performance of advertising services, but the court found that the customer’s claims regarding the use of brokers to place advertisements did concern the agency’s performance in the placement of advertising.

Having determined that the customer’s claims fell within the insuring agreement, the court considered the policy’s contract exclusion, which barred coverage for claims for or “arising out of” any actual or alleged breach of contract. The court found that this exclusion precluded coverage because all of the customer’s allegations “arose out of” the breach of the agency’s contractual obligations to make advertising purchases directly for the customer and to make full disclosures to the customer regarding those purchases. The court found that the customer’s allegations of tortious misrepresentations would not exist if the agency had not allegedly assumed the contractual obligations to run its operations and to disclose its media costs in a particular manner.