Application Exclusion Does Not Apply When Misstatements Were Not “But For” Cause of Claim

The United States District Court for the Southern District of Texas has held that an exclusion contained in the application incorporated into the policy barring coverage for claims “based upon, arising out of or in connection with” misstatements in the application did not apply because the misstatements at issue, regarding a change in the insured’s executive leadership, were not the “but for” cause of the claimant’s alleged damages.  Columbia Lloyds Ins. Co. v. Liberty Ins. Underwriters, Inc., 2018 WL 1561816 (S.D. Tex. Mar. 30, 2018).

The insured, an insurance company, completed an application to renew its directors and officers policy.  The application asked: “Has the Applicant experienced changes to its Board of Directors or to its Key Executives over the past 12 months?”  The insured responded “No.”  In fact, the insured had terminated its president and chief executive officer and hired a new chief operating officer before completing the application.  The insurer issued the policy.  During the policy period, the insured provided notice of counterclaims in a lawsuit and arbitration alleging business disparagement and defamation, among other allegations, against certain insured directors and officers.  The insurer denied coverage, asserting that an exclusion contained in the policy’s application, which formed part of the policy, barred coverage because the claims were “based upon, arising out of or in connection with” misstatements in the application.

The court found that the exclusion did not bar coverage and the duty to defend was triggered.  The court held that under Texas law, the phrase “arise out of” requires “but for” causation.  Although both parties agreed that the insured had made a misstatement in the application, the court found that the change in executive leadership was included only as a background fact in the counterclaims, and that “the connection between . . . [the] change in leadership and any alleged damages suffered by [the claimant] is tenuous, at best.”  The court further found that “at most, the change in executive leadership at [the insured] is a separate and independent cause of many of [the claimant’s] alleged damages,” but ultimately, “the presence of one unrelated claim . . . triggers an obligation [by the insurer] to defend its insureds against all claims brought in the [the actions].”