The United States District Court for the Middle District of Tennessee, applying Tennessee law, has held that a fraud exclusion in a professional liability policy did not bar coverage for a breach of contract claim arising out of a franchise agreement.  For Senior Help, LLC v. Westchester Fire Ins. Co., 2020 WL 1532292 (M.D. Tenn. Mar. 31, 2020).  The court determined that the separately awarded damages for the breach were based on the insured’s failure to meet contractual obligations, regardless of the insured’s otherwise fraudulent conduct.

The insured, a franchisor, entered into a franchise agreement with a company for the operation of non-emergency transportation and patient care services.  The agreement provided that the insured would provide operations support services to the franchisee.  However, the insured failed to provide the services, and the franchisee engaged its own services as a result.  Both parties alleged breach of the franchise agreement.

In a subsequent arbitration, the arbitrator concluded that the insured had knowingly misrepresented that it would provide the operations support services when entering into the contract.  The arbitrator found that the insured breached the franchise agreement and defrauded the franchisee, awarding amounts in favor of the franchisee for breach of contract, fraud, and other claims.

The insured did not dispute that the damages attributable to the fraud claim were not covered.  However, the insured contended that the breach of contract damages were covered under its professional liability policy.  The insurer denied coverage under the policy’s “fraud exclusion,” which barred coverage for claims “alleging, based upon, arising out of, or attributable to any dishonest, fraudulent, criminal or malicious act or omission, or any intentional or knowing violation of the law by an Insured[.]”  The insurer reasoned that all of the damages arose from the insured’s fraudulent conduct when entering into the agreement.

Relying on Tennessee’s “concurrent cause doctrine,” the court held that coverage existed under the policy for the breach of contract damages.  The court noted that, aside from the insured’s fraudulent misrepresentations, the “conduct that directly caused the breach of contract and the resulting damages was [the insured’s] failure to provide operational services as required by the contract.”  The court also held that the franchisee’s attorney’s fees and arbitration costs were properly awarded under the arbitration association rules and not barred by the fraud exclusion.