Arbitration Award for Amounts Owed Under Separation Agreement Not Covered Loss

In a win for Wiley’s client, the United States Court of Appeals for the Ninth Circuit, applying California law, held that no coverage was available for an arbitration award awarding amounts owed under a CEO’s separation agreement because the award constituted “amounts for which an Insured is liable due to an act or omission in knowing violation of any written contract of employment.” Acad. of Country Music v. Cont’l Cas. Co., 2023 WL 4421394 (9th Cir. July 10, 2023).

The insured organization and its CEO entered into a separation agreement providing for payments to the CEO. The organization later stopped making payments. The CEO commenced arbitration against the organization, alleging that the organization breached the separation agreement. The arbitrator found in favor of the CEO and awarded him the amounts owed under the separation agreement, plus attorneys’ fees and costs. After providing a defense to the organization in the arbitration, the organization’s insurer denied coverage for the arbitration award under a private company D&O and EPL insurance policy because the award did not constitute covered “loss.” The EPL coverage part excluded from the definition of “loss” “any amounts for which an Insured is liable due to an act or omission in knowing violation of any written contract of employment” and the D&O coverage part excluded from the definition of “loss” “any amounts for which an Insured is liable due to an act or omission in knowing violation of any oral or written contract or agreement.” The district court granted summary judgment to the insurer that there was no coverage for the arbitration award.

The Ninth Circuit affirmed, concluding that the arbitration award did not constitute “loss” under either coverage part. The court held, based on the arbitrator’s findings, that the insured “knowingly violated the separation agreement because it consciously decided to cease making payments to [the CEO], without any reasonable basis for concluding that its performance under the separation agreement was excused” and the “decision to stop making payments as required by the separation agreement constitutes a knowing violation of a written employment contract.” Accordingly, no coverage was available under the EPL coverage part. Further, because “the narrower EPL exclusion applies to the arbitration award, the broader D&O exclusion does as well” and “the arbitration award is excluded from D&O coverage.”