Breach of Contract Exclusion Bars Coverage for Judgment Rendered in Employment Dispute

The United States District Court for the Eastern District of Louisiana, applying Louisiana law, has held that an insurer does not need to cover a monetary judgment rendered in favor of two former employees of the insured company, finding that the policy’s breach of contract exclusion precluded coverage. AIG Specialty Ins. Co. v. Agee, 2024 WL 303196 (E.D. La. Jan. 26, 2024).

In 2017, after their termination from the insured laboratory company, two former employees sued the company in Louisiana state court to recover unpaid compensation. The court in that case rendered a judgment in favor of the employees, and awarded them unpaid wages, bonuses, and commissions. Following the judgment, the company’s D&O and EPL insurer filed an action seeking a declaratory judgment that there was no coverage under the policy for the amounts owed.

The court in the declaratory judgment action focused on two issues. First, it analyzed the date of the first “claim” against the company and whether it was timely reported to the insurer. The insurer argued that the first claim (i.e., “demand for monetary relief”) was made in April 2015 – shortly after the former employees were terminated – when one of the employees emailed the company about unpaid compensation. The insurer argued that because that was the first claim, which was not timely reported, coverage was unavailable under any of the claims-made-and-reported policies it issued to the company. For its part, the insured company argued that the first claim was the state court complaint in 2017, which was timely reported. To support its argument, the company contended that the April 2015 email was not a demand for monetary relief, but rather an attempt to settle outstanding payments. The court agreed with the company and found that the April 2015 email was “simply an accounting of the amount of money owed,” which, citing deposition testimony, the company intended to pay, and that it “only became a claim when the request could not be satisfied, and a claim was formally made in the form of [the 2017 lawsuit].”

After establishing that coverage existed in the first instance, the court then analyzed the applicability of the policy’s breach of contract exclusion. Both the D&O and EPL coverage sections of the policy contained this exclusion, which barred coverage for loss in connection with a claim for “any actual or alleged contractual liability of the Company under any express contract or agreement.” Because the employment agreements created contractual liability on the company’s part, and because the loss at issue arose from those agreements, the court concluded that the exclusion precluded coverage for the state court judgment. The court also held that an exception to the exclusion for “liability which would have attached in the absence of such express contract or agreement” did not apply.

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