Contract Exclusion Bars Coverage for Claims Arising from Asset Purchase Agreement’s Non-Compete Clause

Applying North Dakota law, a federal district court has held that a contract exclusion contained in a directors and officers liability policy precludes coverage for claims arising from a non-compete clause in an asset purchase agreement.  Mau v. Twin City Fire Ins. Co., 2017 WL 4479731 (D.N.D. Oct. 3, 2017).  The court also held that the insurer had no duty to defend an officer against claims arising from the alleged violation of the non-compete agreement because the officer did not commit the acts underlying the violation in his capacity as officer of a defined subsidiary of the insured entity.

An officer of a subsidiary company of the insured, an oil and gas production company, entered into an asset purchase agreement containing a non-compete clause.  The officer then entered into an allegedly competitive deal as president of a different subsidiary of the insured.  A party to the asset purchase agreement sued the officer and first subsidiary company alleging fraud and breach of contract for violation of the non-compete clause.  The lawsuit did not name the second subsidiary, and it referred to the officer in his capacity as principal and shareholder of the first subsidiary.  The officer and the first subsidiary sought coverage under the policy for defense costs, which the insurer denied.

In the resulting coverage litigation, the court granted summary judgment in favor of the insurer, holding that it had no duty to defend either the officer or the subsidiary.  The policy provided specified coverage for officers and directors of defined subsidiaries of the insured.  The policy defined the second subsidiary as an insured, but the parties disagreed whether the first subsidiary was covered.  The court held that a contract exclusion precluded coverage even if the first subsidiary was an insured under the policy.  The contract exclusion barred coverage for claims arising from “liability under any contract or agreement.”  The court concluded that the exclusion precluded coverage because “any alleged liability was directly related to, based upon, and arose directly from the Asset Purchase Agreement.”

In addition, the court held that the officer was not covered under the policy for the violation of the non-compete clause.  The court determined that the claims implicated the officer in his capacity as president of the first subsidiary (to which the policy did not apply) as opposed to the second subsidiary.  The court explained that it was “clear that [the] breach of contract claim was not pursued against [the officer] in his capacity as a director and officer of [the second subsidiary]” because the agreement was entered into with “the shareholder of [the first subsidiary], not [the second subsidiary].”  Finally, the court held that the insurer did not act in bad faith under the policy because it had no duty to defend the officer and the subsidiary.


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