Contract Exclusion Bars Coverage for Class Action

The United States District Court for the Eastern District of Kentucky, applying Kentucky law, has held that an insurer had no duty to defend or indemnify its insured given the applicability of the policy’s “contractual liability” exclusion to the claims at issue.  See Global Holdings, LLC v. Navigators Mgmt. Co., 2020 WL 3065914 (E.D. Ky. June 9, 2020).

The insured is a Kentucky-based company that operates fitness clubs.  In 2011, the company was sued in a class action lawsuit.  The suit alleged that the company engaged in a series of wrongful conduct towards members and prospective members that included, among other things, aggressively soliciting prospective members to sign membership contracts, overcharging accounts, and making it difficult for members to cancel their memberships.  The complaint included seven causes of action for violations of state law, unjust enrichment, conversion, and breach of contract.  The company’s D&O insurer declined to defend or indemnify the company on the grounds that the policy’s “contractual liability” exclusion barred coverage for the suit.

In the ensuing coverage action, the court focused on one issue:  whether the “contractual liability” exclusion applied to the allegations in the class action complaint.  The exclusion stated that the insurer will not be liable for any Claim “based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any liability under any contract or agreement.”

The company advanced two arguments to support its position that the exclusion did not apply.  First, the company argued that the policy’s “severability of exclusions” provision restricted the scope of the contractual liability exclusion.  That provision stated that certain exclusions only applied if the alleged wrongful conduct was perpetrated by the company’s high-level officers.  Here, the company argued that, even though the company itself was named as the defendant, the claims implicated conduct by lower level employees, and thus the exclusion should not apply.  The court disagreed, holding that the provision was inapplicable because the alleged actions, while carried out by lower level employees, were evidence of company-wide policies and practices, and the claims were made against the company itself.  The court further dismissed the company’s “unworkable argument” that the provision applied because none of the company’s officers were named in the complaint.

Second, the company argued that the insurer incorrectly applied the contractual liability exclusion to certain of the plaintiff’s extracontractual claims.  The court determined that the insurer’s denial was proper, and in doing so, stressed the “staggeringly broad” wording of the exclusion.  The court concluded that the “allegations underlying each of the seven separate claims . . . indirectly resulted from or in some way involved liability that arose under the membership contracts—the very basis for [the plaintiffs’] relationship with [the company].”  The court granted the insurer’s motion for summary judgment and dismissed the complaint with prejudice.



Wiley Executive Summary

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