Contract Exclusion Bars Coverage for Demand for Cost-Overrun Payment

The United States District Court for the Eastern District of California, applying California law, has held that no coverage is available for a demand for payment in excess of agreed purchase orders based on an exclusion barring coverage for loss “as a result of” a claim “for any actual or alleged obligation under . . . any oral or written contract or agreement.”  Cross Check Servs., LLC v. Old Republic Ins. Co., 2019 WL 1429336 (E.D. Cal. Mar. 29, 2019).

The insured, a nonprofit fire prevention organization, applied for a federal grant for fuel reduction efforts.  After receiving the grant, the insured, working with a client municipality, sought bids for a project funded by the grant.  The underlying plaintiff, a forest reduction company, won the bid and agreed to perform the work for a fixed amount.  The insured issued purchase orders under which the plaintiff would perform and be paid.  The plaintiff incurred costs in excess of the agreed amount.  When the plaintiff sought payment for the additional costs, the insured declined to pay the cost-overage invoice despite the city’s recommendation that it pay the additional amount.  The plaintiff filed an arbitration demand seeking payment for the invoice.  The insured sought coverage for the demand under a nonprofit organization and management liability insurance policy.  The insurer denied coverage based on an exclusion barring coverage for loss “as a result of” a claim “for any actual or alleged obligation under . . . any oral or written contract or agreement.”  The arbitrator determined that the plaintiff was entitled to payment for the cost-overage invoice.  The plaintiff sued the insurer for coverage under an assignment of rights.

The court granted the insurer summary judgment, concluding that the insurer had no duty to defend or indemnify the insured for the arbitration demand because the contract exclusion barred coverage.  The court rejected the plaintiff’s arguments that (1) the insurer had a duty to defend because on the date it denied coverage, it had failed to thoroughly investigate whether the demand was covered; and (2) the arbitration award did not arise “as a result of” a contract, but instead arose from a “Wrongful Act,” i.e., the insured’s abuse of discretion in not heeding the city’s request to authorize payment of the cost-overage invoice.  The court found that the insurer had “sufficient knowledge” at the time it denied coverage to determine that the exclusion applied because the only remaining issues at that time concerned the cost overruns on the purchase orders, which set forth the scope of the contractual obligation.  The court further concluded that the fact that the plaintiff encountered cost overruns and sought payment for the increased costs “does not bring its claims for payment outside the purview of the underlying contracts.”