Contract Exclusion Bars Coverage for Fraudulent Representation and Concealment Claims Arising from Purchase and Lease Agreements

The United States District Court for the Central District of California, applying California law, has held that the contract exclusion of a private equity liability policy bars coverage for a lawsuit alleging fraudulent representation and concealment, where the claims arose from breach of contract. AKN Holdings, LLC v. Great Am. E&S Ins. Co., 2021 WL 2325647 (C.D. Cal. May 14, 2021).

The insured private equity firm was sued in connection with the sale and lease of a manufacturing facility once used as refuge for a drug cartel. The buyer alleged that the private equity firm fraudulently represented that it would make rental payments and fraudulently concealed its pending litigation against the prior owner of the facility and the presence of the cartel.

The insurer declined to defend the private equity firm in the lawsuit, relying on the breach of contract exclusion, which provided that the insurer shall not be liable for a Claim “for, based upon, arising from, or in any way related to any actual or alleged breach of contract or agreement . . . ; provided; however, this exclusion shall not apply to liability for Loss which would have attached even in the absence of such contract or agreement.”

The court agreed with the insurer, finding no duty to defend because the claims arose from an alleged breach of agreement and would not exist absent the sale and lease agreements. The court rejected the private equity firm’s argument that the exclusion did not apply because the lawsuit alleged misrepresentations that predated the agreements. In so doing, the court explained that the claim need only be “related to any actual or alleged breach of contract or agreement” to fall within the scope of the exclusion; because the purpose of the alleged misrepresentations was to induce the buyer into entering the agreements, the alleged misrepresentations are related to an alleged breach of agreement. The court also rejected the private equity firm’s argument that the exclusion should not apply because it was not a party to the disputed agreements, noting that the exclusion barred coverage for “any actual or alleged breach of contract or agreement,” not just those to which the policyholder is a formal party.