Negligent Misrepresentation Claim Alleges Wrongful Act Despite Contract-Based Damages

A Massachusetts intermediate appellate court has held that a claim for negligent misrepresentation alleged a Wrongful Act, even though the alleged damages were based on contractual services. Winbrook Comm. Servs., Inc. v. U.S. Liability Ins. Co., 2016 WL 3245059 (Mass. App. Ct. June 14, 2016). Additionally, the court held that the creation of an opportunity for an insured business can be an “advantage in fact” sufficient to trigger a personal profit exclusion.

An insurer issued a D&O policy to an insured company. The policy provided specified coverage for Wrongful Acts, defined as: “any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duties.” The policy contained a personal profit exclusion, which stated that the insurer “shall not be liable to make payment for Loss in connection with any Claim made against any Insured arising out of, directly or indirectly resulting from or in consequence of, or in any way involving: . . . any of the Insureds gaining in fact any profit, benefit, remuneration or advantage to which such Insured was not legally entitled.”

A claimant filed suit against the insured company alleging that the company had made negligent misrepresentations regarding its financial condition, which induced the claimant to continue to work on the development of a book series. The series never went to market, and the claimant sought compensation from the insured for the work performed on the series.

The company sought coverage for the claim under the D&O policy. The insurer denied coverage for the claim on the grounds that: (1) the claim was for failure to pay contractual debts and thus did not allege a Wrongful Act, and (2) the policy’s personal profit exclusion barred coverage. The insured company failed to defend the claim, resulting in a default judgment against the company. The claimant then filed suit against the insurer for recovery of the judgment. In the coverage litigation, the trial court rejected the insurer’s argument that the claim was based on contract and did not allege a Wrongful Act. The trial court did, however, grant summary judgment in favor of the insurer based on the application of the personal profit exclusion.

On appeal, the court again rejected the insurer’s contention that the claim did not allege a Wrongful Act. According to the court, the underlying complaint had alleged liability based on negligent misrepresentation, not breach of contract. The court reasoned that, just because the damages sought for the negligence claim were the cost of the goods and the services performed, it does not mean the claim is one derived from contract and outside the coverage grant of the policy. Additionally, the court held that the insurer, which had failed to defend the insured, was bound by the default judgment entered against the insured company and could not relitigate the liability issues that pertained to coverage.

With regard to the personal profit exclusion, on appeal, the claimant argued that the insured did not actually receive a benefit because it received only the opportunity to gain a profit and no actual profit. The court rejected this argument, holding that an opportunity may constitute an “advantage in fact” under the exclusion because actions such as the extension of trade credit can create an advantage in the form of opportunity for a business to attract capital or customers. Nevertheless, the court held that the insurer had failed to demonstrate that such an opportunity was created, and that additional discovery was needed. Accordingly, the court reversed the grant of summary judgment to the insurer, and remanded the matter for further proceedings.

Wiley Executive Summary

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