California Court: D&O Policy Does Not Cover Breaches Of Contract

A condominium association that refused to pay a construction company was not covered by its Directors and Officers Liability Policy. The question of whether breaches of contract and intentional acts are covered by D&O policies is a recurrent problem with such policies. In Oak Park Calabasas Condominium Assoc. v. State Farm Fire & Casualty, 2006 WL 391557 (Cal.App., Dist. 2, February 21, 2006), the court said the D&O policy’s coverage of “wrongful acts” was limited to negligent conduct.
“Wrongful acts” was defined in the policy as “any negligent acts, errors, omissions or breach of duty . . . .” The court said a plain reading of the phrase would apply the adjective “negligent” to all the words following it, not just to the word “acts.” The insured had urged a reading that would make errors, omissions and breaches of duty subject to an intentional standard. According to the court, that reading would violate the fundamental insurance premise of fortuity by allowing an insured to refuse to pay someone, then shift the burden to its insured.
The condo association had earlier made a claim under its commercial general liability policy, but apparently dropped that claim because the breaches of contract failed to constitute “property damage,” and therefore was not an occurrence, under its CGL policy.
UPDATE: From time to time I get questions about which cases I pick to write about and when I review them. Sometime during the day or evening, I try to look at every coverage case reported in the country the day before (there aren’t as many as you might think, but with three kids and a full-time practice, it isn’t always easy). Of course, just because a case was reported in an electronic service doesn’t mean it was decided the day before. Usually there is a lag of a few days or even a couple weeks between the time when the court made its decision and Westlaw puts the case in its database. I pick cases that present issues that I see frequently, or that are on emerging or unsettled coverage issues. I welcome reader input about what kind of cases you may be interested in. Feel free to send me an e-mail if you have a particular interest I’m not addressing.

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