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Professional liability policies generally insure policyholders for risks created by their professional negligence and, like many other liability insurance products, are often drafted so as not to cover losses arising from the insured’s intentional conduct. This is commonly achieved by including a negligence trigger in the insuring grant, such as a requirement that coverage will only be provided for losses arising from the insured’s negligent acts, errors, or omissions.
When tort claims are made against the insured, it may be relatively simple for a claims handler to decipher what should and should not be covered. Generally, tort causes of action alleging some form of negligence will often trigger a defense obligation under the insuring grant, while intentional torts will not. But what happens when the sole claim asserted against the insured sounds in contract, rather than tort? Should the insurer defend the claim, or does the absence of a tort cause of action alone suffice to enable the insurer to disclaim coverage?
As discussed in greater detail below, under New York law, the answer may depend on the particular facts surrounding the claim, rather than on the mere fact that the claim is characterized as contractual.
Professional Liability Coverage And The Law, Generally
As noted, professional liability insurers commonly limit the scope of coverage to claims arising out of the insured’s “negligent act[s], error[s] or omission[s].” See e.g., Propis v. Fireman's Fund Ins. Co., 112 A.D.2d 734, 735 (4th Dep’t 1985), aff'd, 66 N.Y.2d 828 (1985) (emphasis added). Several jurisdictions have held that such language does not encompass breach of contract claims. In Palm Beach Leisureville Cmty. Ass'n, Inc. v. Evanston Ins. Co., Inc., 2019 WL 4731937 (S.D. Fla. July 10, 2019), for instance, the Southern District of Florida flatly held that a breach of contract claim asserted against an insured by its former employee was not a “negligent act, error or omission” subject to coverage, regardless of whether the breach could fairly be characterized as “negligent.” See id. at *4 (“[N]either party disputes that the Underlying Action is a breach of contract claim. [The underlying plaintiff] explicitly alleges in his complaint that [the insured] owes him accrued leave under the terms of the employment agreement. That [the insured] may have withheld [plaintiff’s] leave by some negligent act or error is irrelevant in this case.”); see also Cincinnati Ins. Co. v. Metro. Properties, Inc., 806 F.2d 1541, 1544 (11th Cir. 1986) (similarly holding that a breach of contract claim did not constitute a negligent act, error or omission).
New York Law On The Issue
In Touchette Corp. v. Merchants Mut. Ins. Co., 76 A.D.2d 7 (4th Dep’t 1980), the court considered this question. There, a data processing company (Touchette) was sued in an underlying action for breach of contract and negligence by an employer’s association (CSEA) it had contracted with. CSEA alleged in the underlying action that Touchette failed to maintain an accurate list of subscribers to CSEA’s newspaper, failed to design and implement a satisfactory system to notify employers of employee dues deductions, and failed to promptly balance CSEA’s accounts.
Initially, Touchette was defended in the underlying action by its errors and omissions insurer, which had issued a policy covering Touchette for any “negligent act, error or omission” it committed in the performance of data processing services. During the course of the action, however, the negligence cause of action against Touchette was dismissed, and its insurer sought to disclaim coverage, arguing that the remaining contractual claim did not arise from a covered “negligent act, error or omission.”
The court disagreed, finding that the characterization of the claim as contractual versus negligent was not dispositive. See id. (“[The insurer] agreed to indemnify Touchette for all sums it is ‘legally obligated’ to pay because of its ‘negligent act[s], error[s] or omission[s]’, and if Touchette's conduct comes within this defined risk, it is no less ‘legally obligated’ to pay an award in a contract action than in a tort action.”). Instead, the court looked to the fact that Touchette’s breach of its contract was alleged to be “negligent” in nature, requiring the insurer to continue defending Touchette.
While New York case law on the issue has been somewhat sparse since Touchette, more recent case law indicates that breaches consisting of intentional conduct are not covered. In Hunt Constr. Grp., Inc. v. Berkley Assurance Co., 2020 WL 7046842 (S.D.N.Y. Nov. 30, 2020), a contractor was sued for, inter alia, breach of contract arising from its “intentional nonpayment of subcontractors.” The contractor sought coverage under an insurance policy covering its “negligent act[s], error[s] or omission[s].” The court held that since the alleged breach was intentional, rather than negligent (i.e., it arose from the insured’s “decision to ignore its alleged contractual obligations”), the insurer had no duty to defend the contractor.
Comment
In analyzing any professional liability claim, the specific coverage trigger, policy terms, and exclusions (particularly any breach of contract exclusions) should be closely examined in determining whether a duty to defend exists. When faced with contractual claims and a negligence trigger in New York, however, claims handlers should not assume that breach of contract claims are not potentially covered. Consideration should be given to how the conduct underlying the breach is characterized, and whether that conduct can fairly be described as negligent or intentional.
Insurance and reinsurance
United States