In today’s insurance market, a number of professional liability policies contain so-called “broad form” contractual liability exclusions. A standard, broad form contractual liability exclusion will typically exclude coverage for Loss in connection with any Claim “based upon, arising from, or in consequence of any actual or alleged liability of any Insured under any express contract or agreement.” These exclusions will also typically contain a carveback to the extent the Insured would be liable “in the absence of such contract or agreement.” Given the various contractual relationships that arise in the professional liability context (shareholder agreements, partnership agreements, employment agreements, etc.), the issue of applying the contractual liability exclusion – and interpreting the carveback – is a hotly debated topic.
In Global Fitness Holdings, LLC v. Navigators Management Co., Inc., et al. No. 20-5774, 2021 WL 1884593 (May 11, 2021), the United States Court of Appeals for the Sixth Circuit weighed in on the broad-form contractual liability exclusion and the carveback to the exclusion for liability “in the absence of such contract or agreement.” In Global Fitness, the court upheld a broad-form contractual liability exclusion in a D&O policy, holding that the exclusion barred coverage for both contract and tort-based causes of action. The decision is important for two reasons: (1) it reaffirms the principle that broad-form contractual liability exclusions apply to the entire “Claim,” even when the “Claim” includes tort-based causes of action; and (2) it extends the “but for” test for applying the carveback to the contractual liability exclusion for liability “in the absence of such contract or agreement.”
Claim Background: The Gascho Action
In April 2011, a putative class of Global Fitness gym members sued Global Fitness alleging the company misrepresented and concealed the material terms of its membership contracts, overcharged customers, and made membership cancellation “as difficult as possible.”[i] The complaint contained seven causes of action: (1) false and deceptive consumer practices in violation of the Ohio Consumer Sales Practices Act (“OCSPA”); (2) unconscionable consumer sales practices in violation of the OCSPA; (3) violation of the OCSPA’s requirements for “prepaid entertainment contracts”; (4) violation of the Ohio Deceptive Trade Practices Act; (5) unjust enrichment; (6) conversion; and (7) breach of contract.
Global Fitness sought coverage under the Navigators D&O policy. Navigators denied coverage based on the contractual-liability exclusion, which provided:
[Navigators] will not be liable . . . to make any payment of Loss, including Costs of Defense, in connection with any Claim made against [Global Fitness] . . . based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any liability under any contract or agreement; provided, however, that this exclusion will not apply to the extent [Global Fitness] would have been liable in the absence of such contract or agreement[.]
Global Fitness settled the Gascho Action and then sued Navigators, arguing that: (1) the contractual-liability exclusion did not apply in the first instance; and (2) the carve-back to the exclusion applied because Global Fitness “would have been liable in the absence” of the agreements.
The Global Fitness Coverage Action
The United States District Court for the Eastern District of Kentucky held that the contractual liability exclusion applied, and granted summary judgment in favor of Navigators. Global Fitness filed an appeal to the United States Court of Appeals for the Sixth Circuit.
The Sixth Circuit determined that each of the seven causes of action asserted in the Gascho Action “arose out of” Global Fitness’s contracts. The court explained that “every aspect of the Gascho litigation was premised on the existence of the contracts between Global Fitness and its customers.” With respect to the causes of action under the Ohio statutes, the court noted that “they all relate to Global Fitness’s contracts with its members.” With respect to the common law claims, the court noted that the “unjust-enrichment and conversion claims alleged that Global Fitness made deductions from its customers’ accounts without any basis in the contracts or any agreement,” and that these deductions were “taken outside the terms of their contracts and/or after their contracts have been terminated.” Moreover, the court noted that in order to be a Gascho class member, “a plaintiff must have had a contract with Global Fitness.”
With respect to the carveback for “liability in the absence of such contract or agreement,” Global Fitness argued that “because each Gascho claim is based on some wrongful conduct it allegedly committed independent of its contractual obligations, the Gascho litigation could have been filed absent the membership and personal training contracts.” The court rejected this argument because it “ignores the breadth of the contractual liability exclusion and the true nature of the Gascho claims.” The court went one step further, noting that “the exclusion is staggeringly broad.” According to the court, “absent these contracts, [the] class action could not have been brought, which forecloses Global Fitness’s reliance on the exception to the exclusion.” In reaching this decision, the court appears to be extending the “but for” test articulated by the court in Office Depot, Inc. v. AIG Specialty Insurance Company, 2019 WL 4570011 (C.D. Cal. June 21, 2019), aff’d 829 Fed. Appx. 263 (9th Cir. Nov. 13, 2020) (noting that a similar carveback did not apply because the allegedly wrongful conduct “would not have existed” without the agreements).
The Sixth Circuit’s decision provides a helpful roadmap for insurance carriers and policyholders evaluating broad-form contractual liability exclusions, including critical questions to ask at the outset:
- What is the nature of the relationship between the Insured and the underlying plaintiff?
- How broad is the exclusion?
- Is the entire “Claim” arising out of the Insured’s alleged liability under the contract or agreement?
- Finally, would the Insured be liable in the absence of the contract or agreement under a “but for” test? In other words, would the Insured owe any duties or obligations absent the contractual relationship?
The case is particularly helpful in analyzing when the carveback to the contractual liability exclusion applies. In Global Fitness, even though the underlying plaintiff asserted non-contractual theories of liability, the court held that the carveback did not apply because the Insured would not face liability “but for” the existence of the contracts.
[i] Gascho v. Global Fitness Holdings, LLC, 822 F.3d 269 (6th Cir. 2016) (the “Gascho Action”).