Another California court broadly interprets “arising from” in a contractual liability exclusion

The broad-form contractual liability exclusion is a key exclusion in private company directors and officers liability policies. On January 28, 2022, in TriPacific Capital Advisors, LLC v. Federal Insurance Company, the United States District Court for the Central District of California addressed the broad-form contractual liability exclusion. The court held that the exclusion applied to bar coverage for an entire lawsuit, notwithstanding the fact that the plaintiff alleged breaches of fiduciary duty. The decision has significant implications for D&O insurers and policyholders.  

Background

The insured, TriPacific Capital Advisors, LLC (“TriPac”), is a financial services company that manages institutional capital for residential construction projects. In 2020, a former employee filed a complaint against TriPac alleging that TriPac owed millions in unpaid profits. The plaintiff’s terms of employment were set forth in a 2013 employment agreement. In 2016, the plaintiff and TriPac entered into a revised employment agreement that increased the plaintiff’s base salary and changed the formula for bonus compensation. The complaint contained causes of action for breach of fiduciary duty, breach of contract, and related counts.  

TriPac tendered the claim to its D&O insurer, Chubb. Chubb denied coverage based on the contractual liability exclusion. The contractual liability exclusion barred coverage for loss on account of any claim “based upon, arising from, or in consequence of any Insured’s liability under any contract or agreement regardless of whether such liability is direct or assumed; provided this Exclusion IV.(B) shall not apply to liability that would attach to an Insured even in the absence of a contract or agreement.”

The court's holding

In the ensuing coverage litigation, the court agreed with Chubb. First, the court noted that California courts have “consistently given a broad interpretation” to the phrase “arising from,” which “broadly links a factual situation with the event creating liability, and connotes only a minimal casual connection or incidental relationship.” Next, the court found that the claim and the employment contracts had a “minimal causal connection or incidental relationship.” For example, the plaintiff alleged that he agreed to continue employment with TriPac as a result of the 2016 amendment. In addition, the plaintiff alleged that the 2016 amendment converted the relationship from employer-employee to partnership, in which TriPac now owed the plaintiff fiduciary duties. Finally, the plaintiff alleged that TriPac breached its fiduciary duties by failing to pay his share of net profits.

After determining that the contractual liability exclusion applied in the first instance, the court rejected TriPac’s argument that the carve-back to the exclusion for “liability that would attach to an Insured even in the absence of a contract or agreement” applied. Applying a “but-for” standard, the court concluded: “Absent the agreement with [the employee] that allegedly created the fiduciary duty, there would be no liability.”

Looking ahead

The court’s decision continues a trend in California in which courts have applied these types of exclusions broadly. In addition, the holding re-affirms that the appropriate test in California for the carveback to the contractual liability exclusion for “liability in the absence of a contract or agreement” is a but-for test.

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