Contractual Liability Exclusion Must Be Assessed Against Each Cause of Action Separately, Not Applied Wholesale Where Multiple Claims Are Pleaded in One Action

In Las Vegas Sands, LLC v. National Union Fire Insurance Co. of Pittsburgh, the United States Court of Appeals for the Ninth Circuit, reviewing the matter de novo, held that the lower court had erred in treating legally distinct causes of action – breach of contract, fraud, and quantum meruit – pleaded within a single lawsuit as a single unified “Claim” barred in its entirety by a directors’, officers’, and private company liability policy’s contractual liability exclusion. The appellate court concluded that the correct methodology required a separate analysis of whether each individual cause of action fell within the scope of the exclusion, rather than a blanket denial of coverage for the entire action on the basis that one or more of the pleaded claims sounded in contract.

Background

The insured was sued in Nevada state court on three distinct causes of action: breach of contract, fraud, and quantum meruit. The claims arose from allegations that the insured had made oral promises to compensate the plaintiffs for services rendered and had failed to honour those undertakings. The insured sought coverage for its defence and settlement costs under its directors’ and officers’ (D&O) liability policy, both at the outset of the suit and again after the Nevada Supreme Court ultimately held the insured liable on the quantum meruit claim. The policy, however, imposed no duty to defend unless the insured elected to tender its defence to the insurer, and the insured conceded that it never did so; in the absence of a tender, the policy instead required the insurer to advance defence costs, subject to a right of recoupment if the insured proved not to be entitled to cover.

The insurer declined coverage in reliance upon the policy’s contractual liability exclusion, which barred coverage for claims “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the insured under any express contract or agreement.” The insurer’s position was that this exclusion applied to bar the entirety of the underlying action from coverage.

Following the denial of coverage, the insured instituted proceedings against the insurer, advancing claims for breach of the contractual duty to cover defence costs, breach of contract in respect of settlement coverage, breach of the covenant of good faith and fair dealing (in both contract and tort), and violations of Nevada’s statutory unfair claims practices legislation. The district court granted summary judgement in the insurer’s favour, concluding that the policy’s contractual liability exclusion categorically precluded coverage for the underlying suit as a whole.

The Court’s Analysis

On appeal, the Ninth Circuit held that the district court had erred by treating the various causes of action as a single, undifferentiated “Claim” for purposes of applying the contractual liability exclusion. The appellate court undertook a claim-by-claim assessment and determined that, while the exclusion might well have precluded coverage in respect of the breach of contract cause of action, it did not automatically extend to the quantum meruit and fraud causes of action. On the quantum meruit claim, the court reasoned that, under the applicable law, quantum meruit is simply not actionable where an express contract governs the relevant subject matter – it applies instead to contracts implied in fact, or as a restitutionary remedy for unjust enrichment, requiring the defendant to pay the plaintiff the value of a conferred benefit. A quantum meruit claim could not, by definition, have arisen out of an express contract, and so could not fall within an exclusion confined to liability under an express contract or agreement. As for the fraud claim, the court noted that it was not clear that the fraud allegations had any basis in a contract or other express agreement at all.

The court observed that the insurer had failed to identify any authority supporting the proposition that the mere inclusion of a non-covered cause of action within a complaint operates to bar coverage for the defence of the entire action – and noted that the authorities the insurer did cite in fact supported the opposite conclusion, namely that an insurer owes a duty to defend claims that are at least potentially covered, even where other claims in the same suit are not.

The Ninth Circuit accordingly vacated the district court’s decision and remanded the matter for a proper claim-by-claim analysis. On remand, the district court was directed to consider, among other things: whether the contractual liability exclusion precluded coverage of the fraud claim specifically; whether a separate profit-or-advantage exclusion applied, having regard to the timing of the adverse Nevada Supreme Court judgement against the insured on the quantum meruit claim relative to the insurer’s earlier denial of coverage and any advances made; and other issues including the insurer’s arguments that the claim was time-barred and that the insured could not show a loss arising from a wrongful act, together with the insured’s claims for breach of the covenant of good faith and fair dealing and its statutory unfair claims practices claim.

Takeaway

The decision reinforces the principle that where an underlying lawsuit pleads multiple, legally distinct causes of action, an exclusion framed around a specific type of liability – such as liability arising under an express contract – must ordinarily be assessed against each cause of action separately, rather than applied wholesale to the suit merely because one or more of the pleaded claims falls within the exclusion’s ambit. An insurer cannot, without more, deny coverage for the entirety of a multi-count action on the strength of a single exclusion directed at contractual liability where the complaint also advances claims that are not inherently contractual in character.

Claims grounded in unjust enrichment or quantum meruit, or in fraud, may arise from the same underlying facts as a breach of contract claim but do not depend on the existence or terms of an enforceable contract for their juridical basis. As such, they will not automatically be excluded from coverage merely because they are pleaded alongside a contractual claim in the same proceedings. Insurers seeking to deny a duty to defend an entire multi cause of action suit on the strength of a contractual liability exclusion should be alert to the risk that a court will require a cause-of-action-by-cause-of-action analysis, particularly where the underlying complaint includes allegations capable of supporting recovery independent of any contractual relationship.