In a recent case in the Eastern District of PA involving a claim under a claims made Directors, Officers and Corporate Liability Insurance Policy for coverage of an underlying breach of contract and UCC claim, the Eastern District Court has refused to rely upon public policy to preclude insurance coverage for contractual claims asserted against an insured.In Verticalnet, Inc. v. U.S. Specialty Insurance Co., though both Verticalnet and U.S. Specialty agreed that the language of the policy at issue provided coverage for the securities related breach of contract claims at issue and that no policy exclusion applied, U.S. Specialty still denied coverage contending that "Pennsylvania public policy bars liability coverage for contractual breaches, thereby rendering Verticalnet's claim 'uninsurable' under Pennsylvania law." In asserting this position, U.S. Specialty cited to PA cases in which courts ruled against policyholders seeking coverage for breach of contract claims under "occurrence" based general liability policies.
The court, noting that the cases cited by U.S. Specialty were determined based upon policy language, that insurers sometimes chose to insure certain types of contractual liability claims, and that no cases in PA have denied coverage for contractual claims based upon public policy concerns, refused to extrapolate from the general liability cases "a sweeping public policy that liability insurance of any type cannot cover otherwise valid claims if they also arise from a breach of contractual duty."
Of course, U.S. Specialty could have avoided all of this rather easily by specifically excluding all, or at least some, contract claims from the scope of coverage, as did the insurers in the cases it cited. This factor appeared to have significant weight in the court's decision.
It should be noted that Verticalnet's bad faith claim and damage issues remain in this case. Both of these issues could result in interesting decisions. The court's determination that there was no precedent in PA for the basis U.S. Specialty's denial may provide some support for the bad faith claim, though we may not have all of the relevant facts. With respect to damages, because the underlying case settled for $5,563,000, funded by the unspent amount of Verticalnet's applicable $500,000 self-insured retention, with the remaining funds consisting of any insurance proceeds that could obtain from U.S. Specialty, the court will need to examine the good faith and reasonableness of the settlement before determining the amount of damages.
Special thanks to Philadelphia lawyer Randy Maniloff for bringing this case to my attention.
