Say What You Mean and Mean What You Say, Says California Federal District Court

A California federal district court determined a standard Breach of Contract Exclusion under Coverage B of a CGL policy did not preclude the duty to defend for alleged disparagement. In MedeAnalytics, Inc. v. Federal Insurance Co., the United States District Court for the Northern District of California interpreted the exclusion very narrowly, finding it applied only to actual — and not alleged — breaches of contract and found a duty to defend.

As background, the claimant alleged the policyholder made disparaging comments in order to create employee dissatisfaction and to make the policyholder’s offer of employment seem more attractive. The claimant specifically alleged the policyholder’s purpose in making the disparaging comments “was to solicit [the claimant’s] employees in breach of a written and implied contract.”

On cross-motions for partial summary judgment, the district court held the insurer had a duty to defend because the alleged defamatory or disparaging comments did not necessarily arise out of an actual breach of contract. Notably, the exclusion at issue stated there was no coverage for “personal injury arising out of breach of contract.” The court interpreted the exclusion as applying to only actual breaches of contract, since the language did not include the word “alleged.” The district court found persuasive other exclusions in the policy that used the term “actual or alleged.” Thus, in strictly construing the breach of contract exclusion in favor of the insured, the district court held the mere allegations of breach of contract did not bar coverage for the insured in the underlying lawsuit.

This decision must leave the insurance industry shaking its proverbial head. Even though standard CGL policy language excludes “personal and advertising injury” arising out of a breach of contract, courts, such as this one, apparently believe the language needs to be clarified to specifically refer to “alleged” breaches, even if the cause of action is for breach of contract. Yet, the duty to defend is necessarily based on the potential that the claimant can prove its allegations against the insured. It would thus stand to reason that exclusions would be read as applying to actual or alleged breach of contract scenarios as a matter of functional necessity. But apparently, what is good enough to trigger the duty to defend may not be good enough to bar the duty to defend.