Fiduciary Duty Claim Triggers Contract Exclusion Because Duty was Created by Contract

Applying California law, a federal district court has held that a policy’s breach of contract exclusion bars coverage for a breach of fiduciary duty claim because the fiduciary duty would not exist absent a contract or agreement.  TriPacific Capital Advisors, LLC v. Federal Ins. Co., 2022 WL 423409 (C.D. Cal. Jan. 28, 2022).

A lawsuit was filed against an insured financial services company by a former employee, alleging that the company had failed to pay him amounts owed pursuant to his employment contract. In addition to breach of contract claims, the complaint in the underlying litigation included a cause of action for breach of fiduciary duties on the basis that the employment agreement provided that the claimant was a “joint venturer” of the company and therefore was owed fiduciary duties, “including the duty of loyalty, to avoid self-dealing, and to account for the proceeds and profits from [its] investments.”

The insurer denied coverage under a claims-made policy issued to the company, which excluded coverage for “Loss on account of any Claim made against the Organization . . . based upon, arising from, or in consequence of any Insured’s liability under any contract or agreement.”  The insurer determined that the contract exclusion applied to all causes of action asserted in the underlying litigation, including the breach of fiduciary duty claim, because they all “arose from” the employment agreement.  The company argued that the fiduciary duty claim could not arise out of contract and, even if it did, the contract exclusion’s carve-out for “liability that would attach to an Insured even in the absence of a contract or agreement” would apply.  The company asserted that, as a result, the insurer had a duty to defend the entire lawsuit, including the breach of contract claims.

The company filed suit seeking a declaration that the policy provided coverage, and the insurer filed a motion for summary judgment.  The court granted the insurer’s motion, holding that the contract exclusion barred coverage for the fiduciary duty claim based on the claimant’s assertion that the company’s fiduciary duties were created as a result of the employment agreement.  In doing so, the court rejected the insured’s argument that the exclusion’s carve-out applied, explaining that “[a]bsent the agreement . . . that allegedly created the fiduciary duty, there would be no liability that existed.”