Contract Exclusion Not Applicable Based on Asset Management Services Carveout

The United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, has held that a contract exclusion did not bar defense cost coverage for a lawsuit against a private equity firm alleging, among other causes of action, enforcement of guaranty and breach of contract, because the exclusion’s carveout for loss resulting from the insured’s provision of “Asset Management Services” applied. Domus BWW Funding, LLC v. Arch Ins. Co., 2024 WL 4136424 (E.D. Pa., Sept. 10, 2024).

The insured, a private equity group, acquired a holding company that guaranteed a lease on behalf of one of its real estate companies. A property management company sued the holding company and the real estate company for indemnification, after a government investigation led to the property management company paying abated taxes on the leased property and investigation costs. The property management company obtained a judgment against the holding company. After the insured acquired the holding company, however, it dismantled the company. Because the property management company could not collect the judgment from the dismantled holding company, it filed a separate lawsuit against the insured, asserting, among other causes of action, enforcement of guaranty, breach of contract, unlawful assignment, fraudulent conveyance, tortious interference, fraudulent concealment, and fraudulent misrepresentation.

The insured sought coverage for the lawsuit under its directors and officers liability policy. The insurer denied coverage based on the policy’s contract exclusion, which barred coverage for “Loss . . . in connection with any Claim against an Insured Organization arising from, based upon, or attributable to any contract or agreement” subject to an exception for “Loss” “resulting from . . . Asset Management Services[.]” The policy defined “Asset Management Services” to include “any statement, act, omission, service, or advice for . . . investment in or management of a Portfolio Company[.]”

The court held that the contract exclusion did not bar defense coverage based on the carveout for Asset Management Services. The court reasoned that the carveout’s prefatory language “resulting from” required a “proximate causation” analysis, where the insured had to demonstrate that the “excepted act was a substantial, i.e., proximate, cause of its Loss.” The court concluded that the insured demonstrated that the carveout applied because its strategy for acquiring and managing the holding company was a substantial cause of the insured’s loss, the insured’s investment strategy was the sole cause of most counts of the underlying complaint, and the insured’s ongoing financial management of the holding company was constant until the time of the loss. The court also reasoned that “breach of contract wasn’t the core of the claims against [the insured]” and while the holding company’s “breach [of guaranty] might have set off the chain of events that led to [the suit against the insured]” there is “no evidence to suggest that [the insured] would have faced those claims, or incurred those costs, without providing [Asset Management Services].”

Although the court held that the primary insurer was required to advance the insured’s defense costs and awarded damages to the insured for defense costs incurred less the applicable retention, the court dismissed the insured’s bad faith claims, holding that its statutory claim was barred by the statute of limitations and its contractual bad faith claim was encompassed by its claim for breach of contract.