Contract Exclusion Precludes Coverage for Breach of Health Management Service Provider Agreement

A Texas federal district court, applying Texas law, has held that a contract exclusion in an errors and omissions policy precluded coverage for a suit alleging that the insured breached a contract and committed related misconduct in connection with a contract for providing health management services to a client.  Conifer Health Solutions, LLC v. QBE Specialty Ins. Co., 2018 WL 4620613 (E.D. Texas Sept. 26, 2018).

A client of the insured health management service provider filed suit alleging wrongdoing in connection with the insured’s services and asserting claims for breach of contract, breach of express warranty, unjust enrichment, and gross negligence/willful and wanton misconduct.  The client later amended the complaint restating the factual allegations and omitting all causes of action other than breach of contract.  The health management service provider tendered the claim to its E&O insurer, which denied coverage based on several policy exclusions.

In the coverage litigation that followed, the court held that the insurer was correct that the policy’s contract exclusion barred coverage.  The contract exclusion provided that no coverage was available for “any liability in connection with any contract, agreement, warranty or guarantee to which an Insured is a party, provided that this [exclusion] shall not apply to Loss to the extent that such Insured would have been liable for such Loss in the absence of such contract, agreement, warranty or guarantee.”  The court rejected the insured’s arguments that the exclusion did not apply because the claim did not allege that it was a party to the contract, and that its status as an assignee was legally distinct from that of a party to the contract.  The court held that because there was a valid assignment and an assignee generally stands in the shoes of the assignor, the insured was a party to the contract.

In considering the insured’s argument that the term “party” rendered the exclusion ambiguous, the court concluded that the insured had not demonstrated that the provision was susceptible to more than one reasonable interpretation and that a plain reading of the exclusion did not present any ambiguity.

The insured had also argued that the claim alleged wrongful acts that were independent of the contract at issue and that some alleged wrongdoing took place prior to the assignment of the contract.  The court rejected these arguments, holding that the allegations were nonetheless in connection with the contract and fell within the scope of the exclusion.  The court also found that the insured failed to establish that without the contract in place, it would be liable for the other allegations, such that the exception in the exclusion would apply.