Contractual Liability Exclusion Bars Coverage for Insureds’ Alleged Liability under Contract, Regardless Whether Contracts Are Actually Valid

Applying New Jersey law, the United States Court of Appeals for the Third Circuit has held that a contractual liability exclusion precludes coverage for a claim seeking to recover under contracts for foreign exchange transactions regardless whether the contracts in fact are valid.  PNY Techs. Inc., v. Twin City Fire Ins. Co., 2015 WL 3622933 (3d Cir. June 11, 2015). 

An insured company’s chief financial officer entered into contracts for foreign exchange transactions with four banks.  When the contracts resulted in losses, the banks demanded payment from the company pursuant to the contracts.  The company sought coverage for the banks’ claims from its D&O insurer.  The insurer denied coverage based on an exclusion in the policy for claims “based upon, arising from, or in any way related to any actual or alleged . . . liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.”

The company argued that the exclusion did not apply because the CFO was not authorized to execute the foreign exchange contracts, and thus the contracts were invalid.  The court affirmed the district court’s entry of summary judgment in favor of the insurer, holding that because the exclusion applies to any alleged liability under any contract and the banks had alleged such liability, it does not matter for purposes of triggering coverage whether the contracts in fact are invalid.  The court also rejected the insured company’s argument that the alleged liability arose from the CFO’s malfeasance—i.e., tortious acts rather than contractual liability.  The court held that the banks were alleging liability due to losses under the contracts, and thus the contractual liability exclusion applies.