Eighth Circuit Affirms No Coverage for Lawsuit for Breach of Noncompetition Covenant

Applying North Dakota law, the United States Court of Appeals for the Eighth Circuit has held that an insurance policy issued to a parent company and several of its commonly owned affiliates did not provide coverage for a lawsuit against the owner of the companies and one of the insured subsidiaries for breach of a noncompetition covenant in an asset purchase agreement.  Mau v. Twin City Fire Ins. Co., -- F.3d --, 2018 WL 6379281 (8th Cir. Dec. 6, 2018).

An individual owned and operated several affiliate companies.  One of the companies, the seller company, sold its assets to a separately owned and operated entity, the buying company, through an asset purchase agreement, which included a noncompetition covenant.  The owner and the seller company were parties to the agreement.  After the agreement was signed, two affiliates of the seller company—which were owned by the same individual as the seller company but were not parties to the asset purchase agreement—entered into a transaction.  The buyer company sued the seller company and the owner for breach of contract, fraud, and civil conspiracy on the grounds that the transaction violated the noncompetition covenant.

The seller company and one of the affiliate companies were insured subsidiaries under an insurance policy issued to their common parent company, also owned by the individual owner.  The other affiliate company involved in the disputed transaction was not an insured.  The owner and the seller company sought a defense from the insurer, but the insurer declined to defend.  Coverage litigation followed, and on cross motions for summary judgment, the court found in favor of the insurer.

The Eighth Circuit affirmed on appeal, holding that the insurer had no duty to defend the owner because he was not sued in his capacity as a director and officer of the insured affiliate company but rather as a party to the asset purchase agreement.  Further, the court held that, even if he was sued in his capacity as a director and officer of the seller company, which was an insured entity, a dual service exclusion in the policy applied because the claims at issue in the litigation arose from and were related to his service to the uninsured affiliate.  The court also held that the insurer had no duty to defend the seller company because the claims asserted against the company would not exist in the absence of the asset purchase agreement, and therefore the policy’s breach of contract exclusion applied.