Ninth Circuit Affirms Contract Exclusion Bars Coverage for False Claims Act Lawsuit

The United States Court of Appeals for the Ninth Circuit, applying California law, affirmed a district court opinion finding no coverage under a directors and officers liability policy for a lawsuit brought against the insured pursuant to the California False Claims Act (“CFCA”) on the basis that coverage was barred by a contract exclusion. Office Depot, Inc. v. AIG Specialty Ins. Co., Case No. 19-55819 (9th Cir. Nov. 13, 2020). A summary of the district court opinion is available here.

The insured was sued under the CFCA for allegedly overcharging California government entities pursuant to certain contracts with the government. The insured settled the lawsuit and sought coverage under a directors and officers insurance policy. In the resulting coverage litigation, the district court held that the policy did not afford coverage because the suit did not trigger the policy’s insuring agreement and, in any event, multiple policy exclusions precluded coverage.

On appeal, the Ninth Circuit focused on the policy’s contract exclusion, which barred coverage for any claim “alleging, arising out of or resulting, directly or indirectly, from any liability or obligation under any contract or agreement or out of any breach of contract” but not to liabilities or obligations “an insured would have in the absence of such contract or agreement.” The Ninth Circuit noted that under California law, “the term ‘arising out of’ requires ‘only a minimal causal connection or incidental relationship’” and that provisions such as the contract exclusion at issue “also exclude coverage of tort claims which could not exist without the relevant underlying contracts.” The court concluded that the underlying allegations “directly, and indirectly, arose out of [the insured’s] contractual obligations,” pointing to the insured’s statement that the “heart” of the suit was for allegedly overcharging the government under the terms of particular contracts. In addition, the insured’s counsel testified that the claims were based on the insured’s “performance or nonperformance of [its] government contracts.” The Ninth Circuit held that the broad contract exclusion therefore barred coverage for the claim.