Jean-Paul Rudd | Partner | Adams and Adams | mail me |
In Las Vegas Sands, LLC vs National Union Fire Insurance Co. of Pittsburgh, the United States Court of Appeals for the Ninth Circuit reviewed the matter de novo. The court held that the lower court had erred by treating legally distinct causes of action as a single, unified “Claim”.
These causes of action included breach of contract, fraud, and quantum meruit, all pleaded within one lawsuit. The lower court had applied a directors’, officers’ and private company liability policy’s contractual liability exclusion to bar the entire action. However, the appellate court concluded that the court needed to assess each cause of action separately.
The court had to determine whether each fell within the exclusion’s scope. It could not deny coverage wholesale simply because one or more claims sounded in contract. This approach clarifies how insurers should interpret contractual liability when a lawsuit combines different legal grounds for recovery.
The dispute over insurance coverage
The insured faced three distinct causes of action in Nevada state court: breach of contract, fraud, and quantum meruit. These claims arose from allegations that the insured had made oral promises to compensate the plaintiffs for services rendered. The plaintiffs alleged that the insured had failed to honour those undertakings.
Consequently, the insured sought coverage for its defence and settlement costs under its directors’ and officers’ (D&O) liability policy. It sought coverage both when the lawsuit began and after the Nevada Supreme Court ultimately held it liable on the quantum meruit claim. However, the policy imposed no duty to defend unless the insured elected to tender its defence to the insurer.
The insured conceded that it had never done so. Without a tender, the policy instead required the insurer to advance defence costs. Nevertheless, the insurer retained the right to recoup those costs if the insured ultimately proved ineligible for coverage.
The insurer declined coverage, relying on the policy’s contractual liability exclusion. The exclusion barred coverage for claims “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the insured under any express contract or agreement”. The insurer argued that this exclusion barred coverage for the entire underlying action.
How the coverage dispute reached the appellate court
Following the coverage denial, the insured instituted proceedings against the insurer. It advanced claims for breach of the contractual duty to cover defence costs and breach of contract concerning settlement coverage. It also alleged breach of the covenant of good faith and fair dealing, in both contract and tort. Additionally, the insured alleged violations of Nevada’s statutory unfair claims practices legislation.
The district court granted summary judgment in the insurer’s favour. It concluded that the policy’s contractual liability exclusion categorically precluded coverage for the entire underlying lawsuit.
On appeal, the Ninth Circuit held that the district court had erred by treating the various causes of action as a single, undifferentiated “Claim” when applying the contractual liability exclusion. Instead, the appellate court assessed each claim individually.
The court determined that the exclusion might have precluded coverage for the breach of contract cause of action. However, it did not automatically extend to the quantum meruit and fraud causes of action. This distinction is central to understanding how contractual liability exclusions operate when a complaint advances multiple legal theories.
Quantum meruit – a distinct basis for recovery
Regarding the quantum meruit claim, the court reasoned that applicable law does not permit quantum meruit recovery where an express contract governs the relevant subject matter. Instead, quantum meruit applies to contracts implied in fact or provides a restitutionary remedy for unjust enrichment. It requires the defendant to pay the plaintiff the value of a benefit conferred.
By definition, a quantum meruit claim could not have arisen from an express contract. Consequently, it could not fall within an exclusion limited to liability under an express contract or agreement. The court therefore rejected the assumption that the contractual liability exclusion necessarily barred this cause of action.
As for the fraud claim, the court noted that the fraud allegations might not have rested on any contract or other express agreement. Therefore, the court could not automatically treat those allegations as contractual liability simply because the complaint also included a breach of contract claim.
A need for a proper claim-by-claim analysis
The court also observed that the insurer had failed to identify any authority supporting its argument that including a non-covered cause of action in a complaint automatically bars coverage for the defence of the entire action. Furthermore, the authorities the insurer cited actually supported the opposite conclusion. They indicated that an insurer owes a duty to defend claims that are at least potentially covered, even when other claims in the same lawsuit fall outside the policy’s coverage.
Accordingly, the Ninth Circuit vacated the district court’s decision and remanded the matter for a proper claim-by-claim analysis. On remand, the district court had to consider several issues.
First, it had to determine whether the contractual liability exclusion specifically precluded coverage for the fraud claim. Second, it had to assess whether a separate profit-or-advantage exclusion applied. This assessment required consideration of the timing of the adverse Nevada Supreme Court judgment against the insured on the quantum meruit claim. The court also had to consider that timing relative to the insurer’s earlier coverage denial and any advances it had made.
The district court also had to consider other issues. These included the insurer’s arguments that the claim was time-barred and that the insured could not demonstrate a loss arising from a wrongful act. In addition, the court had to address the insured’s claims for breach of the covenant of good faith and fair dealing. It also had to consider the alleged violations of Nevada’s statutory unfair claims practices legislation.
Insurers must evaluate each claim independently
The decision reinforces the principle that courts should ordinarily assess exclusions directed at specific types of liability against each cause of action separately. This is particularly important when an underlying lawsuit pleads multiple, legally distinct causes of action.
For example, a contractual liability exclusion targeting liability under an express contract should not automatically apply to an entire lawsuit simply because one or more claims fall within its scope.
An insurer cannot, without more, deny coverage for an entire multi-count action by relying on a single exclusion directed at contractual liability. This is especially relevant when the complaint also advances claims that do not inherently depend on a contractual relationship. The ruling highlights why insurers must examine the legal basis of each claim before determining whether an exclusion applies.
In conclusion
Claims based on unjust enrichment, quantum meruit, or fraud may arise from the same underlying facts as a breach of contract claim. However, they do not depend on the existence or terms of an enforceable contract for their juridical basis. Therefore, courts will not automatically exclude these claims from coverage merely because the plaintiff pleads them alongside a contractual claim in the same proceedings.
Insurers seeking to deny a duty to defend an entire lawsuit involving multiple causes of action should therefore proceed cautiously. They must recognise that courts may require a cause-by-cause analysis, particularly when the underlying complaint contains allegations that could support recovery independently of any contractual relationship.
Ultimately, the decision underscores the importance of carefully interpreting contractual liability exclusions within the context of each pleaded cause of action. It demonstrates that the presence of a contractual claim does not, by itself, justify denying coverage for every other claim in the same lawsuit. Insurers should therefore evaluate the wording of the exclusion, the legal basis of each claim, and the potential for independent recovery before making a coverage determination.