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(Article from Insurance Law Alert, October 2015)

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The Eleventh Circuit ruled that a contractual liability exclusion barred coverage for tort claims that had a “clear nexus” and were “inextricably intertwined” with certain operative contracts.  Bond Safeguard Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2015 WL 5781002 (11th Cir. Oct. 5, 2015).

Real Estate developer Land Resource, LLC (“LRC”) contracted with municipalities to develop residential subdivisions.  LRC obtained surety bonds from Bond Safeguard Insurance Company and Lexon Insurance Company (collectively “Bond-Lexon”).  The surety bonds guaranteed LRC’s timely completion of the subdivisions.  In connection with the surety bonds, LRC and Bond-Lexon entered into a General Agreement of Indemnity (“GAI”) under which LRC agreed to indemnify Bond-Lexon for any liability incurred in connection with the bonds.  Several years after initiation of a subdivision project, LRC ceased work and Bond-Lexon was obligated to pay the municipalities pursuant to the surety bonds.  Thereafter, Bond-Lexon sued LRC.  Bond-Lexon initially alleged breach of contract and negligence, but later amended its complaint to allege only negligence.  LRC sought coverage from National Union, which the insurer denied.  National Union argued that there was no coverage because a contractual liability exclusion applied to all losses “arising out of, based upon or attributable in any actual or alleged contractual liability of the Company of any other Insured under any express contract or agreement.”  A Florida federal district court agreed and ruled in favor of National Union.  The district court concluded that the contractual liability exclusion was “unambiguously broad so as to preclude coverage for tort claims that depended on the existence of the insured’s contractual liability under any express contract or agreement.”  The Eleventh Circuit affirmed.

Although Florida courts have not interpreted the precise language at issue, the Eleventh Circuit held that under Florida law, the term “arising out of” should be interpreted broadly to mean “some causal connection.”  The court concluded that this standard was met because the alleged tort losses arose from LRC’s contractual breach of either the GAI or its contracts with the municipalities.  More specifically, the court held that although Bond-Lexon’s claim sounded in negligence and was based in part on conduct that pre-dated the GIA, those alleged acts of negligence “occurred during the course of LRC’s performance under the development contracts with the municipalities.”  The court therefore concluded that Bond-Lexon’s claim “depended on the existence of contractual liability of some kind” and was thus excluded from coverage. 

The Eleventh Circuit’s interpretation of the phrase “arising out of” was outcome-determinative in this case.  However, as reported in previous Alerts, other courts disagree as to whether the phrase should be construed broadly to require only some causal connection (as was the case here) or construed narrowly to require proximate or “but for” causation.  See June 2015 Alert; May 2012 Alert.