Contractual liability exclusions are a fact of life in directors and officers (D&O) policy forms. While there is no getting around the existence of the contractual liability exclusion within standard policy wording, insureds can certainly benefit from variations in wording that can carve-back certain elements of coverage. Consider asking the following questions in order to determine potential ways to minimize the impact of the exclusion.
- Is there a carve-back for liability that would have attached even in the absence of a contract or agreement? All policy forms should make this exception.
- Does the exclusion bar coverage for written contracts only? Or does it also apply to oral contracts?
- Does the exclusion only refer to “contracts,” or does it also apply to “agreements,” “warranties,” and/or “guarantees”? Inclusion of these other terms, especially when combined with wording excluding them in their oral forms, can significantly broaden the effect of the exclusion and thus constrict coverage.
- Is there a carve-back for defense costs in the event of claims against insured persons (e.g., Side A defense coverage)?
- Does the exclusion apply to both express and implied contracts? Much like the inclusion of some of the terminology shown above, implied contracts can extend the restrictive impact of the exclusion to a far greater range of the insured’s activities.
- Does the lead-in wording to the exclusion bar coverage for claims “for” contractual liability, or does it bar coverage for claims “based upon, arising out of, or in any way related to” contractual liability? The former is the less common approach but is more favorable for an insured.
- Does the exclusion explicitly state that it also applies to the liability of others that an insured assumes?
- Is there an exception for contractual liability related to “employment claims”? With the blurring of some D&O and employment practices liability (EPL) risks in recent years and the frequency with which officers have employment contracts, this is particularly relevant.