In this Canadian judgment, the court dealt with a professional errors and omissions policy which excluded contractual liability claims unless the insured would have had that liability in the absence of the contract.
The relevant exclusion read:
“This Policy does not apply to any Claim … arising from the Insured’s:
- assumption of liability in a contract or agreement; or
- breach of contract or agreement.
This exclusion does not apply to: (i) liability that the Insured would have in the absence of the contract or agreement…”
The court held that the exclusion itself was unambiguous and rejected the argument that the meaning and effect of the exclusion was to nullify coverage under the policy because the insured always provided its professional services under a contract. It excluded assumed liability and liability for breach.
The exception to the exclusion read literally however was ambiguous, said the court. There would have been no relationship between the relevant parties if there had been no contract or agreement under which the insured provided the professional services.
The court held that the policy covered “professional losses caused by the insured in performing its professional functions in its relationship with the claimant that arise in law, regardless of the terms of their contract.”
The insurer was not responsible for indemnifying the insured for any “extra obligations” it undertakes in a contract or for the breach of those obligations.
The court also said that in agreeing pay liquidated damages for a breach in the relevant agreement, the insured “effectively contracted out of its insurance coverage” The obligation to pay liquidated damages was contractually assumed and did not otherwise arise as the third party had contracted out of any claim that it may have for damages and negligence. The court did not explain why the insured could not claim the damages it would have been liable for up to the amount of the penalty, which was “a genuine pre-estimate” of those damages.
The judgment does demonstrate the importance of having an appropriately worded “contracted out” exclusion in any liability policy with a view to avoiding or at least limiting any debate in respect of the liabilities which the policy intends to cover.