Regular readers know that a recurring topic on this site is the question of the proper scope of the contractual liability exclusion found in many professional liability and management liability insurance policies. In prior posts I have argued that insurers sometimes apply the exclusion overly-broadly so as to exclude matters I believe should otherwise be covered under the policy. A recent Delaware Superior Court decision once again considered these issues in the context of an underlying qui tam action alleging violations of federal law. As discussed below, the court concluded that the applicable policy’s contractual liability did not preclude coverage for the underlying claim. A copy of the Delaware Superior Court’s March 12, 2025, opinion in the case can be found here.

Background

Pangea Properties participated as landlords in the U.S. Department of Housing and Urban Development’s (HUD) Section 8 Housing Program. In a qui tam action, a relator claimed that under the HUD program, the Pangea entities were required to certify on a form that the rents they charged tenants under the Housing Program were not higher than the rents charged for comparable unassisted units. The relator alleged that the Pangea entities violated the False Claims Act by submitting false certification and information regarding rent comparability.

The Insurance Dispute

At relevant times, Pangea maintained a program of D&O insurance that consisted of a layer of primary insurance and a layer excess D&O insurance. Pangea submitted the qui tam action as a claim under the policies. The insurers denied coverage for the actions under the primary policy’s contractual liability exclusion. The Pangea entities filed a breach of contract and bad faith action against the insurers. The parties filed cross-motions for judgment on the pleadings.

The Pangea entities argued the contract exclusion is inapplicable, as the complaint in the qui tam action hinged on alleged regulatory violations and misrepresentations, not on breaches of contract. The Pangea entities argued further that a broad application of the contractual liability exclusion would render coverage under the policies illusory. The insurers argued that based on the exclusion’s broad preamble that it is applicable even to underlying causes that do not allege breach of contract claims, and that the Pangea entities obligation to fill out the forms at the heart of the underlying claim “arose out of” the Pangea entities entry into the contracts as part of the HUD housing assistance program.

Relevant Policy Language

Under the policies, the insurers are not liable to make any payment for Loss “based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any actual or alleged breach by the [Pangea entities] of an express or implied contract or agreement.”

The March 12, 2025, Opinion

On March 12, 2025, Delaware Superior Court Judge Meghan A. Adams granted the Pangea entities’ motion for judgment on the pleadings, and denied the insurers’ cross-motion.

In granting the Pangea entities’ motion, Judge Adams rejected the insurers argument that the exclusion precluded coverage because the underlying claim “arose out of” the contractual agreement that Pangea entered in order to participate in the housing assistance program. Judge Adams said that recent Delaware case law “does not support the application of the Breach of Contract Exclusion based on the tenuous connection between the [HUD contract] and the Qui Tam Action.”

The prior Delaware case on which Judge Adams principally relied was the August 2022 decision in Guaranteed Rate, Inc. v. ACE American Insurance Co., a copy of which can be found here. In September 2023, the Delaware Supreme Court affirmed the Superior Court’s opinion in the Guaranteed Rate case (here).

In the Guaranteed Rate case, the insurers had also tried to argue that the qui tam claims against a policyholder for violation of various certification requirements in connection with a federally insured loan program arose out of the policyholder’s contracts with the government. The Superior Court had held in the Guaranteed Rate case that as the underlying claim did not involve a claim for breach of contract, the breach of contract exclusion was inapplicable. The court went on to say that were the exclusion applied in the absence of a breach of contract it would “void coverage.”

Judge Adams said the Guaranteed Rate case was “analogous,” as both involved qui tam actions for alleged violations of the Federal Claims Act. In both cases, the underlying claims did not involve an action for breach of contract. Judge Adams rejected the insurers’ efforts to distinguish the Guaranteed Rate case, saying that the insurers’ argument in that case based its analysis “on the assumption that the insured had formed a contract with the government, and still concluded that the breach of contract exclusion was inapplicable.” Judge Adams also rejected the insurers’ efforts to distinguish the Guaranteed Rate case on the grounds that application of the exclusion in this case would not “void coverage.”

Judge Adams noted that the insurers here sought a broad application of the exclusion to cases in which a breach of contract action is not brought against the insured entities. Such an interpretation, Judge Adams said quoting the Guaranteed Rate decision, would “effectively extend coverage of the exclusion to just about anything remotely connected” to the allegedly breached contract, even where the underlying action is not one for breach of contact. While, Judge Adams acknowledged, the exclusion employs broad language, Delaware law mandates that insurance policy exclusions are to be “construed narrowly.”

The underlying qui tam action, Judge Adams observed, is not one for breach of contract; rather it alleges violations of federal law. The insurers, Judge Adams also noted, “ask this Court to employ an overbroad application” of the exclusion. To do so, Judge Adams said, “would risk voiding Side C coverage under the Policies.” Just as in the Guaranteed Rate case, Judge Adams refused “to apply the Breach of Contract Exclusion in the manner requested by the Insurers.”

Discussion

Regular readers know that one of my hobby-horse issues on this site is the Delaware courts’ predisposition in favor of policyholders — particularly the policyholder predisposition of the Delaware Superior Court. Some readers might be inclined to interpret the outcome of this case as just one more example of the outcome-determinative advantages policyholders enjoy in coverage lawsuits in the Delaware Superior Court.

From my perspective, I think it would be a mistake for this ruling to be discounted as merely another example of the policyholders win/insurers lose logic of the Delaware courts. I would argue that this case is rather an example of a court drawing the line on insurers’ attempts to use an overly broad interpretation of the contractual liability exclusion in order to try to preclude coverage for claims that ought to be covered by the D&O insurance policy.

I have frequently argued on this site that insurers often seek to try to apply the contractual liability exclusion broadly, in order to try to preclude coverage for claims that that do not involve (or that do not entirely involve) claims for breach of contract. I have regularly argued that a breach of contract exclusion is entirely appropriate to preclude coverage for voluntarily undertaken liability (that is, assumed by contract) but not for liability imposed by law (that is, imposed by a court for a violation of the law). I have argued further that the broad scope that insurers seek to impose based on the typical broad preamble wording of the contractual liability exclusion hazards making coverage under the policy illusory, as almost every private company D&O claim involves a contract at some level.

In this case, I would argue that Judge Adams got it right. She is correct that the connection between the HUD contract and the relator’s allegations that the Pangea entities made misrepresentations in their forms to the government is simply too tenuous to trigger the contractual liability exclusion. I would argue further that the relator’s misrepresentation claim is the very kind of claim for which private companies buy insurance, and that were the exclusion extended to this kind of claim, the purported coverage under the policy would indeed be rendered illusory. I would go further than that – I would argue that if the exclusion really does apply to the kind of claim the relator asserts, private companies might well wonder why they should even buy D&O insurance in the first place.

The real problem here, one that I have pointed out many times, is the insurers’ use of the broad “based upon, arising out of” language. I know that this language arguably is close to industry standard. But while most carriers may use this language, that does not make it right. Indeed, long-time readers may recall that I have long argued that the insurers’ use of this language is one thing that D&O insurers “regularly get wrong.”

From my perspective, a contractual liability exclusion framed in terms consistent with the overall purposes of the D&O insurance policy would not use the broad “based upon, arising out of” language. Rather, the exclusion – properly framed – would use the “for” preamble, rather than the overly broad “based upon, arising out of” wording. The use of the “for” wording would likely discourage insurers (or at least many of them) from attempting to apply the exclusion overly broadly and ensure that the exclusion does not apply to claims for which the D&O insurance policy should be providing coverage. The “for” wording would also more appropriately align with the purposes for which the exclusion is in the policy in the first place.

In any event, as much fun as I have had pointing out the Delaware courts’ predisposition in favor of policyholders, I would argue that in this case the Delaware court got it right, whatever else may be said about the courts.

I know some readers may disagree with my views expressed in this post. I encourage readers to add their arguments to this post using the site’s comment feature.

One final note. Geoffrey Fehling of the Hunton Andrews Kurth law firm has an interesting March 15, 2025, LinkedIn post about Judge Adams’s decision in the Pangea Properties case, here. Among other things about the decision, Fehling notes that the ruling represents “broader trends showing that False Claims Act litigation” is “often covered by D&O insurance … despite being subject to recurring disputes about insurability of FCA remedies, various exclusions, and coverage for government investigations.”