One of the perennial management liability insurance coverage issues is whether a policy’s contractual liability exclusion precludes coverage for related tort claims filed alongside claims for breach of contract. Often, these issues turn on the specific wording of the exclusion involved. A recent insurance coverage decision from the Northern District of Illinois addressed these issues in the context of an underlying lawsuit involving both a breach of contract claim and a claim for tortious interference with contract. As discussed below, the court concluded, based on the specific language involved, that the exclusion did not preclude coverage for the tortious interference claim.

The Court’s March 31, 2026, opinion can be found here. An April 9, 2026 LinkedIn post about the court’s decision by Paul Curley of the Kaufman, Borgeest & Ryan law firm can be found here.

Background

Metropolis Condominium Association is a homeowners’ association for a condo building in Chicago. The building contains a parking garage. Metropolis had a management agreement with Addis, a parking garage manager, to operate the garage. Addis operated the garage pursuant to a collective bargaining agreement (CBA) with the Teamsters Union.

Under the garage management agreement, Metropolis was required to pay Addis for operating expenses, including the salaries, wages, payroll taxes, and fringe benefits of the union members. Addis apparently sought to have the union release it from the CBA. The union refused. Addis’s principal then formed a new non-union company, TBF Parking, to perform the work previously performed by Addis. Addis then stopped making monthly contributions to the union funds.

In 2019, the union sued Addis and TBF seeking recovery of the unpaid fringe benefit contributions. Addis and TBF were ultimately found liable for unpaid contributions of $327,253. The union sought to collect the funds from TBF, but it was insolvent.

In April 2023, the union sued sued Metropolis (the Funds lawsuit), asserting claims for breach of contract and tortious interference with contract. The Funds lawsuit ultimately was settled in April 2025.

Metropolis sought to have its insurer defend and indemnify it for the Funds lawsuit. The insurer filed a lawsuit against Metropolis seeking a judicial declaration that, owing to the policy’s contract exclusion, it did not have a duty to defend or indemnify Metropolis. Metropolis countersued the insurer contending that the insurer had breached its contract. The parties filed cross-motions for summary judgment.

Relevant Policy Language

The policy’s contract exclusion provided in relevant part that:

We are not liable to pay, indemnify or defend any claim for any actual or alleged liability of an insureds under the terms, conditions or warranties of any oral or written contract or agreement….

The Court’s March 31, 2026, Opinion

In a March 31, 2026, opinion, Northern District of Illinois Judge Matthew F. Kennelly, applying Illinois law, denied the insurer’s summary judgment motion and granted Metropolis’s summary judgment motion.

The insurer had argued that the coverage for the Funds lawsuit was precluded by the contract exclusion because it “was brought against Metropolis because of and due to Metropolis’s liability under the terms of the Management Agreements.”  Metropolis argued that the tortious interference with contract theory of liability in the Funds lawsuit did not arise under the terms of any contract. Metropolis argued further that under Illinois law if any portion of a complaint is covered, a duty to defend insurer must defend the entire lawsuit.

Judge Kennelly started his analysis of the coverage issue by reviewing the underlying allegations in the Funds lawsuit. The first count – the breach of contract claim – was based on allegations that Metropolis had breached its obligations under the garage management agreement. The second count in the underlying lawsuit – the tortious interference claim – alleged that Metropolis was liable because it induced Addis/TBF to breach the CBA. Metropolis pointed out that it was not a party to the CBA.

Judge Kennelly observed that the tortious interference allegations “did not rely on Metropolis’s liability under the terms of the management agreement.” Rather, he observed, the tortious interference allegations “alleged inducement of another entity’s breach of the CBA, to which Metropolis was not a party.”  That is, Judge Kennelly said, with reference to the contract exclusion’s language, the tortious interference claims against Metropolis “did not involve a claim ‘for …alleged liability of [Metropolis] under the terms … of any …contract.’” The Funds lawsuit therefore, Judge Kennelly said, “alleged a theory of liability against Metropolis that is not barred by the contract exclusion term.”

The insurer sought to argue that the exclusion nevertheless applied to preclude coverage, relying on various prior court decisions that had enforced the contract exclusion. Judge Kennelly not only found that the cases on which the insurer sought to rely were factually distinct, but he also noted that the contractual exclusion in the cases on which the insurer sought to rely was different than the exclusion at issue in this case. The other cases involved contractual exclusion that had a broad preamble, excluding coverage for claims “based upon or attributable to liability under any contract.”

The contract exclusion at issue in this case, Judge Kennelly said, was more limited and did not include the broader language present in the policies involved in the cases on which the insurer sought to rely. The exclusion at issue here precluded coverage only for alleged liability “under” the terms of any contract; none of the tortious interference allegations, Judge Kennelly said “were based on Metropolis’s liability under the terms of the CBA, management agreements, or any other contracts.” The tortious interference claim, Judge Kennelly held, does not fall within the policy’s contract exclusion.

Discussion

Long-time readers know that the wording of contract exclusions is an issue that I have long argued insurers “regularly get wrong.” Specifically, I have argued that the contract exclusion should not have the broad “based upon, arising out of, in any way involving” preamble, but rather should have the narrower “for” wording.

My argument has always been that the exclusions with the broad preamble sweep far too broadly, precluding coverage for claims that ought to be covered. (Indeed, as I discussed at length here, the Seventh Circuit, applying Wisconsin law, has said that an E&O policy’s contract exclusion with the broad preamble improperly rendered that policy’s coverage “illusory.”)

The specific problem with the overbroad wording is that it extends the reach of the contract exclusion not only to contract claims but to tort claims that are not based on contractual liability. (I have written about cases where courts have applied the contract exclusion to preclude coverage for tort claims, for example, here and here.)

That was in fact what the insurer was trying to do here, to extend the contract exclusion to try to preclude coverage for tort claims that are not based on contractual liability. Interestingly, in order to try to make this argument, the insurer sought to rely on cases involving policies that had the broader “based upon, arising out of” language. However, as Judge Kennelly found, the exclusion at issue here was narrower, did not have the broad language, and therefore did not reach a claim that did not involve contractual liability.

Also interestingly, to me at least, is that Judge Kennelly did not base his analysis of the exclusion here on the fact that it had the narrower “for” wording. That certainly would have been what I would have argued; that is, if I were arguing for Metropolis here, I would have argued that the tortious interference claim was not a claim “for” contractual liability. However, Judge Kennelly based his analysis on a slightly different wording issue, which is that the tortious interference claim was not a claim “under” a contract, as was required under this policy in order for the contract exclusion to apply.

This is the point in my discussion of these issues where I invoke my privileges as the oldest guy in the room. (Which often is the case for me these days.) As the old guy, I may be among the few these days that remembers how things worked before the contract exclusion was added to the policy.

In those days, the insurers argued that contractual liability claims were not covered because contractual liability is a voluntarily undertaken liability, rather than a liability imposed by law. The insurers would argue that liability insurance policies were intended to provide insurance only for liabilities imposed by law, not for voluntarily undertaken liabilities, like those based on a contract. (The reason I know that insurers made these arguments is that I made these arguments myself on behalf of insurers as a young carrier-side attorney early in my career.)

When entity coverage became a standard part of private company D&O insurance policies, insurers added the contractual liability exclusion as a precaution. (Public company D&O insurance policies do not have a contractual liability exclusion because the entity liability coverage in public company D&O insurance policies applies only to Securities Claims.) Unfortunately, rather than restricting the scope of the contractual liability exclusion to preclude coverage only for the voluntarily undertaken liabilities, some insurers worded their exclusion broadly, so as to preclude coverage not only for voluntarily undertaken liabilities but also to preclude coverage for liabilities imposed by law – that is, the very types of claims for which the policies were intended to provide coverage.

My view is that the contractual liability exclusion should be applied so as to preclude coverage only for the voluntarily undertaken liabilities, but not to preclude coverage for the liabilities imposed by law. For that reason, the appropriate preamble for the contractual liability exclusion is the “for” wording, not the broad “based upon, arising out of” wording.

Though the Court’s analysis in this case was not exactly as I would have expected, the case is a good illustration of the way that a narrowly tailored exclusion operates – and of the way the policy should operate. This insured should have coverage under its policy for tort claims, even if, as we can all agree, the policy is not there to insure the policyholder’s voluntarily undertaken contractual liabilities.

One last bit of history. There was a time when many carriers’ forms used the broad “based upon, arising out of” preamble for the bodily injury/property damage exclusion found in most private and non-profit D&O insurance policies. Worded this way, the BI/PD exclusion swept far too broadly. A concerted effort on behalf of policyholders got the insurers to change their wording. Most D&O insurance policies’ BI/PD exclusions now use the “for” wording rather than the broader “based upon, arising out of” wording. Indeed, the “for” wording for the BI/PD exclusion is now pretty much standard. Time to bring the contractual liability exclusion into the modern era as well; the industry needs to move to a “for” wording standard for the contractual liability exclusion.