Misrepresentation inducing a contract is not a breach excluded by the contractual exclusion clause in a policy (US)

Patrick Bracher, Norton Rose Fulbright

A US court found that the exclusion in an insurance policy against losses arising out of or involving a breach of contract or agreement did not exclude a claim resulting from a misrepresentation that induced the contract.

The insurer was excused from paying the amount of an arbitration award arising from a business dispute which found that the insured had fraudulently induced the other party into purchasing certain distribution rights.  The arbitration panel found that there was a negligent misrepresentation and awarded over USD18 million as out-of-pocket losses. The court held that the claim was excluded by the breach of contract exclusion.

The policy had a breach of contract exclusion clause that stated the insurer was not liable to pay for a loss in connection with a claim made against any insured that was based on a breach of contract.  The policy referred specifically to a breach of contract “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any actual or alleged breach of any oral or written contract or agreement” unless the liability would have arisen “in the absence of the contract or agreement”.

The language of the exclusion therefore applied only to losses arising out of or involving a breach of the contract.  A claim for negligent misrepresentation during negotiations is separate from a claim for breach of contract.  A claim for negligent or fraudulent misrepresentation is a claim in delict rather than contract so therefore the breach of contract exclusion did not apply.

The situation is the same in South Africa.  These misrepresentation claims are not breach of contract claims.

[Carolina Casualty Insurance Company v Spicer First District Court of Appeals for the State of Florida case number 1D20-916]

First published by: Financial Institutions Legal Snapshot