In Indiana Insurance Co. v. Kopetsky, 11 N.E.3d 508 (Ind. Ct. App. 2014), corrected on reh’g, 14 N.E.3d 850, trans. denied, the Court of Appeals decided a number of issues relevant to insurance coverage, among them the previously open question of the scope of the common policy exclusion for damages an insured is obligated to pay because of liability assumed in a contract. The Supreme Court initially granted transfer in Kopetsky, thereby vacating the Court of Appeals opinions, but then, following oral argument, denied transfer and reinstated both the initial opinion and the opinion on rehearing. See generally Indiana Law Blog, “Supreme Court, 3-2, Reinstates COA Opinion in Environmental Insurance Case.”
This article examines the basis for the Kopetsky court’s holding regarding contractual liabilities, identifies what the holding means and does not mean for insurance carriers, and discusses what insurers can do to effect a broader exclusion.
Scope of the contractual liability exclusion following Kopetsky
In Kopetsky, a seller of property was sued by the purchasers under several theories, including a claim that the seller breached the terms of a sale agreement by failing to inform the buyers that he had notice of toxic waste on the property. Kopetsky, 11 N.E.3d at 512. The applicable insurance policies excluded coverage for “‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The insurer argued that this exclusion applied to the breach of contract claims, which stemmed from the seller’s alleged failure to inform the buyer of potential contaminations as required by the contract. The insurer argued that these allegations equated to a claim that the seller had assumed liability under the contract.
The seller (actually, the seller’s wife, since the seller was deceased) argued that being held liable for entering into and then breaching a contract is not the same as assuming liability in a contract and that, therefore, the exclusion did not apply. Id. at 523. The Court of Appeals agreed with the seller, holding that “‘assumed’ liability is liability originally incurred by a third party but then taken on by another.” Id. The court then quoted with approval a decision by the Alaska Supreme Court that explained, “‘[l]iability assumed by the insured under any contract’ refers to liability incurred when one promises to indemnify or hold harmless another, and does not refer to the liability that results from breach of contract.” Id. (quoting Olympic, Inc. v. Providence Wash. Ins. Co. of Alaska, 648 P.2d 1008, 1011 (Alaska 1982)). The court then cited cases from a number of jurisdictions that had interpreted the same or similar policy exclusion and “join[ed] those jurisdictions who have held that contractual liability exclusions in CGL policies bar coverage not for liability incurred by a contract breach but, rather, for liability assumed from a third party, which seems to be the majority position by a wide margin.” Id. at 524; see also Jamie R. Carsey, Sarah R. Anchors, and Steven H. Weisman, “Are You in Control? Deconstructing Insurance Coverage Issues in the Context of Contractual Indemnification Obligations” (ABA 2014) (“The majority of courts interpret the exclusion to only apply to a hold harmless or indemnification obligation in an agreement, and not to all liability that results from breach of contract.”).
The Kopetsky court correctly recognized that a majority of jurisdictions have decided that assumed contractual liability exclusions do not exclude coverage for breach of contract claims that result from accidental breaches and apply only when an insured assumes liability that lies with another party. However, a minority view holds that contractual assumption exclusions apply whenever an insured agrees in a contract to assume duties that exceed the scope of the common law duties owed in the absence of a contract. See, e.g., Crownover v. Mid-Continent Casualty Co., 772 F.3d 197 (5th Cir. 2014) (applying Texas law); Silk v. Flat Top Constr., Inc., 453 S.E.2d 356 (W.Va. 1994).
The Kopetsky court explicitly rejected the minority view, so the out-of-state authority is of no use in cases involving Indiana law. See Kopetsky, 11 N.E.3d at 524 n.5. However, in the event that a dispute arises under the law of a state that has not yet interpreted the contractual liability exclusion, it is worth noting the split of authority and being aware that a court applying the law of such a jurisdiction could adopt the minority view.
What Kopetsky means
Kopetsky involved coverage for an alleged breach of a sales contract provision requiring disclosure of known contaminants, but it did not limit its holding to these facts. The Kopetsky court cited a number of decisions from jurisdictions that held other types of contractual claims were covered despite the contractual assumption exclusion. The decisions relied upon held that coverage was not excluded for claims alleging damage to tomato plants caused by a contractor’s use of defective film, see Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786 (8th Cir. 2005); damages to an apartment building caused by a contractor’s failure to properly replace a roof, as required by contract, see ACUITY v. Burd & Smith Constr., Inc., 721 N.W.2d 33 (N.D. 2006); consequential damages caused by a contractor’s failure to provide defect-free structural components for a distribution center warehouse, as warranted in the construction contract, see American Fam. Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004); and damages caused by a publisher’s loss of photographic transparencies that were to have been used for book illustrations, see Gibbs M. Smith, Inc. v. U.S. Fidelity & Guar. Co., 949 P.2d 337 (Utah 1997). Although these out-of-state authorities would certainly not bind an Indiana court applying a contractual liability exclusion, the Kopetsky court citing the cases with approval foreshadows the scope of the Kopetsky decision. Therefore, insurers and their counsel should be prepared for courts to conclude that a wide variety of contractual liability claims will not be excluded by the common policy exclusion.
When the application of Kopetsky may become important
Although plaintiffs cannot recover duplicative damages under tort and contract claims, see Cutter v. Classic Fire & Marine Ins. Co., 926 N.E.2d 1067 (Ind. Ct. App. 2010), a single act causing damage can constitute both a tort and a breach of contract, see Georgie Boy Mfg., Inc. v. Pariso, 550 N.E.2d 111, 112 (Ind. Ct. App. 1990), trans. denied. Depending on the circumstances, the damages recoverable on the two claims could be the same or could significantly differ. For example, a claim for personal injury stemming from a negligently performed contract likely has more value as a tort claim than as a contract claim and, therefore, would not be brought as a contract claim. In these cases, the Kopetsky rule will generally have no effect on available coverage.
However, as the Supreme Court’s decision in Schuman v. Kobets, 716 N.E.2d 355, 357 (Ind. 1999) illustrates, if the statute of limitations has passed on a tort claim, a personal injury plaintiff may, out of necessity, bring only a contract claim. Although, in the personal injury context, the damages recoverable may be different on the two claims, it is fairly well established that claims based on contractual relationships are governed by the statute of limitations applicable to contract claims, even where the claim alleges harm to person or property. See Schuman, 716 N.E.2d at 357; Powers & Sons Constr. Co. Inc. v. Healthy E. Chicago, 919 N.E.2d 137, 143-44 (Ind. Ct. App. 2009); Wells v. Stone City Bank, 691 N.E.2d 1246, 1250 (Ind. Ct. App. 1998), trans. denied; Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 594 N.E.2d 459, 465 (Ind. Ct. App. 1992), adopted in relevant part, 612 N.E.2d 550 (Ind. 1993). Kopetsky means that there will be insurance coverage for such claims.
What Kopetsky does not mean
The Kopetsky court’s holding regarding the exclusion for contractual liability applies only to an analysis of whether that exclusion precludes coverage. The holding does not mean that insurance policies with the exclusion necessarily provide coverage for all breach of contract claims. In fact, on rehearing, the Kopetsky court specifically stated that coverage did not exist for the years of coverage after the insured knew of the contamination, as the known claim exclusion applied. See Kopetsky, 14 N.E.3d at 853. Further, insureds still cannot look to their insurers for coverage after an intentional breach, made as a business decision or otherwise, as such damages would be excluded by an “occurrence” or “accident” requirement. See Sheehan Const. Co. v. Cont’l Cas. Co., 935 N.E.2d 160, 172 (Ind. 2010) (“[I]f the defective work of the subcontractors were done intentionally instead of ‘without intention or design,’ then it is not an accident.”), modified on reh’g, 938 N.E.2d 685.
Nor did Kopetsky change the usual requirement in general liability policies that the accident or occurrence cause property damage or personal injury. Therefore, Kopetsky should not affect the caselaw holding breach of contract claims not involving these kinds of damages are not covered. See, e.g., Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1054 (Ind. 2001); Cont’l Cas. Co. v. Sycamore Springs Homeowners Ass’n, Inc., 2010 WL 3522955, at *6 (S.D. Ind. Aug. 31, 2010) (holding damages caused by the accidental flooding caused by faulty workmanship were covered, but expenses incurred to prevent future flooding are not covered), aff’d, 652 F.3d 804 (7th Cir. 2011).
Finally, it is important to recognize that Kopetsky involved an interpretation of commonly used contractual language. The case did not rest on common law, statutory or public policy principles. Therefore, Kopetsky does not mean that insurance companies cannot exclude coverage for breach of contract claims; Kopetsky means only that insurance companies that use the typical exclusion language have not done so.
How insurers can limit liability for breach of contract claims
Although the language currently used in many insurance policies does not serve – in most states and now in Indiana – to exclude coverage for a claim based on negligent or other unintentional contractual breaches, insurers can certainly take steps to limit their exposure on contract claims. For example, some insurers use contractor warranty endorsements, which require insureds to include indemnity or additional insured provisions in their contracts with subcontractors. See generally Meryl Lieberman, “Emerging Issues in Risk Shifting through Contractual Indemnity, DRI Insurance Coverage and Practice Symposium” (2014). Such provisions lead to either shifted responsibility to cover the claim or exclusion of coverage if the insured fails to comply with the obligation.
A more direct way to limit liability would be to simply rewrite the contractual liability exclusion. An insurer that wants to limit liability in the manner that the current policy language applies in Texas and West Virginia could simply write policies that exclude coverage for “duties assumed pursuant to a contract that exceed those duties imposed by the common law.” Whether insurance companies actually want to limit coverage in this manner, of course, is a different question and one outside this article’s scope.
Kopetsky, in theory, broadened coverage for contractual claims to include contractual claims that were arguably excluded. However, given the weight of authority from other jurisdictions, it is more appropriate to view the decision as confirming the scope of coverage that already existed. Other aspects of the decision, particularly the court’s holding on rehearing regarding known-claim exclusions in policies, actually benefit insurers. See Kopetsky, 14 N.E.3d at 853-54; see also Mary E. McPherson, “What Did George Know and When Did He Know It?” 5 Commercial General Liability Dispatch 7 (July 2014) (describing the Kopetsky decision as “significant partly because an Indiana court (which is generally ‘pro-policyholder’) sided with the insurance company … .”). Therefore, although one aspect of the Kopetsky decision foreclosed the argument that Indiana should adopt the minority view regarding contractual liability exclusions, the decision as a whole provides insurers and their counsel with useful authority when dealing with what appear to be intentional or willful breaches of obligations, whether contractual or otherwise, and when applying a policy’s known-claim exclusion.•
Mr. Ramsey is an attorney at Barrett McNagny in Fort Wayne and is a member of DTCI. The opinions expressed in this article are those of the author.