District Court Ignored Narrow Exclusion Construction Case Authority
/District Court Ignored Narrow Exclusion Construction Case Authority
By David A. Gauntlett[*]
Exclusionary provisions in insurance contracts must be narrowly constructed to provide coverage for policyholders. So what happens when “arising out of” is included in an exclusion? The issue came to a head in the Texas case SXSW, LLC v. Fed. Ins. Co., No. 1:21-CV-900-RP, 2022 U.S. Dist. LEXIS 183423 (W.D. Tex. Sep. 29, 2022), which adopted the Magistrate Judge’s opinion in SXSW, LLC v. Fed. Ins. Co., No. 1:21-CV-00900-RP, 2022 U.S. Dist. LEXIS 92709 (W.D. Tex. May 24, 2022) as few Orders from Magistrate Judges are revisited.
“Contract” Exclusion
The underlying action, now resolved, was a class action lawsuit by ticketholders following the cancellation of the South by Southwest music festival in Austin, Texas due to COVID-19. Claims for breach of contract, unjust enrichment, and conversion were asserted against SXSW, but potential coverage was only sought under the last two counts. The district court agreed with the insurer, Federal Insurance Company, that potential coverage for all claims was precluded by the policy’s “Contract” Exclusion, which read:
[The insurer] shall not be liable for Loss on account of any Claim against an Organization: based upon, arising from or in consequence of any liability in connection with any oral or written contract or agreement to which an Organization is a party, provided that this Exclusion (B)(1) shall not apply to the extent that such Organization would have been liable in the absence of such contract or agreement.
Distinct Liability Outside Contract Was Not Considered
The Magistrate Judge’s Order ignored arguments premised on the exception to the “Contract” Exclusion evidencing liability falling outside its scope, improperly relying on Fifth Circuit authority (see Gemini Ins. Co. v. The Andy Boyd Co. LLC, 243 F. App'x 814, 815 (5th Cir. (Tex.) 2007)) to justify its decision. The ruling failed to follow governing case law requiring strict construction of exclusions against the insurer. King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002); see also David A. Gauntlett, Insurers Must Establish That Exclusions Apply in “All Possible Worlds,” https://www.gauntlettlaw.com/news/insurers-must-establish-that-exclusions-apply-in-all-possible-worlds (Sep. 29, 2022).
Other jurisdictions, like California, have resolved the tension created by exclusions containing “arising out of” differently. For example, see My Choice Software, LLC v. Travelers Casualty Insurance Co. of America, 823 Fed. App’x 510, 512 (9th Cir. 2020). The My Choice court overturned a district court decision which too narrowly interpreted “arising out of” language connected to an IP Exclusion in light of governing California Supreme Court authority, citing to MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003) and Tower Ins. Co. v. Capurro Enters., No. C 11-03806, 2012 U.S. Dist. LEXIS 46443, *27–28 (N.D. Cal. Apr. 2, 2012) (citing on point California Supreme Court authority). See also David A. Gauntlett, Three 2020 Coverage Cases Clarify Coverage Availability, https://www.gauntlettlaw.com/news/three-2020-coverage-cases-clarify-coverage-availability (Feb. 17, 2021).
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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.