FIDUCIARY DUTY IS NOT CONTRACTUAL, FIFTH CIRCUIT HOLDS

The Fifth Circuit Court of Appeals recently re-examined the scope of a contractual liability exclusion in a liability insurance policy.  In Windermere Oaks Water Supply Corp. v. Allied World Specialty Ins. Co., No. 22-50218, 2023 WL 3313593 (5th Cir. May 9, 2023) (slip op.), a municipal utility company sought coverage for a suit a filed against it alleging that it sold a valuable tract of land to a company board member “for pennies on the dollar.”  The suit alleged violations of the Texas Business Organizations Code, including unauthorized conveyance of property, improper use of the cooperative's assets, improper disbursement of the cooperative's assets to benefit the directors, and failure to recover loss, as well as for common-law breach of fiduciary duty. 

The insurer denied the claim, leading to this suit, in which the trial court ordered the insurer to defend.  This appeal resulted.  The appellate court’s summary of its holding was refreshingly simple: “This insurance dispute turns on a simple principle of law: A claim for breach of fiduciary duty is not a claim for breach of contract, and is therefore not subject to exclusion from coverage under a contractual liability exclusion. That's what the district court found here in granting summary judgment in favor of the insured. We accordingly affirm.”

In its analysis, the court was mindful of Ewing Const. Co. v. Amerisure Ins. Co., 420 S.W.3d 30  (Tex. 2014) [link to our summary at newsroom-news-TIN-20140121-item1.html], in which the Supreme Court of Texas limited the scope of contractual liability exclusions.  Although a contract for the sale of land was the subject of the underlying suit against Windermere, the actual claims asserted against Windermere were not contractual in nature and did not depend on a contractual relationship between Windermere and the plaintiffs.  They were the types of claims that grew out of duties imposed by law, not contract, and therefore were beyond the scope of the Contractual Liability exclusion.