Where the purchaser of an oil refinery sued the seller for breach of contract for $25 million damages resulting from a fire caused by various acts and omissions of the seller prior to the sale, the claim was not covered under the seller’s commercial general liability policy. The claim was not based on property damage but on damages arising from false representations and the failure to deliver what was bargained for.

The typical liability policy covered ‘those sums that the insured becomes legally obliged to pay as damages because of bodily injury or property damage resulting from an accident’. The policy did ‘not apply to bodily injury or property damage for which the insured is obliged to pay damages by reason of the assumption of liability in a contract or agreement’. This exclusion did not apply to ‘liability for damages that the insured would have in the absence of the contract’.

The court pointed out that exceptions to exclusions do not expand coverage but restores coverage that would otherwise have been lost via the exclusion (in much the same way that a double negative is a positive). The insured would not have had any liability for damages in the absence of the contract. The claim did not allege liability for property damage caused by an accident as required by the policy.

This is an interesting case because the exclusion and the exception to the exclusion are found in most liability policies and are frequently discussed in relation to liability claims.

The case is Murphy Oil Corporation v Liberty Mutual Fire Insurance Company.