The insured was sued for and settled a claim for $77.5 million under the California False Claims Act for overcharging California government entities under the terms of particular contracts despite their offer of low prices to the government. The insured sued the insurer for an indemnity for its loss. The court denied the claim on the basis of the contract exclusion which denies coverage for any claim ‘alleging, arising out of or resulting, directly or indirectly, from any liability or obligation under any contract or agreement or out of any breach of contract’. The exclusion does not apply to liabilities or obligations ‘an insured would have in the absence of such contract or agreement’. The clause also excludes coverage of delictual claims which could not exist without the relevant underlying contract. In Californian law the term ‘arising out of’ requires only a minimal causal connection or incidental relationship.

The lawsuit against the insured was primarily based on two contracts between the insured and Los Angeles County. The claims and the allegations made were related to the performance or non-performance of the government contracts.

The court, while ‘noting the uncomfortable breadth of such contract exclusions’, concluded that the lawsuit was based directly or indirectly on contractual obligations and therefore the claim was not covered under the policy.

Almost identical wording is commonly used in liability policies in South Africa and a similar result should follow.

The case is Office Depot Inc v AIG Specialty Insurance Co.