This Delaware District Court judgment considered the insured’s claim under the insurer’s Not-For-Profit Entity and Directors, Officers Liability Insurance Policy (“the Policy”).
The Policy the parties explicitly excluded any claim “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of [SAEDF] under any express contract or agreement.”
The court held that neither of the disputed terms “arising out of” and “contractual liability” was ambiguous.
A “contractual liability” refers to a liability expressly assumed under a written contract or agreement. Such a liability can be created when a contracting party has a contractual obligation to do, pay or make something, either because of a breach of the contract or under the explicit terms of the contract itself.
The term “arising out of” is to be construed broadly and interpreted it, as other courts have done, to “require some meaningful linkage between the two conditions imposed in the contract”.
“Arising out of” is broader than “caused by” and is understood to mean “originating from”, “having its origin in”, “growing out of” or “flowing from”.
The United States Agency for International Development (USAID) awarded a multimillion dollar grant to the insured. After an audit, USAID required the insured to return USD2,337,402 because of irregular payments made.
The insured argued that the liability for which it claimed indemnity was because it had failed to exercise sufficient oversight of funds in breach of its fiduciary duties and that there were no findings that the insured breached the relevant Grant Agreement between the insured and USAID which had awarded a multi-million dollar grant to the insured.
The insured contended that there was no “meaningful linkage” between USAID’s final decision to recover the Grant Agreement.
The court held that the insured ignored that the “fiduciary duties” noted by USAID were created by and pursuant to the Grant Agreement. USAID found that the insured failed to exercise relevant oversight over monies paid. USAID cited the fiduciary obligations and internal corporate and accounting policies made applicable by, and originating from, the Grant Agreement. Because the fiduciary obligations originated from the Grant Agreement the court held that there was an indisputable and meaningful linkage between the insured’s liability under the Grant Agreement and the USAID claim. That claim was not “tangential” with the Grant Agreement but stemmed from the very restrictions and obligations placed on the insured under the Grant Agreement.
In the circumstances the insurer was entitled to rely on the contractual liability exclusion.
As matter of principle, the outcome should be no different under South African law.