BatesCarey’s Kristi S. Nolley and Lindsey D. Dean address the recent Sixth Circuit Court of Appeals decision in Global Fitness Holdings, LLC v. Navigators Mgt. Co., Inc., et al., which held that a contractual liability exclusion in a directors and officers liability policy precluded coverage for claims sounding in both tort and contract.

Contractual liability exclusions in professional liability and management liability policies can often seem broad at first glance. However, those exclusions typically are subject to an exception for the insured’s liability that would exist in the absence of a contract. While lawsuits solely seeking damages for breach of contract may clearly fit within the exclusion, and outside of the exception, it is a closer call when a lawsuit asserts both contract and tort claims. Policyholders often argue that the tort claims fall within the exception for liability that exists outside the contract. However, a decision issued yesterday by the Sixth Circuit recognized that is not always the case. Even causes of action based in tort can fall outside of the exception to the contractual liability exclusion if those causes of action are inextricably tied to a policyholder’s conduct in connection with a contract.  

In Global Fitness Holdings, LLC v. Navigators Mgt. Co., Inc., et al., Case No. 20-5774, 2021 WL 1884593 (6th Cir. May 11, 2021), the insured, Global Fitness Holdings, LLC, sought coverage under its directors and officers liability insurance policy for a class action alleging that it engaged in unfair trade practices when selling membership and personal training contracts to its customers. Global Fitness operated a chain of gyms and fitness clubs, where it sold memberships as well as personal training services. In 2011, Global Fitness’s Ohio members filed a putative class action alleging that it misrepresented and concealed material terms of its membership and personal training contracts, overcharged customer accounts for the services provided under those contracts, and made cancellation “as difficult as possible.”  The class action alleged causes of action for violation of the Ohio Consumer Sales Practices Act, unjust enrichment, conversion and breach of contract. 

Global Fitness’s directors and officers liability insurer denied coverage based upon the contractual liability exclusion in the policy, which barred coverage for any claim “based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any liability under any contract or agreement; provided, however, that this exclusion will not apply to the extent [Global Fitness] would have been liable in the absence of such contract or agreement.” Global Fitness ultimately settled the underlying lawsuit and sued its insurer. The United States District Court for the Eastern District of Kentucky held that the contractual liability exclusion in the policy barred coverage for the entirety of the underlying lawsuit, and, on appeal, the Sixth Circuit Court of Appeals agreed. 

The Sixth Circuit rejected Global Fitness’s assertion that the severability of exclusions clause barred application of the contractual liability exclusion. The severability clause provided that only the Wrongful Acts of C-suite employees could be imputed to the company for purposes of determining whether an exclusion applies. Global Fitness argued that the putative class alleged Wrongful Acts committed by lower-level employees, and, as such, the Wrongful Acts of those employees could not be imputed to Global Fitness. In discarding this argument, the Sixth Circuit found that the allegations against Global Fitness related to wrongful overarching policies and practices that were carried out by lower-level employees.  Because the putative class alleged that Global Fitness’s own policies harmed the class members, the severability of exclusions clause did not apply.

The Sixth Circuit then turned to Global Fitness’s assertion that the allegations in the underlying lawsuit fit within the exception to the contractual liability exclusion for liability that would exist in the absence of a contract. The Court held that, although the plaintiffs alleged causes of action other than breach of contract, including violation of the Ohio Consumer Sales Practices Act, conversion and unjust enrichment, those causes of action were still inextricably tied to Global Fitness’s misconduct in misrepresenting the terms of its membership and personal training agreements and in making deductions from customers’ accounts without any basis in those agreements. The Court also noted that to qualify as a putative class member, a plaintiff must have had a contract with Global Fitness. Thus, the Sixth Circuit concluded that even the putative class’s arguably non-contractual causes of action fell outside of the exception to the contractual liability exclusion.

Contractual liability exclusions like that in Global Fitness’s policy embody the principle that liability insurance policies are not intended to provide coverage for a policyholder’s contractual obligations, or its failure to abide by such obligations. Here, the Sixth Circuit correctly recognized that, regardless of how the underlying plaintiffs couched their claims, at their core, even the tort claims were entirely dependent upon the membership and personal training agreements between Global Fitness and its members.