Ninth Circuit Rejects “All-or-Nothing” Approach to D&O Coverage Exclusions—Key Lessons for Policyholders from Las Vegas Sands v. National Union

Because effective Directors & Officers insurance (D&O) is becoming even more important for companies and their leaders, particularly for peace of mind and financial soundness in our highly litigious society, we provide this coverage alert.  

In a win for policyholders, the U.S. Court of Appeals for the Ninth Circuit in Las Vegas Sands, LLC v. National Union Fire Insurance Company  held that a D&O policy exclusion for Claims arising out of liability under an express contract did not preclude a potential for coverage for a lawsuit including fraud and quantum meruit claims in addition to a breach of contract claim. This decision reinforces that insurers must conduct a claim-by-claim analysis when evaluating coverage exclusions and cannot blanketly deny coverage because one cause of action may be excluded. This ruling provides further ammunition for policyholders facing wholesale coverage denials based on contractual liability - or other - exclusions that apply to less than all causes of action alleged in a lawsuit.

Background

Plaintiffs in the underlying litigation sued Las Vegas Sands, LLC and Las Vegas Sands Corporation (collectively, “LVS”) asserting claims for breach of contract, quantum meruit, and fraud. National Union Fire Insurance Company (“National Union”) denied coverage based on an exclusion for Claims “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the [Insured] under any express contract or agreement” (the “Contractual Liability Exclusion”). In the underlying action, LVS was held liable in quantum meruit, which, under Nevada law, cannot be coextensive with a contractual obligation.

LVS brought a coverage action against National Union in the U.S. District Court for the District of Nevada challenging National Union’s coverage denial. The district court granted summary judgment to National Union, holding that the Contractual Liability Exclusion barred coverage for the entire underlying lawsuit. LVS appealed to the Ninth Circuit.

The Key Ninth Circuit’s Decision

The Ninth Circuit concluded that the district court erred in treating the underlying causes of action for breach of contract, fraud, and quantum meruit as one “claim” for purposes of the Contractual Liability Exclusion. Accordingly, it vacated the district court’s judgment.

The Ninth Circuit’s analysis focused on whether the Contractual Liability Exclusion precluded coverage for the entire underlying lawsuit, i.e., whether it applied to the breach of contract claim and the quantum meruit and fraud claims. The Ninth Circuit acknowledged that the Contractual Liability Exclusion may preclude coverage for the breach of contract claim, but emphasized that, under Nevada law, quantum meruit and breach of contract are fundamentally different causes of action. Under Nevada law, quantum meruit claims are not actionable where there is an express contract or agreement. The quantum meruit claim therefore could not have arisen out of liability of the insured under an express contract, thereby precluding application of the Contractual Liability Exclusion. The Court also noted that it was unclear whether the underlying fraud claim had any basis in an express contract, which precluded the district court’s summary disposition of coverage on that claim. Accordingly, the Ninth Circuit held that the district court erred in concluding that the Contractual Liability Exclusion barred coverage for the entire underlying lawsuit.

Key Takeaways for Policyholders

The Las Vegas Sands decision provides several important clarifications for policyholders with D&O coverage:

• Insurers must conduct claim-by-claim analysis. Insurers cannot deny coverage for an entire lawsuit simply because one cause of action may fall within a policy exclusion. Each cause of action must be analyzed separately to determine whether coverage exists.

• Contractual liability exclusions do not automatically bar coverage for all claims. Even when an underlying lawsuit includes claims for breach of contract, other causes of action—such as fraud or quantum meruit—may not “arise out of” the express contract and, therefore, may not be subject to contractual liability exclusions.

• Policy definitions of “Claim” do not override substantive coverage analysis. The fact that a liability policy may define “Claim” broadly to include an entire “proceeding” does not permit insurers to treat all causes of action within that proceeding as a single, unified claim for purposes of applying exclusions.

Conclusion

The Ninth Circuit’s decision in Las Vegas Sands rejects the “all-or-nothing” coverage denial approach to D&O coverage. By requiring claim-by-claim analysis and refusing to allow a potentially single excluded cause of action to taint coverage for an entire lawsuit, the Ninth Circuit upheld important protections for policyholders. Companies facing coverage disputes under liability policies should carefully review whether their insurers have properly analyzed each distinct claim and should be prepared to challenge blanket denials that fail to account for potentially covered causes of action.

For more information, please contact:

Josh Sohn  Partner  +1 212.590.5442  jsohn@crowell.com

Rachel Stevens  Senior Counsel  +1 212.590.5430  rstevens@crowell.com

Caitie Young  Senior Counsel  +1 312.379.4294  caitieyoung@crowell.com

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This alert is for informational purposes only and does not constitute legal advice.