Hunton Insurance Recovery Blog

Policyholders facing coverage denials under directors and officers liability policies often hear the same refrain from insurers: because the underlying claims involve a contract, coverage is barred under a contractual liability exclusion. In The Cincinnati Insurance Co. v. Metropolis Condominium Association, No. 24-C-4328 (N.D. Ill. Mar. 31, 2026), an Illinois federal judge issued an important reminder that contract-exclusion analysis is not that simple.

Policyholders facing coverage denials under directors and officers liability policies often hear the same refrain from insurers: because the underlying claims involve a contract, coverage is barred under a contractual liability exclusion. In The Cincinnati Insurance Co. v. Metropolis Condominium Association, No. 24-C-4328 (N.D. Ill. Mar. 31, 2026), an Illinois federal judge issued an important reminder that contract-exclusion analysis is not that simple.

I. Background

The underlying lawsuit stemmed from a parking services arrangement. The policyholder, a condominium association, had a management agreement with its contractor, requiring that the contractor provide fringe benefits to certain union employees. According to the allegations, the association later asked the contractor to create a new company that would not be subject to those benefit obligations. A new entity was formed, which allowed the association to shift the parking work to that new company. The original contractor then stopped paying the benefits.

The union benefit funds filed suit. After obtaining a judgment for the unpaid benefits, the funds sued the association, asserting claims for breach of the management agreement and tortious interference with contract. The case later settled, and the association sought coverage under its D&O policy.

The insurer denied coverage and then filed a declaratory judgment action, arguing that the policy’s contract exclusion barred coverage and that the settlement was not a covered loss.

II. The Court Rejects the Insurer’s Contract Exclusion Defense

The policy excluded coverage for “any claim for any actual or alleged liability . . . under the terms, conditions, or warranties of any oral or written contract or agreement.”

According to the insurer, the exclusion applied because the underlying suit involved contractual obligations. The insurer also contended that the court should evaluate the lawsuit as a whole, rather than analyzing the individual causes of action separately. Because the lawsuit included breach of contract claims, and the policy defined “claim” as “a civil proceeding commenced by the filing of a complaint or similar pleading,” the insurer asserted that the entire proceeding—not just the breach of contract claims—was excluded.

The court rejected that approach.

Central to that decision was the presence of a tortious interference claim. Yes, that claim required the existence of a contract. But the association’s alleged liability was not liability under the contract itself. Instead, it arose from the association’s own conduct in allegedly interfering with the contractual relationship between the contractor and the union funds. The association was not even a party to the contract at issue.

• Policyholder Takeaways

This case is a useful reminder that contract exclusions should not be applied mechanically just because a contract appears in the underlying allegations. Key takeaways for policyholders include:

• A contract exclusion does not automatically bar coverage simply because the complaint involves a contract.
• Policyholders should analyze each cause of action separately, rather than accept the insurer’s characterization of the case as broadly “contract-based.”
• Exclusionary wording matters, with small variations materially impacting the availability and scope of coverage. The exclusion in Metropolis applied only to claims “for” contract liability, but the outcome may have been different under broader “arising out of or in any way involving” lead-in language.
• Pay attention to carve-outs. Non-contract or quasi-contract theories may provide a path to recovery if they seek liability independent of contractual obligations.
• Be proactive. Overcoming broad exclusions at the point of claim is often too late. Instead, assess exclusions and other limiting language at each placement and renewal and negotiate narrower language to avoid surprise denials, including for valuable defense coverage.

The Metropolis decision reinforces a basic but important point: a claim involving a contract is not necessarily a claim for liability under that contract subject to a D&O policy’s contractual liability exclusion.