Insurance Coverage for Claims Alleging Breach of Preexisting Duty: Limitations on the Eaton Vance Rule

Liability insurance covers, among other things, an insured’s legal obligation to pay damages to a third party arising out of a claim against the insured for breach of a duty owed to that third party. But what if the damages the insured becomes liable to pay – whether by settlement or court order after a judgment – constitute nothing more than amounts the insured already had a pre-existing contractual or statutory duty to pay, irrespective of whether any claim had been made alleging a breach? This latter category of damages is generally not covered by liability insurance because the insured’s obligation to pay does not result from the third-party “claim”; rather, it results from the pre-existing contractual or statutory obligation. The distinction between covered and non-covered damages for breach of a pre-existing duty is often difficult to see and even harder to explain coherently, for attorneys and judges alike.

A significant body of confusing – and sometimes inaccurate, contradictory, and inartfully worded – case law has developed on these issues. Relying on these cases, it is now relatively common for insurers to look for every opportunity to disclaim indemnity coverage for any claim seeking damages based on an alleged breach of a duty imposed by contract or statute. As a result, the “Eaton Vance rule” has expanded beyond can be justified by the policy language and moral hazard concerns from which the rule was born.

Strategies exist for protecting the policyholder's right to coverage and the insurer's concerns that it is being cast as a guarantor of performance. Getting and providing the coverage that both parties contracted for requires a more careful approach than has been utilized heretofore.

Listen as the panel of insurer and policyholder counsel discusses the complex issues surrounding insurance coverage for damages related to breach of contract claims, the “Eaton Vance rule,” and how to sort through imprecise and confusing language in the case law to brief and argue the legal issues correctly.

1. The Eaton Vance line of cases
2. Distinguishing between breach of a preexisting payment obligation vs. breach of other preexisting contractual or statutory duties that can give rise to consequential damages
3. Coverage for settlements where the insured's preexisting obligation to the claimant has not been established or admitted
4. The "moral hazard" problem and policy wording that can address insurers’ concerns
5. Strategies for policyholders
6. Strategies for insurers

The panel will review these and other important issues, including:

• What strategies exist for policyholders to prevent erroneous denial or loss of coverage from improper application of the Eaton Vance rule?
• How can insurers protect themselves against the “moral hazard” risk that has been described by courts addressing coverage for claims alleging breach of a pre-existing duty?