HNRK Coverage Corner

On March 21, 2024, the Fifth Circuit issued a decision in SXSW, L.L.C. v. Federal Ins. Co., Case No. 22-50933, holding that a liability policy’s contract and professional services exclusions did not bar defense coverage for a class action lawsuit on behalf of ticket holders seeking refunds for a festival canceled in the early months of the Covid-19 pandemic.

In the class action, SXSW, which hosts a yearly festival in Austin, Texas, faced ticket holder claims for breach of contract, as well as unjust enrichment and conversion, arising from its refusal to give refunds (as opposed to ticket deferrals and half-price tickets to further festivals).  The policy contained standard exclusion for claims “based upon, arising out of or in consequence of any liability in connection with any oral or written contract or agreement to which an Organization is a party.”

The district court found that the exclusion precluded coverage for all the claims in the class action, adopting the insurer’s argument that the exclusion applies—even to non-contract causes of action—so long as the existence of a written contract is a “but-for cause of the litigation.”  Under this interpretation, coverage was barred because “[w]ithout the ticket purchase contracts, no purchaser litigation would have ever occurred.” The Fifth Circuit reversed, finding that under Texas law, the insured’s reading of the exclusion—focusing not on but-for causation but on “whether the claims in the complaint alleged liability under a contractual obligation—was “plainly reasonable” and therefore must control “even if the insurance company’s reading is better.” 

Because the unjust and enrichment and conversion claims were not contract-based, the exclusion did not apply to those claims. And because the complaint had at least one covered claim, the insurer was required to defend the entire lawsuit—the standard rule for a duty to defend policy.