The Second Circuit recently affirmed a decision by a New York district court that the contract exclusion in a D&O insurance policy applied to all of the causes of action in an underlying action, including a cause of action for declaratory relief stemming from a shareholder agreement. See Paraco Gas Corp. v. Ironshore Indem., Inc., No. 23-1069-cv, 2024 U.S. App. LEXIS 14628, at *9 (2d Cir. June 17, 2024).

The insureds were a CEO father and board member daughter duo of a closely held family corporation that distributes propane fuel and equipment. See id. at *2 n.1. The underlying lawsuit was brought by the CEO’s brothers and alleged that the CEO had transferred shares in violation of the terms of two shareholder agreements. See id. at *2. Coverage for the underlying lawsuit was denied on the grounds that the 10 causes of action fell under the contract exclusion in the policy, which excluded payment for loss “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability. . . under any contract, agreement, employment contract or employment agreement.” See id. at *3-4. When the insureds later brought suit against the insurer for declaratory judgment, the district court dismissed the suit pursuant to the contract exclusion. See id. at *2. The insureds appealed, conceding that nine of the underlying causes of action were excluded from coverage but arguing that the contract exclusion did not apply to Count IV for declaratory relief related to one of the shareholder agreements.  See id. at *4.

On appeal, the Second Circuit affirmed. It focused on the plain language of the policy, noting that the “arising out of” language in the policy has historically been interpreted by New York courts in a broad manner. See id. at *4. Focusing on Count IV, which sought a declaration that an agreement signed by the CEO purporting to terminate one of the shareholder agreements was invalid, the court found that the contract exclusion clearly applied under the “but for” test. See id. at *6. “But for” the contractual obligations created by the shareholder agreements, Count IV would not have been a viable cause of action. As the court put it, “while Count IV is not a breach of contract claim per se, it certainly has a causal relationship to [the insureds’] contractual obligations arising out of the [shareholder agreements].” See id. at *7.