A breach of fiduciary claim is not a breach of contract claim and is therefore not subject to exclusion from coverage under a directors and officers liability insurance policy, a federal appeals court said Tuesday, in affirming a lower court ruling in favor of a water utility.

Allied World Specialty Insurance Co. issued a WaterPlus package insurance policy to Spicewood, Texas-based Windermere Oaks Water Supply Corp. that included coverage for public officials and management liability, according to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Windermere Oaks Water Supply Corp. et al. v. Allied World Specialty Insurance Co.

At issue in the case is the coverage’s contractual liability exclusion, the ruling said. Three members and partial owners of Windermere filed suit against the utility, its officials and others alleging Windermere sold a valuable tract of land at Spicewood Airport to a commercial entity controlled by a Windermere board member for “pennies on the dollar,” according to the lawsuit.

The litigation contends Windermere’s losses because of the sale and a subsequent transaction have been more than $1 million, resulting in rate hikes and fee increases. It charges Windermere with exceeding its powers, and its board of directors with exceeding its authority and breaching its duties.

After Allied World refused to provide a defense in the litigation, Windermere and its board of directors filed suit against the insurer. The U.S. District Court in Austin, Texas, ruled in the policyholders’ favor, and was affirmed by a three-judge appeals court panel.

“Allied World contends that the district court was wrong to decline to apply the contractual liability exclusion to this case…. But the Underlying Lawsuit is not a suit for breach of contract. As Plaintiffs rightly point out” the underlying lawsuit’s focus is rather plaintiffs’ purported breach of their fiduciary duties, which is established by law, not by contract, the ruling said, in affirming the lower court.

Windermere attorney Douglas P. Skelley, a member of the Shidlovsky Law Firm PLLC in Austin, Texas, said in a statement, “Our clients and our firm are pleased with the Court's decision and appreciative of the Court’s quick resolution of the appeal.”

Allied World’s attorneys did not respond to a request for comment.