Legal Definitions - failure-to-perform exclusion

A failure-to-perform exclusion is a common clause found in insurance policies or contracts that limits or denies coverage for losses or damages that arise directly from a party's failure to fulfill their contractual obligations, duties, or agreed-upon standards.

Essentially, if a loss occurs because someone did not do what they were supposed to do under a contract or agreement, this exclusion prevents the insurance policy from covering that loss. It reinforces the principle that insurance is generally meant to cover unforeseen events, not the consequences of one's own non-performance or negligence in fulfilling a specific duty.

Here are a few examples to illustrate this concept:

• Example 1: Professional Services

  A marketing agency is hired by a client to run a digital advertising campaign, with a contractual agreement to provide weekly performance reports and optimize ad spend. If the agency fails to provide these reports or optimize the campaign, leading to significant financial losses for the client due to wasted ad spend, their professional liability insurance policy might contain a failure-to-perform exclusion. This exclusion would mean the insurance company would likely deny coverage for the client's claim, as the loss stemmed directly from the agency's failure to uphold its contractual duties regarding reporting and optimization.

• Example 2: Construction Contract

  A roofing company is contracted to install a new roof on a commercial building, with specifications requiring specific high-grade materials and installation techniques. If the company uses cheaper, substandard materials and shortcuts the installation process, leading to a premature roof collapse during a storm, their general liability insurance policy might invoke a failure-to-perform exclusion. The insurer would argue that the damage was not due to an unforeseen event covered by the policy, but rather the direct result of the roofing company's failure to perform its work according to the agreed-upon quality and material specifications in the contract.

• Example 3: Software Development

  A software development firm is hired to build a custom application for a client, with a clause in the contract stating that all code must pass a rigorous security audit before deployment. If the firm deploys the application without conducting the required audit, and a subsequent data breach occurs due to a known vulnerability that the audit would have identified, their cyber liability insurance policy could apply a failure-to-perform exclusion. The exclusion would prevent coverage for the costs associated with the data breach, as the loss was a direct consequence of the firm's failure to perform the mandatory security audit as stipulated in their agreement.