(Article from Insurance Law Alert, January 2015)
For more information, please visit the Insurance Law Alert Resource Center.
Two courts recently addressed the question of when a claim is first "made" or "filed" for purposes of coverage under a claims-made policy, and both concluded that there was no coverage because the claims at issue were made prior to the inception of the policy periods.
A Massachusetts federal district court ruled that an insurer had no duty to defend a Securities and Exchange Commission ("SEC") Enforcement Action and related subpoenas because the investigation was all part of a single "claim" that was first made prior to the issuance of the policy. BioChemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493 (D. Mass. Jan. 6, 2015).
In May 2011, the SEC commenced an investigation by Formal Order of BioChemics and its officers. The SEC issued subpoenas. During this time frame, the company was insured by Greenwich Insurance Company. However, beginning November 2011, BioChemics became insured by Axis Reinsurance. Shortly after the inception of the Axis policy, the SEC served additional subpoenas on BioChemics and its officers under the same SEC matter identification number and caption as the initial Formal Order and subpoenas. In December 2012, the SEC filed an Enforcement Action against the company and several individuals. Axis denied coverage, arguing that the entire SEC investigation constituted a single "claim" that was first made in May 2011 and therefore was outside the scope of policy coverage. The court agreed.
The Axis policy defined a "claim" to include any "civil, arbitration, administrative or regulatory proceeding." The policy further provided that all claims "arising from the same Wrongful Act … and all Interrelated Wrongful Acts shall be deemed one Claim and such Claim shall be deemed to be first made on the earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy … ." The court held these policy provisions, read together, supported the conclusion that all SEC actions taken against BioChemics and its officers over the two-year period were part of a single "claim." Additionally, the court concluded that the claim was first made in May 2011 (during the Greenwich policy period) and was therefore not subject to coverage under the Axis policy. Notably, the court reached this conclusion notwithstanding the fact that some of the misrepresentations alleged in the SEC enforcement complaint took place during the Axis policy period.
Along similar lines, the Eighth Circuit ruled that a professional liability insurer owed no coverage where a claim was deemed "made" during a 2007 policy period, but was not reported to the insurer until after the inception of a 2008 policy period. Philadelphia Consol. Holding Corp. v. LSI-Lowery Sys., Inc., 2015 WL 127368 (8th Cir. Jan. 9, 2015).
The coverage dispute arose out of troubled software programs developed and installed by LSi and sold to Hodell in 2007. Software-related problems arose immediately after installation. In March 2007, Hodell initiated a series of email communications with LSi expressing dissatisfaction with the software and threatening legal action. Email exchanges, including demands for reimbursement and threats of litigation, continued through July 2007. During this period, Hodell retained counsel and attempted to resolve the problems. Finally, in November 2008, Hodell sued LSi and others asserting fraud, breach of contract and negligence. Shortly thereafter, LSi notified its professional liability insurer of the claims. The insurer denied coverage under successive 2007 and 2008 policies. A Missouri federal district court upheld the insurer’s denial, finding no coverage under either policy. The Eighth Circuit affirmed.
The Eighth Circuit ruled that LSi did not give notice of a claim or potential claim within the policy period, as required by the 2007 policy’s notice provision. The court also held that there was no coverage under the 2008 policy, which provided coverage for "any claim first made against you during the policy period." The court concluded that a claim against LSi was first made prior to the April 2008 policy inception date, finding that the communications between Hodell and LSi from March 2007 through mid- 2008 constituted a claim. In particular, the court reasoned that Hodell’s complaints and demands for remediation and costs, as well as its threats to seek legal recourse, taken together, established the existence of a claim, defined in both policies to include a "demand for money." The court noted that even absent a specific dollar demand, a proposal to reach settlement to avoid legal action constitutes a demand for money. Finally, the court rejected the argument that prejudice must be established to deny coverage on the basis of untimely notice, ruling that Missouri law does not require such a showing under a claims-made policy.
For more information, please visit the Insurance Law Alert Resource Center.