(Article from Insurance Law Alert, May 2019)
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The Ninth Circuit ruled that a district court erred in dismissing breach of contract claims against a D&O insurer, finding that issues of fact exist as to whether a demand letter against the insured company constituted a “claim” first made outside the policy period. Kelly v. Starr Indem. & Liab. Co., 2019 WL 1895825 (9th Cir. Apr. 29, 2019).
Scott Kelly and John DeWald (“Plaintiffs”) operated a real estate investment firm. Kenneth Brehnan loaned Plaintiffs money in exchange for promissory notes. In 2010, Brehnan sent a demand letter, seeking payment of amounts due and warning that he “would like to try not to proceed with legal remedy . . . as being recommended by my legal team.”
In May 2011, Plaintiffs applied for and obtained a claims-made D&O policy issued by Starr. In November 2011, Brehnan issued a second demand letter warning of his intention to assert claims against Plaintiffs. In August 2012, Brehnan filed suit. Starr disclaimed coverage. After Plaintiffs settled with Brehnan, they sued Starr, alleging breach of contract and negligence. A California district court granted Starr’s summary judgment motion, finding that the insurer had no duty to defend or indemnify because the initial Brehnan demand letter was a claim first made prior to inception of the policy.
The Ninth Circuit reversed, finding issues of fact as to whether the demand letter was a “claim.” The court explained that the demand letter was not necessarily a “claim . . . against such Insured Person for any Wrongful Act” because it was not clear that the demand letter alleged any wrongful acts. The court stated: “Brehnan demanded money owed pursuant to contracts with Plaintiffs’ companies, which at most establishes a question of fact whether the claim would be covered by the Policy.”
The Ninth Circuit also declined to uphold the dismissal of Plaintiffs’ claim on the basis of material misrepresentations in the policy application. It reasoned that Plaintiffs’ failure to disclose the initial demand letter in the application did not constitute a material misrepresentation because issues of fact exist as to whether the demand was a “circumstance[] that might lead to potential claims.”