(Article from Insurance Law Alert, September 2021)
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Vacating a summary judgment ruling in the insurer’s favor, the Fifth Circuit held that a demand letter to the policyholder constitutes a covered “claim” and that a settlement payment constitutes a covered “loss” the policyholder was legally obligated to pay. HMI International, LLC v. Twin City Fire Ins. Co., 2021 WL 3928970 (5th Cir. Sept. 2, 2021).
HMI, an accounting and financial services provider, fell prey to a fraudulent scheme which resulted in the wire transfer of a client’s funds to a hacker. The client sent HMI a letter accusing it of negligence and demanding reimbursement. Twin City denied coverage and HMI brought suit. While that litigation was pending, HMI settled with the client. Thereafter, Twin City moved for summary judgment, which the district court granted. The district court reasoned that HMI was not “legally obligated to pay” the settlement, as required by the policy, because the client had never brought suit and because any potential underlying negligence claim was barred by the applicable statute of limitations. The Fifth Circuit vacated the ruling.
The Fifth Circuit reasoned that the district court erroneously equated “claim” with “cause of action,” explaining that a covered claim includes a written demand for money, which cannot be time barred. Additionally, the Fifth Circuit ruled that the district court misinterpreted “legally obligated to pay” to require that HMI “actually lost or would have lost” if the clients had filed suit. Under Texas law, “legally obligated to pay” can include a contractual obligation to pay through settlement. The court deemed it irrelevant that the clients never actually filed suit and that the limitations period had seemingly run on a potential negligence cause of action because “insurers that breach their duty to defend cannot challenge the reasonableness of the settlement amount.”