Unlike the simple timing element required by occurrence-based liability insurance policies, claims-made liability policies are triggered when an insured receives notice of a claim. Insurers then often dispute whether the notice-triggering event constitutes a “claim” at all. And there is no nationwide consensus in the courts. James R. Murray and Jared Zola of the Dickstein Shapiro L.L.P. law firm explain how claims are defined under these circumstances.

An issue frequently raised in coverage disputes involving claims-made liability insurance policies is determining whether certain pre-lawsuit events or disputes constitute a “claim” sufficient to trigger coverage.

Unlike occurrence-based liability policies that respond in the policy year or years during which the coverage-triggering event occurred (e.g. the years in which third-party property was damaged in an environmental coverage claim), a claims-made liability insurance policy is triggered upon the insured's receipt of a claim.

Upon an insured's providing notice of a claim, its insurers may dispute whether the notice-triggering event constitutes a “claim” at all, or whether some earlier event constituted a “claim” of which the insured was obligated to provide notice to its insurer.

While there is no consensus among courts across the country, in the absence of a clear answer, courts overwhelmingly accept the policyholder's business judgment of what event constitutes a claim to maximize coverage.

A potential policy definition of “claim” may include a civil proceeding for monetary or nonmonetary relief commenced by service of a complaint or similar pleading. Some policies include receipt of written demands for money in the “claim” definition.

%%BREAK%%

Frequently, policies do not define the term “claim,” in which case courts may look to dictionary definitions to determine the common meaning. Dictionary definitions of “claim” are exceedingly broad, e.g., “a demand for something due or believed to be due”; or “something that is claimed,” as defined by the Merriam-Webster Dictionary.

Given significant variations in policy “claim” definitions and the lack of defined terms in many instances, the point at which a dispute ripens into a “claim” that triggers coverage is frequently disputed.

A Delaware court in AT&T Corp. vs. Faraday Capital Ltd. was called upon to decide the number of “claims” presented in two lawsuits under a directors' and officers' policy. Explaining the crux of the issue, the AT&T court held that: “The policy definitions of "claim' include "a written or oral demand for damages...' and a "civil...proceeding initiated against any of the assureds.'”

The AT&T court stated: “Thus, here, as in (Home Insurance Co. of Illinois [New Hampshire] vs. Spectrum Information Technologies Inc.), there may be a "claim' that is not a civil proceeding (where, for example, there is simply a written demand for money damages) and a civil proceeding that is not a "claim' (where, for example, the civil proceeding seeks relief for the same wrongs that were presented in a prior written demand). The term "claim' means a demand for money damages or other relief, regardless of the form in which that demand is presented.”

%%BREAK%%

In a prior case decided under Illinois law, the court in Minuteman International Inc. vs. Great American Insurance Co. was faced with determining whether a U.S. Securities and Exchange Commission subpoena served together with a formal SEC order of investigation constituted a claim. There, the SEC order made specific allegations of wrongdoing, stating: “SEC staff had reported information indicating that, in connection with securities transactions, Minuteman officers and others may have made false or misleading statements, failed to keep accurate records and accounts, and failed to implement and maintain a system of internal accounting controls.”

Ultimately, the Minuteman court determined that the “investigative proceedings at issue in the present case constituted a claim as that term is used in the policy.”

Juxtaposed to Minuteman is the federal district court's decision in St. Paul Mercury Insurance Co. vs. Foster. There, St. Paul argued that the insureds breached their duty to give it notice of the claims as soon as practicable, thus invalidating coverage. Specifically, the insurer contended that a pre-lawsuit letter sent on behalf of the soon-to-be underlying plaintiffs to the insured seeking information and inquiring about certain breaches of fiduciary duties constituted a claim under a D&O policy.

The policy defined “claim” as: “1. a written demand against any insured for monetary damages or other relief; 2. a civil proceeding against any insured commenced by the service of a complaint or similar pleading; 3. a criminal proceeding against any insured commenced by a return of an indictment; or 4. a formal civil administrative or regulatory proceeding against any insured commenced by the filing of a notice of charges, formal investigative order or similar document; for a wrongful act, including any appeal therefrom.”

%%BREAK%%

St. Paul argued that the request for information constitutes “other relief” within the meaning of a “claim” under the terms of the policy. The court disagreed, stating that the “standard urged by St. Paul would be bad public policy” and would create uncertainty with regard to the notice requirement, “as well as result in a flood of notices of "claims' based on requests for information or efforts at intimidation by attorneys that may never materialize into demands against any insurance policies.”

The court in Minuteman addressed the different outcome from the St. Paul case by reaffirming the widely accepted proposition that in determining whether a demand for information constitutes a claim, any doubts should be resolved in the insured's favor. The Minuteman court, in distinguishing St. Paul, found: “Also, unlike the present case and the other cases that have been cited, in St. Paul, finding that there was not a claim favored the insured, not the insurer. Thus, unlike the present case, any doubts should have been resolved in favor of finding no claim.”

Accordingly, even though St. Paul held that a pre-lawsuit investigatory demand was not a “claim” and Minuteman held that a subpoena and accompanying SEC order of investigation was a “claim,” both courts agreed on one critical point—the insured's determination was correct, which led to decisions in favor of maximizing coverage.

%%BREAK%%

Other cases include Polychron vs. Crum & Forster Ins. Cos., which found coverage under the “ordinary meaning test” of “claim” and read the policy in favor of the policyholder; Richardson Electronics Ltd. vs. Federal Insurance Co., which found service of a subpoena constituted a claim because “it would frustrate the point of an executive risk insurance policy to require (a demand for money) unless it were expressly indicated in the policy language”; and MBIA Inc. vs. Federal Insurance Co., which found that an investigative subpoena constituted an “investigative order,” which was included in the policy's “claim” definition.

These cases recognize the realities of an insured's business by deferring to the insured's judgment. The insureds involved in everyday business disagreements and disputes are better-positioned than an insurer in determining when such a matter rises to the level of a “claim” for which the insured will seek coverage.

Also inherent in this line of cases is the recognition that insurers frequently argue both sides of this issue in an effort to avoid their coverage obligations to the insureds. If an insured provides notice of a pre-lawsuit event, its insurer frequently contends that the event does not constitute a “claim.” However, if an insured determined that the same pre-lawsuit event did not yet rise to the level of a “claim” under the policy and later gives notice of a lawsuit arising from the same factual nexus, for example, its insurer frequently contends that coverage does not exist for the subsequent lawsuit because the insured should have provided notice of the earlier event because it was a “claim.”

%%BREAK%%

In an attempt to avoid this untenable position, courts frequently defer to the insured's judgment by finding in favor of maximizing coverage.

James R. Murray is the deputy leader of Dickstein Shapiro L.L.P.'s Insurance Coverage Group in Washington. A nationally recognized trial lawyer with more than 25 years of courtroom experience, he has represented corporate policyholders on matters involving nearly every line of insurance. He can be reached at (202) 420-3409 or murrayj@dicksteinshapiro.com.

Jared Zola is a New York-based partner and deputy practice leader in Dickstein Shapiro L.L.P.'s Insurance Coverage Practice. His practice focuses on representing corporate policyholders in insurance coverage litigation, as well as negotiating settlements with prominent property and casualty insurers. He can be reached at (212) 277-6684 or zolaj@dicksteinshapiro.com.