Most management liability insurance policies these days are written on a claims made basis - -that is, they cover claims that are first made during the policy period. But what determines when a claim is first made? A February 15, 2012 decision from the Western District of Texas and applying Texas law took a look at these in an insurance dispute arising under a condominium association insurance policy and concluded that under the facts presented the claim had first been made prior to the inception of the policy. The February 15 decision can be found here.
Deer Oaks Office Park Association is an office park condo association that owns and maintains office condos in San Antonio. Deer Park was insured under a condo association insurance policy with a policy period from January 30, 2010 to January 30, 2011. The policy included a directors and officers liability insurance extension.
Prior to the policy’s inception, Thomas Jeneby, purchased a unit in the condo development, intended to use if for medical offices. He later alleged that he indicated his intent to install an elevator in the unit to facilitate patient access. Deer Oaks later declined to approve the elevator. Jeneby contended that Deer Oaks had made misrepresentations about his ability to install an elevator. He also had complaints about Deer Oaks’ condo maintenance.
Eventually, and during the policy period of the policy, Jeneby filed a lawsuit against Deer Oaks. Deer Oaks submitted the lawsuit to its insurer. The insurer declined to provide a defense claiming that the claim had been made and that Deer Oaks had notice of the claim prior to the inception of the policy. In making this argument, Deer Oaks relied on a September 23, 2009 letter from Jeneby’s attorney to Deer Oaks, in which the attorney presented multiple complaints about Deer Park and attributing monetary losses to Deer Oaks.
Among other things, the letter stated that Jeneby is “adamant that he bout this building in reliance of the fact that he would be allowed to install an elevator.” The letter also complained about numerous maintenance problems. The stated that Jeneby’s disputes with Deer Oaks have been going on for two years “with expenses and loss of business continuing to increase.” Jeneby’s attorney concluded the letter by stating that “if I have not heard a response back from your client by October 2, 2009, then my client has instructed me to file suit in District Court.”
After the insurer declined to provide Deer Oaks with a defense against Jeneby’s lawsuit, Deer Oaks filed an action seeking a judicial declaration that the insurer was obligated to defend the claim. The parties to the insurance coverage dispute filed cross-motions for summary judgment.
The February 15 Ruling
In her February 15, 2012 ruling, Magistrate Judge Nancy Stein Nowak granted summary judgment in favor of the insurer and denied DeerOaks’ cross motion.
Deer Oaks had argued that the September 23, 2009 letter did not constitute a claim nor did it provide Deer Oaks with notice of claim. In making this argument, Deer Park relied on the fact that the policy did not define the term “Claim,” and also relied on International Insurance Company v. RSR, a 2005 decision from the Fifth Circuit, to argue that under the circumstances of this case, a “claim” means a “demand for money, property or legal remedy, and that because the letter did not explicitly demand, property or a legal remedy, it did not provide notice of Jeneby’s claims.
Magistrate Judge Nowak disagreed, saying that although Deer Oaks’ “use of available case law is resourceful,” its argument “fails.” She found that “the only reasonable interpretation” of the September 23, 2009 letter is that is “asserted a right to hold [Deer Oaks] liable for all of the costs Jeneby had spent and lost because of [Deer Oaks’] acts.” The letter’s “bottom line,” the Court said, was “if you do not comply with my demands, I will sue you.” The Court concluded that “under any construction, the letter constituted a claim,” and it also “constituted notice.” Because Deer Oaks “had notice before the effective date of the policy, the claim fell outside the policy and [the insurer] had no duty to defend.”
To a certain extent, the value of this case may be limited by the fact that it involved a policy that did not define the term “claim.” Although there was a time many years ago when it was common for management liability policies to lack a definition of the term, in more recent years it has become very uncommon for management liability policies to be issued without a definition of the term “claim.” Indeed, the reason that many insurers incorporated the term in to their policies is that they found that without a policy definition of the term, courts were inclined to infer a very broad definition of the term.
As the Magistrate Judge herself noted in discussing the Firth Circuit case on which Deer Oaks sought to rely, the appellate court had sought to apply an interpretation of the term claim that was “most favorable to the insured.” However, this dispute illustrates the fact that a broad definition of the term does not always work out in the policyholder’s favor. By applying a broad meaning to the term, the Magistrate Judge had little trouble determining that the letter sent prior to the policy’s inception was a “claim,” and therefore that the claim had first been made prior to the policy period.
The outcome of this case is very fact specific, turning as it does in part on the unusual absence of a definition of the term “claim” in the policy, as well as the other specific circumstances involved. There is one very peculiar aspect of the letter that does make this a troublesome case just the same. Oddly, the September 23, 2009 letter does not appear to demand anything from Deer Oaks. The letter recites Jeneby’s grievances, states that Jeneby has incurred costs, and threatens a lawsuit. But as far as I can tell, the letter does not expressly demand anything in particular from Deer Oaks.
The Magistrate, applying the Fifth Circuit case law, found that the term “claim” could include “the assertion of a right to hold the insured liable,” notwithstanding the absence of any explicit demand. But I wonder whether this letter would be sufficient to constitute a claim under the usual policy definition of a claim as “a demand for monetary damages or non-monetary relief.”
In any event, this case does illustrate the point that broad definitions and interpretations do not always work to the policyholder’s advantage, and that what the position that any particular policyholder may want to take in any specific case may well depend on the actual circumstances involved.
One final note. The court’s opinion, and apparently the parties’ arguments, seemed to focus on whether or not Deer Park had notice of claim. This seems odd to me. The issue from my perspective seems to me to be when the claim was first made. The question of notice seems beside the point.
In Case You Missed It: If you did not see my blog post yesterday on the meaning of “relatedness” in the context of a D&O insurance policy, please refer here.
Yes, the Title Says it All, and, No, I Am Not Making This Up: I am quite sure that no reader of this blog would ever stoop so low as to click on a link to an article captioned “Japanese Fart Scrolls.” Certainly, no one here at The D&O Diary would stoop so low as to try to extract humor value from a web site entry entitled “Japanese Fart Scrolls.” Our motto: Dignity, always dignity.