In a January 9, 2015 opinion (here), the Eighth Circuit, applying Missouri law, held that there was no coverage under either of two successive professional liability insurance policies issued by the same insurer for a claim against its insured, LSi-Lowry Systems, because the claim was first made before the inception of the second policy and because LSi had not given timely notice of claim under the first policy. The appellate court rejected LSi’s argument that its email exchange with a dissatisfied customer during the policy period of the first of the two policies did not constitute a claim.
Background
LSI sold Hodell-Natco Industries business software and software support services. The software went live on March 1, 2007 and software performance issues immediately emerged. In a lengthy series of emails that followed between the two companies, Hodell complained about the performance issues and demanded that LSi remedy the defects. Within days, Hodell threatened legal action. On April 27, 2007, Hodell sent emails asking “who will pay for damages” and advising that the company had retained legal counsel. On June 25, 2007, Hodell demanded that LSi correct the problems “or reimburse Hodell-Natco for the expense.”
On July 24, 2007 Hodell’s lawyer sent LSi a letter stating that the company is “compelled to declare [LSi] in material default of their agreements,” advising that Hodell “will pursue all legal and equitable remedies available to us,” and demanding that LSI have their attorneys contact Hodell’s counsel in order to “discuss an amicable resolution to this matter.” LSi acknowledge receipt of the letter, asking “You are asking for remedies (ie money?) Correct?”
On January 23, 2008, Hodell sent LSi an email stating “We are offering you the chance to resolve this situation by refunding the TOTAL funds we’ve paid to LSi,” adding “Don’t you carry professional liability insurance for this type of issue? …In an effort to avoid a dragged-out lawsuit, we made a proposal to resolve this matter in a manner that gave us a small amount of relief, far short of our total cost.”
On November 21, 2008, Hodell filed a lawsuit against LSi in the Northern District of Ohio asserting claims for fraud, breach of contract, negligence and negligent misrepresentation arising from the performance issues with the software. On December 8, 2008, LSi first notified its professional liability insurer of the Hodell’s claims.
LSi had two successive professional liability insurance policies issued by the same insurer. The first was issued for the policy period April 23, 2007 to April 23, 2008; the second was effective from April 23, 2008 to April 23, 2009. Both policies required LSi to provide notice during the policy period of any “claim made against [it]” or “any circumstance that could reasonably be expected to give rise to a claim.” In the 2007 policy, a “claim” was defined as “a demand receive [sic] by the Insured for money, including the service of suit or institution of arbitration proceedings involving the Insured.” In the 2008 policy, the definition of a “claim” changed to “a demand received by you for money or services, including the service of suit or institution of arbitration proceedings involving you arising from any alleged wrongful act.” (Emphasis added).
The insurer denied coverage for Hodell’s lawsuit against LSi and instituted an action in the Eastern District of Missouri seeking a judicial declaration that neither of its policies provided coverage for the lawsuit. The district court granted the insurer’s motion for summary judgment, agreeing with the insurer that LSi did not provide timely notice of claim during the policy period of the 2007 policy, when, the district court held, the claim was first made. LSi appealed.
The January 9 Opinion
On January 9, 2014, in an opinion by Judge Jane Louise Kelly for a unanimous three-judge panel, the Eighth Circuit affirmed the district court, holding that there was no coverage for the claim under either of the two professional liability insurance policies.
The district court had concluded there was no coverage under the 2007 policy because LSi did not give notice of claim or potential claim to the insurer within the 2007 policy period. The appellate court said “We agree with the district court,” quoting the district court’s statement that “by the plain language of the 2007 policy, there is no coverage.”
The district court also found that there was no coverage under the 2008 policy because it concluded that the email communications between LSi and Hodell during the period March 2007 and April 23, 2008, when the 2008 policy incepted, constituted a claim. The appellate court said, quoting with approval from the district court opinion, “We agree with the district court that the communications ‘show that Hodell blamed LSi for the functionality problems of the software, requested that LSi fix the issues, and expected LSi to pay the associated costs.’”
The appellate court also rejected LSi’s argument that the district court had erred in relying on the definition of “claim” in the 2008 policy – which included “a demand for money or services” – but rather should have analyzed the question using the definition of “claim” in the 2007 policy, which defined a claim solely as “a demand for money.” LSi argued that Hodell did not make a claim against LSi during the 2007 policy period because Hodell did not make a specific demand for money.
The appellate court said “As an initial matter, we question whether the definition of a claim in the 2007 policy would apply when determining coverage under the 2008 policy.” But, the court added, in any event, the term “claim” in both policies included a “demand for money” within the definition. The court reviewed the various statements in the email communications and concluded that “Regardless of which definition applies, the result is the same: The communications between Hodell and LSi prior to the date coverage began under the 2008 policy constituted a ‘demand for money’ and therefore amounted to a ‘claim.’”
The appellate court also rejected LSi’s contention that the email correspondence at most reflected Hodell’s dissatisfaction with LSi’s performance of its contract, which would not be covered under the policy, rather than a claim of negligence, and therefore, LSi argued it was not required to give the insurer notice of claim. The court said “While the evidence may support the assertion that Hodell believed LSi had breached its contract, Hodell made it clear to LSi it intended to pursue all legal and equitable remedies – not just a suit premised on breach of contract.”
Finally, the appellate court rejected LSi’s argument that the insurer should have been required to show that it was prejudiced in order to rely on the LSi’s failure to give timely notice as a defense to coverage. The appellate court said that “Missouri law does not require an insurer to show prejudice under a claims made policy.”
Discussion
It is a common misunderstanding for those not immersed in insurance terminology that a claim is a lawsuit and that if there isn’t a lawsuit there isn’t a claim. Just the other day, the general counsel of one of my clients contested my suggestion that his company should give notice of claim to its insurers, telling me that there was no need to give notice because no lawsuit had been filed or served. (I managed to persuade him otherwise.)
Most liability policies define the term “claim” more broadly than just a lawsuit. Indeed, in recent years, there has been a steady evolution of policy language broadening of the definition of the term “claim.” The general industry view is that a broader definition of the term claim is in the policyholder’s interests. But this case is a reminder that if the policy’s definition of claim has been met, the definition has been met for all purposes, including for purposes of the determination of the “claims made” date. In this instance — as in the case I discussed last week (here) where service of a subpoena prior to the policy period was held to be a claim and to establish the date on which a claim was first made — a broader definition of the term “claim” can in some circumstances wind up precluding coverage for the policyholder.
It is pretty clear that the district court and the appellate court thought that LSi had sat on its rights. The email correspondence in 2007 and early 2008 does reflect a steady stream of threats of litigation and demands for recompense. The email chain also reflects the claimant’s query – somewhat ironic in retrospect – asking whether LSi had professional liability insurance for this sort of dispute. I will say that this case is a good illustration of the reason for my standard rule of thumb about giving notice , which everyone around me has heard me say a million times, and that is – always give notice. No matter what, put the notice in and worry later about whether there is coverage or what the impact of the notice will be on the renewal.
Just the same, there is something frustrating to me about the outcome of this case. The carrier was on the risk throughout the period of the dispute and when the lawsuit was filed. This isn’t a case where the coverage had moved to a different carrier between the first policy period and the second policy period (which was an issue in the case about the SEC subpoena, which I discussed in a post last week). The carrier here had been paid two annual premiums to provide coverage for exactly the kind of lawsuit that was filed against LSi. To be sure, the appellate court said that under applicable law the carrier did not have to show prejudice in order to be able to deny coverage for the untimely notice, but it does seem unsatisfying that the carrier is off the hook for a process delay that caused no harm. The policyholder is deprived of the coverage for which it paid through a simple failure to recognize that circumstances amounted to a claim under the policy though the delay in giving notice caused no harm.
In the end, this decision is a reminder that under a liability policy, both the policyholder and the insurer have duties. A liability insurance policy involves more than just an insurer’s duty to pay certain kinds of losses under certain circumstances. It also involves certain duties for the policyholder, too, including the duty to give timely notice in the event of a claim. The policyholder’s provision of timely notice is a prerequisite to coverage. As harsh as it may seem, the risk is on the policyholder that the policyholder might fail to recognize that a given set of circumstances involves a claim and therefore fail to give timely notice. The lesson is that policyholders must be diligent in protecting their interests. (My earlier post about policyholder’s obligations in the insurance policy can be found here.)