nystateMany D&O insurance policies contain specific prior litigation exclusions precluding coverage for claims made during the policy year related to proceedings commenced prior to the policy inception. A question that can arise is the issue of what type of prior proceedings or actions triggers this exclusion. The Second Circuit recently considered whether a Maryland attorney general’s office’s letter threatening that it “may” bring an enforcement action triggered an exclusion precluding coverage for a claim “involving” any prior “demand, suit or other proceeding.” In a March 7, 2016 summary order (here), the appellate court, applying New York law, affirmed the district court’s ruling that the AG’s prior letter was a “demand,” and therefore that the policy unambiguously precluded coverage for the insured’s defense fees incurred in a later U.S. Department of Justice action.



Edward Morris Weaver is the former CEO of Multivend, LLC. He was the target of a criminal investigation brought against him by the U.S. Department of Justice. Weaver sought coverage from Multivend’s D&O insurer for his attorney’s fees incurred in defending against the DOJ action.


The insurer denied coverage for Weaver’s fees, contending that the Policy excluded coverage for the DOJ action because it related to the same facts and circumstances underlying a November 26, 2007 letter that Multivend received from the Maryland Attorney General’s office, which the company had received prior to the policy’s February 20, 2008 inception date.


In asserting this position, the insurer relied on Section IV.A.2.a of its policy, which excludes coverage for “any Claim … in any way involving … and demand, suit or other proceeding pending … against any Insured on or prior to [February 20, 2008], or any Wrongful Act, fact, circumstance or situation underlying or alleged there.”


The Maryland AG’s letter stated that it had been sent  in order for the AG’s office to determine Multivend’s compliance with the Maryland Business Opportunities Sales Act. The letter required that Multivend provide certain documents and information, but also that Multivend “acknowledge in writing that it will immediately cease all offers and sales of the Vendstar business opportunity to Maryland residents.” The letter stated that these requests were made pursuant to the AG’s authority to “investigate and take action against any person who violates the act, including by bringing a civil action. The letter did not say that Multivend was in violation of the act, but it did say that Multivend’s “failure to respond may result in more formal legal action.”


After the carrier denied coverage for his legal fees in the DOJ action, Weaver sued the insurer alleging breach of contract and seeking a judicial declaration that his legal fees were covered under the policy. The district court granted the insurer’s motion for summary judgment and Weaver appealed. On appeal, Weaver did not dispute that the DOJ action and the Maryland AG’s office’s letter involved the same facts and circumstances. Rather, he argued that the AG’s letter was not a “demand” within the meaning of the policy.


The March 7 Opinion

In a March 7, 2016 summary order, a three–judge panel of the Second Circuit affirmed the district court, holding that the AG’s letter was a “demand” within the meaning of the exclusion, and therefore that coverage was precluded under the exclusion.


The appellate court first noted that the policy did not define the term “demand.” The court said that under New York law “a demand requires an imperative solicitation for that which is legally owed, as distinguished from a request carrying no legal consequences.” The court found that the Maryland AG’s letter “satisfies these requirements.” In reaching this conclusion, the court noted that the letter “set forth the Division’s request under a claim of right, including its entitlement to the documents identified therein, and put Multivend on notice of the legal consequences of any failure to comply.”


The court rejected Weaver’s argument that the letters request to Multivend that it “please confirm whether the company agrees to voluntarily cease” its offers and sales rendered the letter merely precatory. The court cited prior cases holding that a demand may be couched in polite language, noting that all that is required is the assertion of the right and a request for compliance. The letter, the court noted, was not a mere request for information, but rather made it clear that there would be consequences for noncompliance.


The court concluded that because the Maryland AG’s letter constituted a “demand” as a matter of New York law, the exclusion unambiguously excluded coverage for Weaver’s defense of the DOJ action on the grounds that it involves the same facts and circumstances as the letter, which predated the policy’s prior and pending claims date.



Under the policy language at issue and in light of the meaning under New York law of the term “demand,” this outcome of this case arguably is no surprise. However, there is at least one perspective from which the court’s analysis is at least a little bit troubling. That is, the prior letter may be a “demand” sufficient to trigger the policy’s prior and pending litigation exclusion here, but it could be argued that the reverse proposition is not true; that it, at least based on the definition of the term Claim typically found in most D&O insurance policies at the time these issues arose, the Maryland AG’s offices letter would not have been sufficient to constitute a Claim and trigger coverage.


The Maryland AG’s letter requested the provision of documents and information; requested that the company confirm in writing that it had ceased its sales activities; and threatened possible future legal action if the company did not comply. If Multivend had submitted this letter at the time to its D&O carrier under the then-applicable D&O policy, the carrier would likely, given the prevailing definition of the term Claim found in most policies then, have taken the position that the letter was not a Claim. In other words, as this case ultimately played out, coverage was precluded under Multivend’s later policy because of an event that would not have triggered coverage under the prior policy.


The response to this concern is of course that even if the letter would not have triggered coverage under the prior policy, the letter would have been recognized as a circumstance that may give rise to a claim. Had Multivend submitted the letter at the time under its then-applicable D&O insurance policy, coverage for the subsequent claim would have been preserved under that prior policy, because the subsequent claim would have related back to the date of the prior notice of circumstances.


A specific concern that occurred to me as I read this opinion is the fact, noted by the court, that the policy does not contain a definition of the term “demand.” This case underscores that the meaning of the term is not necessarily self-evident. This case also shows that serious questions can arise on the question whether or not a specific proceeding or action represents a “demand.”


I could imagine an argument that the prior and pending litigation exclusion shouldn’t even refer to a “demand” and that the exclusion should preclude coverage only if the prior matter was a “suit or legal proceeding.” There may be something to this contention. However, I think the answer to this concern is the fact that, as apparently could have been the case here, a “demand” would represent a circumstance from which a claim could later arise. Because a prior demand of this type would represent a circumstance, it appropriately should be linked to the policy at issue at the time, and a subsequent claim relating to the same circumstance should related back to the prior policy, not a later policy in place at the time when the claim finally does arise.


A March 21, 2016 memo from the Bressler Amery & Ross law firm about the Second Circuit’s ruling can be found here.


For a discussion of the issues that can arise under the prior and pending litigation exclusion when a lawsuit is filed in one policy period but not served until a subsequent policy period, refer here.


About Supreme Court Nominee Merrick Garland: President Obama’s nomination of Merrick Garland to the fill Justice Antonin Scalia’s seat on the U.S. Supreme Court has become a political issue of a kind on which I will not comment on this site. However, among all the disputes, there is one issue that should be beyond question – that is that Garland is a highly qualified candidate. Indeed, according to a March 21, 2016 Baltimore Sun op-ed column (here), written by my  good friend and distinguished Washington attorney Christopher Wright, Garland is the best prepared Supreme Court nominee in nearly four decades.


Wright, who is now an attorney in private practice, has served in a number of important positions, including General Counsel of the Federal Communications Commission, and as a deputy in the U.S. Solicitor General’s office. (Full disclosure: My wife and I have had dinner with Chris and his wife every New Year’s Eve since 1982.) Wright’s perspective on Garland’s nomination, based as it is on decades of experience with and observation of the nominee, is interesting and worth reading.