Most professional liability insurance policies are written on a claims-made basis – that is, they cover only claims first made during the applicable policy period. A recurring issue under these kinds of policies is the question of when a claim was first made. This question can be particularly complicated if there were pre-policy period communications about a subject that subsequently results in a lawsuit. The question is whether the claim was first made at the time of the prior communications or at the time of the subsequent lawsuit. Two recent cases reached different conclusions about whether not pre-policy period communications represented a claim. As discussed below, these diverging decisions raise interesting issues.
The November 14, 2017 District of Colorado Decision
First, in a November 14, 2017 decision, District of Colorado Judge R. Brooke Jackson held that a pre-policy period letter from an employee of the insured company demanding that the company reconsider its decision to eliminate his position represented a claim under the policy, and that the employee’s subsequent related lawsuit was deemed first made at the time of the employee’s pre-policy period demand. A copy of Judge Jackson’s opinion can be found here. A November 22, 2017 post on the Wiley Rein law firm’s Executive Summary Blog about the opinion can be found here.
In his pre-policy period letter, the employee had written to the company’s board of directors, its CEO, and its President. The employee asserted his belief that in moving to eliminate his position, the company had violated federal statutes protecting against age discrimination. In his letter, the employee asked the parties to “reflect on what has taken place and why,” and that the parties, “ensure that my salary and benefits are not interrupted until this matter is fully resolved.” The employee further requested that the company “reconsider the decision to terminate my employment because of my age or any unjustified or unlawful reason” and asked that all parties “quickly get together and determine if my continued employment may be mutually addressed in a manner reflective of all issues to avoid litigation.” The employee concluded by saying that if the parties did not “pursue the steps outlined above,” he would “pursue all appropriate remedies against everyone involved.”
Later, and during the policy period of the company’s EPL policy, the employee filed an EEOC charge and a lawsuit related to the same age discrimination allegations he had raised in his prior letter. The company tendered the EEOC matter and lawsuit to its EPL carrier. The EPL carrier denied coverage for the EEOC matter and lawsuit, arguing that the prior demand letter constituted a claim, and that the subsequent EEOC matter and lawsuit were interrelated with the prior demand and therefore were first made prior to the policy period of the EPL policy. The insurer filed an action seeking a declaratory judgment that its policy provided no coverage for the EEOC matter and the lawsuit. The parties filed cross-motions for summary judgment.
In his November 14 opinion, Judge Jackson agreed that the employee’s pre-policy period letter constituted a claim. Judge Jackson rejected the company’s argument that the demand letter was not a claim because it was not written by a lawyer, was not clear or specific about alleged damages, and did not address a specific settlement sought. The employee’s letter, Judge Jackson said, was a “thinly veiled ultimatum.” The letter listed the specific legal violations that had occurred in relation to his termination and suggested that the letters get together to try to avoid litigation, impliedly requesting a settlement of the issues he raised while suggesting that litigation would follow if they did not reach a settlement. The fact that the employee himself wrote the letter rather than a lawyer made no difference, as the employee was a sophisticated professional who had clearly articulated the alleged legal violations he asserted.
Judge Jackson also found that the employee’s request that the company reconsider their decision to terminate his employment, ensure that his salary and benefits were not terminated, and “get together” to resolve issues without litigation represented a “written demand against an Insured for damages or other relief” sufficient to meet the policy’s definition of the term “Claim,” as it was “a request for the type of relief a court could order and a threat to seek such court-ordered relief as needed.”
The November 21, 2017 Eastern District of Washington Decision
The second of the two recent decisions is a November 21, 2017 ruling by Eastern District of Washington Judge Salvador Medoza, Jr. that a pre-policy period notice of a statutory notice of intent to sue did not constitute a claim under the a claims made insurance policy. A copy of Judge Mendoza’s opinion can be found here. A November 30, 2017 post on the Wiley Rein law firm’s Executive Summary Blog can be found here.
In June 2010, before the policy incepted, Tree Top Inc. received a letter from the Earth Liberation Front (ELF) that it intended to sue Tree Top under California’s Proposition 65 law, which is aimed at reducing the public’s exposure to chemicals by requiring warning labels on consumer product. The letter contained a paragraph stated that “Pursuant to [the relevant statutory provision], ELF intends to bring suit in the public interest against the entities in Exhibit ‘A’ 60 days hereafter to correct the violation occasioned by the failure to warn all customers of the exposure to lead.” As the court subsequently noted, the letter did not contain any settlement offers or other demands for relief.
On September 2011, after the policy had incepted, ELF filed a lawsuit against Tree Top. Tree Top successfully defended the claim. Tree Top sought coverage for the costs associated with the lawsuit. The insurer denied coverage on the grounds that the pre-policy period statutory notice letter constituted a claim and that the subsequent lawsuit was interrelated to the notice letter and therefor deemed first made at the time of the notice letter. The parties filed cross-motions for summary judgment.
In his November 21 opinion, Judge Mendoza granted Tree Top’s motion for summary judgment and denied the insurer’s motion, holding that the statutory notice letter was not a claim within the meaning of the policy.
In reaching these conclusions, Judge Mendoza held that the statutory notice letter was not a claim because it was not a “written demand for money, services, non-monetary relief or injunctive relief.” He noted that the notice letter “does not contain an explicit demand for relief.” Rather the letter states that Tree Top was required to provide required warning to consumers and stated that ELF “intends to bring suit … 60 days hereafter to correct the violation.” The notice, Judge Mendoza said, “does not require a settlement or direct Tree Top to take any affirmative action”; rather “it merely provides notice of ELF’s allegations and its intent to sue.”
Judge Mendoza rejected the insurer’s argument that the letter functioned as an “implicit demand” and a “call to action.” He said that this argument requires more to be inferred from the notice “than its plain language supports.” The letter’s “past-tense language” about the company’s failure to provide the required consumer warnings and the letter’s threatened lawsuit suggests that ELF intended to bring suit for past violations. It is “not at all apparent from this language that Tree Top could have avoided suit by conforming its labels to ELF’s demands.”
Judge Mendoza did note a prior Montana court decision in which the court said that “where the alleged tortfeasor has reasonably been put on notice by the injured party that he intends to hold the tortfeasor responsible for his damages, it would indeed be anomalous to hold that a claim is, nevertheless, not made until a suit is actually filed.” While acknowledging the logic of this statement, Judge Mendoza ruled that the policy language at issue controlled. The insurer, Judge Mendoza noted, could have defined the term claim to mean any communication expressing an intent to hold the insured liable for alleged wrongdoing. However the policy at issue here defines a claim as a demand for relief and the notice sent to Tree Top contains no such demand.
The seemingly divergent conclusions in these two coverage disputes involving pre-policy period communications underscore the fact the resolution of these kinds of disputes is very fact-specific. The particulars of the two different pre-policy period communications in these two cases help to explain the different outcomes. In very simple terms, the employee letter in the first case presented an ultimatum and demand for action in order to avoid litigation. It actually was a demand letter. The notice letter in the second case did not request that Tree Top take any action to avoid the threatened litigation, it simply said that litigation was coming. There was no demand.
It is of no help to the companies involved in these disputes that the companies could have and arguably should have provided notice to their insurers at the time the prior communications were received. To the extent prior coverage was in place at that time, an insurer that was provided notice of these kinds of communications would treat the communications as a notice of circumstances out of which a subsequent claim could arise, even if the communications did not constitute claims under the relevant policies. This step would have eliminated the claims made timing problems that both of these coverage disputes involved.
Of course, I know from involvement with many policyholders over the years, the need to provide carriers with notices of these kinds of circumstances often only becomes apparent to the policyholders in hindsight. The stumbling block for many companies is that they think of claims as lawsuits. It is only when the lawsuits later arise that many companies confront the question of whether or not their insurer should have been notified of the prior communications about the dispute that led to the lawsuit.
Taken together this two cases present a cautionary lesson for all companies, which is that claims made policies involve some serious potential complications for policyholders. The best protection for policyholders against the possibility of facing a serious lawsuit without the benefit of insurance is for the company to remain attentive to the need to provide its insurer with prompt notice of all matters, even matters that may not seem to arise to the level of a claim.
It is worth noting that the potential complications involved with claims made policies can be a problem for insurers as well as for policyholders. The insurer in the second case was unsuccessful in its argument that the lawsuit filed against Tree Top had first been made prior to the policy period, and as a result the insurer was unable to avoid coverage on that basis. Insurers provide coverage on professional liability policies on claims made policies in order to provide insurance only on a narrowly circumscribed basis. However, the Tree Top case shows that there are limitations on the extent to which the claims made nature of the coverage will operate to protect the insurer. To be sure, in a difference set of factual circumstances, the fact that a statutory warning letter is not a claim could work to the policyholder’s detriment, rather that the insurer’s, as was the case here.