As the policy definition of the term “Claim” has expanded in recent years, the range of incidents and procedures for which the policyholder must provide notice to the insurer has also grown. Among the recent expansions has been the inclusion in many policies of a “subpoena” within the meaning of the term “Claim.” As a result, a policyholder’s failure to notify its insurer of a “subpoena” could imperil coverage for a later related lawsuit. However, as a federal district court recently held, applying New York law, the notice requirement is not triggered if the prior “subpoena” does not meet the professional liability insurance policy’s definition of the term “claim,” and, the court further held that the failure to notify the insurer of the subpoena did not preclude coverage for a later suit. The court’s decision sheds interesting light on a number of frequently recurring coverage issues.
This insurance coverage dispute involves the question of whether Castle Title Insurance Agency’s professional liability insurance had a duty to defend Castle Title in a lawsuit filed against the agency in 2016. The relevant facts involve two prior lawsuits to which Castle Title was not a party.
The Foreclosure Actions
In 2010, Sovereign Bank filed two foreclosure actions against Fox Island Properties, LLC. The claims alleged in the foreclosure action did not involve any allegations relating to professional services provided by Castle Title. While the foreclosure actions were pending, Sovereign assigned its interests in the disputed mortgages to SR Holdings I, LLC. In September 2012, SR Holdings obtained a judgment against Fox Island in the foreclosure actions.
The Post-Judgment Subpoena
In July 2015, SR Holdings filed a post-judgment judicial subpoena duces tecum on Castle Title. The subpoena bore the caption of the foreclosure actions and was issued by SR Holdings as judgment creditor. The subpoena sought documents from Caste Title as title agent and asserted that the requested documents were “material and necessary to determine the bona fides of the various transfers, mortgages, etc.” Castle Island initially did not comply with the subpoena, and the court entered various orders directing compliance. Castle Title ultimately complied with the subpoena in April 2016.
The 2016 Lawsuit
In April 2016, SR Holdings filed a lawsuit against Castle Title, alleging that Castle Title had “negligently and/or fraudulently delayed” submitting documents for recording by the County Clerk. SR Holdings also asserted general claims for conspiracy, fraud, and fraudulent conveyance. In June 2019, the court dismissed all of the claims in the 2016 lawsuit.
The Insurance Dispute
From 2014 to 2017, Castle Title was insured under three consecutive professional liability insurance policies issued by the same insurer. The application for the September 10, 2015 to September 10, 2016 policy asked whether the applicant was “aware of any incident or circumstance which MAY RESULT in a Claim being made against the applicant.” Castle Title did not disclose the subpoena in the application.
In July 2016, after Castle Title had been served with the 2016 lawsuit, Castle Title submitted the lawsuit to its professional liability insurer as a claim under the policy in force at the time. The professional liability insurer initially acknowledged receipt of the claim and reserved its rights under the policy.
In November 2017, the insurer filed a separate action against Castle Title seeking a declaratory judgment that it had no duty to defend or indemnify Castle Title in the 2016 lawsuit. The parties filed cross-motions for summary judgment.
In its declaratory judgment action, the insurer contended that the 2015 subpoena was a claim under the policy, for which Castle Title had not provided the insurer with timely notice of claim under the policy in force at the time. The insurer argued further that the later 2016 lawsuit was interrelated with the prior subpoena, and therefore constituted a single claim deemed first made at the time of the subpoena, and therefore that coverage for the subsequent lawsuit was precluded by the prior failure to provide timely notice under the policy in force at the time the subpoena was served.
Castle Title argued that the subpoena was not a claim under the policy, that the two claims were not interrelated, and that it had provided timely notice of claim under the policy in force at the time the 2016 lawsuit was filed and served.
The Relevant Policy Language
The Policy defines the term “Claim” to include “a written demand by subpoena upon an Insured as a non-party to litigation or arbitration involving Professional Services provided by such Insured.”
The term “Related Claims” is defined as “all Claims … arising out of a single Wrongful Act or a series of Wrongful Acts that have a common nexus, are interrelated or are logically or causally connected by reason of any fact, circumstance, situation, event, transaction, practice, act, error, omission, decision or cause or series of causally-connected facts, circumstances, situations, events, transactions, practices, acts, errors, omissions, decisions or causes.”
Under the policy, “all Related Claims are deemed a single Claim, and such Claim shall be considered first made on the date the earliest of such Related Claim is first made against an Insured, regardless of whether such date if before or during the Policy Period.”
The February 3, 2020 Opinion
In her February 3, 2020 opinion, Judge Seibel granted Castle Title’s motion for summary judgment and denied the insurer’s motion for summary judgment.
In support of its motion, Castle Title had argued that the subpoena as not a “Claim” within the meaning of the policy because it had not been issued to Castle Title “as a non-party to litigation or arbitration involving Professional Services provided by” Castle Title. In seeking to argue that the subpoena met the definition of “Claim,” the insurer argued that the phrase “involving Professional Services by [the insured]” modifies “subpoena,” not “litigation or arbitration,” and thus the subpoena is a “Claim” because Castle Title rendered professional services in connection with the properties that are the subject of the 2015 subpoena.
Judge Seibel rejected the insurer’s argument, saying that “the only reasonable interpretation of the language” is that the “adjectival clause ‘involving professional services’ modifies the nouns that it immediately follows” – that is, “litigation or arbitration.” Therefore to qualify as a “Claim,” the subpoena must be issued in a “litigation or arbitration” involving Professional Services by Castle Title. The subpoena, Judge Seibel said, “does not so qualify,” as the post-judgment subpoena was “for the purpose of enforcing the judgment, not questioning Castle Title’s professional services.”
Because the subpoena is not a “Claim,” the 2016 Lawsuit “falls squarely within” the policy period of the policy in force at the time Castle Title was served with the 2016 Lawsuit, and the insurer is “required to defend Castle Title in the 2016 Lawsuit.”
Judge Seibel said that the insurer’s arguments to the contrary “are unavailing.” While the subpoena and the 2016 lawsuit are indeed “logically and causally connected,” because the subpoena is not a “Claim,” the two “by definition cannot be Related Claims.”
Judge Seibel added in a footnote that even if the subpoena is a “Claim,” the subpoena and the 2016 lawsuit are not “Related Claims” within the meaning of the policy because the subpoena “contains no allegations that Castle Title committed any ‘Wrongful Acts.’” Because there is no allegation of a Wrongful Act in the subpoena, “it follows that there can be no ‘nexus’ of ‘Wrongful Acts’ between it and the 2016 Lawsuit.”
Finally, Judge Seibel rejected the insurer’s argument that the warranty exclusion precluded coverage for the later lawsuit based on Castle Title’s failure to disclose the existence and service of the subpoena in its application for the 2015-2016 policy. Judge Seibel said that because the subpoena bore the caption of the foreclosure actions and did not involve any professional services provided by Castle Title, there was “no reason for Castle Title to think that it was obligated to provide notice” of the subpoena in its insurance application.
This insurance coverage dispute presents an interesting perspective on some frequently recurring coverage issues. The question of whether or not a subpoena is a claim comes up often, although in most cases, it is the policyholder that is in the position of arguing that a subpoena is a claim, in order to try to recover its costs involved in responding to a subpoena (as for example discussed here). In this case, the usual roles are reversed, as it was the insurer that was arguing that a subpoena was a claim, and the policyholder that was arguing that the subpoena was not a claim.
Regardless of who is arguing whether or not a subpoena is claim, the question is going to come down to the specific policy language involved. Here, the definition of claim had added some specifics to the definition of claim; it was not just any subpoena that would meet the policy’s definition of claim. In order for a subpoena to meet the definition, it must be “a subpoena upon an Insured as non-party to litigation or arbitration involving Professional Services provided by such Insured.”
Judge Seibel had no trouble concluding that in order for a subpoena to meet this definition it must arise in connection with litigation or arbitration involving Professional Services provided by Castle Title. Indeed, she said that the “only reasonable interpretation” of this provision is that the adjectival clause “involving professional services” modifies the nouns that immediate proceed it, that is, “litigation and arbitration.”
The insurer had tried to argue that “involving Professional Services by [the Insured]” modifies “subpoena,” not “litigation or arbitration.” Judge Seibel rejected this argument. Honestly, I see her point. The way I read the language of the provision, it has only one possible meaning, the one that Castle Title urged and the one that the court accepted.
I confess that I struggled for a while just trying to understand the alternative interpretation the insurer was arguing. Having finally figured out what the insurer was arguing, I still have a hard time saying that there are two equally plausible interpretations of the language. As I read the clause, the two interpretations are not equally plausible, as the interpretation urged by the insurer requires a strained and unnatural reading of the language. I agree with Judge Seibel that the interpretation urged by Castle Title was the “only reasonable interpretation.”
But even if there were two equally plausible interpretations that would mean only that the clause is ambiguous and therefore would have to be construed against the insurer.
The insurer is of course entitled to a presumption that it had reasons it deemed sufficient to dispute coverage and to file a declaratory judgment action. The rest of us can form our own opinions.
There are at least two additional interesting aspects of Judge Seibel’s opinion. The first was her observation that even though the subpoena and the 2016 Lawsuit were indeed, as the insurer argued, “logically and causally connected,” that does not mean that they are “Related Claims,” for the simple reason that they could not be “Related Claims” if the subpoena is not a “Claim.” Relatedness is, as I have frequently observed, an elusive concept, but even if two things are indeed in a sense related, that does not make them “Related Claim” if one of the two things is not a “Claim.”
The other interesting thing about Judge Seibel’s opinion is her footnote comment that even if the subpoena were a “Claim,” the subpoena and the 2016 lawsuit could not be “Related Claims” because the “subpoena” does not contain any allegations of a “Wrongful Act.” This observation casts an interesting light on one of the arguments that the insurer here tried to raise and that Judge Seibel rejected, which is that the inclusion of third-party subpoenas in the definition of claim was a policy enhancement and that the subpoena was, in fact, a claim for which the insurer would have provided Castle Title with counsel to respond. In light of the absence of an alleged “Wrongful Act” in the subpoena, it seems to me there are reasonable grounds to question whether this insurer or any insurer might have provided the policyholder with counsel to respond to the subpoena if the subpoena had been submitted as a claim.
Judge Seibel’s observation that the subpoena did not involve an actual or alleged Wrongful Act does provide an interesting perspective on the policy’s inclusion of subpoenas in the definition of claim; that is, it may not be sufficient for policyholders to obtain policy coverage for subpoenas just to ensure that the definition of claim includes subpoenas. In order to secure coverage, it may be necessary for the policyholder to ensure further that the provision states that the insurer agrees that it will not take the position that there is no coverage for a subpoena because the subpoena does not involve an actual or alleged wrongful act (as indeed some policies do now provide).