It is frequently the case that lawsuits are preceded by a letter in which a prospective litigant identifies a grievance and makes various kinds of threats or demands. A perennial question is whether this type of pre-suit demand letter constitutes a “claim” within the meaning of a claims-made liability insurance policy. The Second Circuit, applying New York law, recently affirmed a district court ruling holding that a pre-suit demand letter, received before the applicable policy’s coverage inception date, was a claim within the meaning of the policy. Because the claim was first made prior to the inception of coverage, the court held that there was no coverage for the subsequently filed lawsuit. The Court’s ruling provides an interesting take on this frequently recurring issue.

A copy of the Second Circuit’s March 26, 2024, Summary Order can be found here. An April 1, 2024, post on the Wiley law firm’s Executive Summary blog about the decision can be found here.

Background

Pine Management is a real estate management company. In a July 17, 2018, letter written by a law firm on behalf of the owner of certain properties the company managed, the firm advised Pine of possible claims against it. In July 2019, the owner filed a complaint against Pine in New York state court alleging that Pine had mismanaged certain of the owner’s apartment buildings. Attached to the complaint was a copy of the July 17, 2018, letter.

Pine maintained a program of professional liability insurance. The policy was effective from August 1, 2018, to December 1, 2019. Pine submitted the lawsuit to its insurer as a claim. The insurer refused to defend or indemnify Pine in the lawsuit on the ground that the July 17, 2018, pre-suit demand letter was a Claim within the meaning of policy that had been made prior to the policy’s inception date. Pine filed a coverage lawsuit against the insurer seeking damages and a judicial declaration that the insurer had a duty to defend Pine in the lawsuit. The insurer moved for judgment on the pleadings. The district court granted the insurer’s motion. Pine appealed.

The policy defines the term “Claim” to include “a written demand received by [the Insured] for monetary, nonmonetary or injunctive relief” and arising from a “Wrongful Act.”

The March 26, 2024, Summary Order

In a March 26, 2024, a three-judge panel of the Second Circuit affirmed the district court’s ruling granting the insurer’s motion for judgment on the pleadings.

In ruling on the dispute, the appellate court considered Pine’s argument that the pre-suit letter does not constitute a Claim because it “does not contain a sufficiently clear demand for relief and because it is framed in precatory language that failed to put Pine on proper notice of the demand.” The appellate court rejected this argument and agreed with the district court that the pre-suit letter was a Claim within the policy’s meaning.

 First, the court said, the letter “contains several allegations of wrongdoing, including specific theories” that the letter expressly styled as “claims.” The letter specifically stated that Pine had “breached its fiduciary duty” and “failed to disclose material facts.”

Second, the court said, the letter “makes it clear that it is demanding certain forms of relief.” Among other things, it explicitly demanded the production of specified documents. The letter also alleges that Pine made unauthorized payments to itself, “indicating that the letter was demanding repayment of such funds.” The letter “therefore put Pine on notice that [the owner] sought relief to remedy Pine’s alleged wrongdoing.”

Third, the court noted, the letter suggested a meeting to resolve the dispute. Pine had argued that this language indicates the owner was not making a claim but simply a communication that the aggrieved party wanted to discuss the concerns. The appellate court disagreed, noting that the letter’s final line explicitly referred to future litigation, underscoring the legal consequences that would likely result from non-compliance with the demands and reinforcing the letter’s prior assertion that there are serious issues arising from Pine’s management and “such claims would survive a motion to dismiss and a motion for summary judgment.”

In short, the appellate court said, the pre-suit letter “sets out specific legal claims, including facts, legal theories of liability, and sufficiently clear demands for relief.” The letter, the court said, therefore constituted a Claim within the policy’s meaning. Because the Claim was made before the policy’s inception, the insurer had no obligation to defend or indemnify Pine in the underlying lawsuit.

Discussion

It is worth noting that while the result of the court’s analysis in this case is that the insurer prevailed and the finding of no coverage was affirmed, it is not always going to be the case that a finding that a pre-suit demand letter is a Claim is going to be to the insurer’s advantage and to the policyholder’s detriment. It is sometimes the case that it is the policyholder that is arguing that a pre-suit demand letter constitutes a claim. In other situations, the recognition that a pre-suit demand letter is a claim will simply determine in which policy period a claim was first made.

Determinations of this kind often are going to be a factor of the contents of the letter – what the letter does or doesn’t say – and the specific wording of the applicable policy’s definition of “claim” and the requirements of applicable law.

However, the fact that a pre-suit demand letter can constitute a claim is an important insurance management principle for policyholders to keep in mind. As Bonnie Thompson of the Lavin Ridner and Duffield law firm wrote in an April 2, 2024, Law360 article about the Second Circuit’s order (here), “it is important for insureds to be aware” that a pre-suit demand letter can constitute a Claim “when considering their notice obligations,” particularly because the issue of whether or not a letter is a claim “can be dispositive of coverage.” Indeed, the question of whether a pre-suit demand letter constitutes a claim comes up most frequently in the context of a dispute over whether the policyholder gave the insurer notice of claim within the requirements of the policy.

The court’s analysis of the issues is interesting, particularly its consideration of what constituted a demand for relief. Among other things, the court noted that the request for production of documents was a form of a demand for relief. Also, the court said that the letter’s assertion that Pine had made unauthorized payments to itself indicated that “the letter was demanding repayment of the such funds.” I find these aspects of the appellate court’s ruling as these kinds of assertions are common features of pre-suit demand letters. I find it particularly interesting that the court was willing to conclude that the letter’s reference to unpaid funds represented a kind of demand for relief even though the letter did not itself expressly demand the return of funds.

The court’s consideration of the letter’s suggestion of a meeting to resolve the concerns in the letter is also interesting. The court’s analysis of this aspect of the letter is noteworthy because this kind of suggestion is a regular feature of these kinds of pre-suit demand letters – indeed, that is almost always the point of the letter, to see if the parties can resolve the matter without litigation. A factor in the court’s analysis was that the letter expressly referenced the possibility of litigation if the matter were not resolved. It is interesting to consider how the analysis might have gone if there were a request for a meeting but no express threat of future litigation – would the various other elements (demand for production of documents, reference to unauthorized expenditure of funds) have been sufficient for the court to conclude that the letter presented a demand for relief sufficient for the court to conclude that the letter represented a Claim within the policy’s meaning?

In any event, I don’t suppose this appellate opinion will clear up forever when a pre-suit demand letter represents a Claim. However, it does provide some important guideposts for prospective coverage litigants to consider when addressing the question.