Policies Afford No Coverage for Litigation Arising Out of Unreported Demand Letter

A California federal court has held that two consecutive claims-made-and-reported professional liability policies afford no coverage for litigation when the insured failed to provide notice of a prior related Claim.  Alterra Excess & Surplus Ins. Co. v. Gotama Building Engineers, Inc., 2014 WL 3866093 (C.D. Cal. July 24, 2014).  The court also concluded that a warranty exclusion barred coverage for the litigation. 

An insurer issued two professional liability policies to an engineering firm for the claims-made policy periods of June 1, 2012 to June 1, 2013 (the “2012 Policy”) and June 1, 2013 to June 1, 2014 (the “2013 Policy”).  In April 2013, the insured received a demand letter from an architecture firm concerning the insured’s plumbing and mechanical design for a building.  The demand letter stated that the insured was responsible for the cost of correcting certain design deficiencies and demanded that the engineering firm acknowledge responsibility and place its insurance carriers on notice of the claims.  The insured did not report this demand letter.  In addition, in May 2013, the engineering firm provided the insurer with a renewal application in which the insured responded “no” to a question asking whether an insured had “any knowledge or information of any act, error or omission which might reasonably be expected to give rise to a claim.”  The application provided that “if such knowledge or information exists any claim or action arising there from is excluded from this proposed coverage.”  In June 2013, the building filed a lawsuit against the architecture firm, and, in August 2013, the architecture firm filed a cross-claim against the insured based on the claims in its demand letter.  The insured provided notice of the cross-claim to the insurer in January 2014.  The insurer maintained that late notice precluded coverage under the 2012 policy and the litigation was not first made during and was otherwise excluded under the 2013 policy by operation of the warranty exclusion.

As to the 2012 policy, the court agreed that the demand letter was a Claim because it was a “written demand for monetary damages, services or non-monetary relief” and that the insured therefore failed to provide timely notice of the Claim.  As for the 2013 policy, the court concluded the insured should have disclosed the demand letter.  Because the cross-claim was “the court-filed equivalent” of the demand letter, it arose from the demand letter and therefore was excluded by the warranty exclusion.  In so holding, the court found that “arising from” meant that the exclusion applied to “all proceedings sharing common facts and circumstances.”