New Jersey Court Holds Demand Letter Is A Claim

New Jersey Court Holds Demand Letter Is A Claim

In its recent decision in Innes v. St. Paul Fire & Marine Ins. Co., 2015 U.S. Dist. LEXIS 121753, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], (D.N.J. Sept. 11, 2015), the United States District Court for the District of New Jersey had occasion to consider what constitutes a “claim” for the purpose of a claims-made and reported policy.

The Innes decision concerned coverage under a legal malpractice policy issued by St. Paul. The underlying dispute arose out of the insured’s legal services rendered in connection with a divorce proceeding, and its alleged failure retain the passport of its client’s daughter, thereby allowing the client and her daughter to leave the country. Prior to the inception date of the St. Paul policy, the insured law firm received a letter from counsel for client’s ex-husband stating that the insured’s failure to safeguard the passport ultimately required the ex-husband to spend tens of thousands of dollars to “retrieve” his daughter. The opening of the letter specifically stated that counsel was representing the ex-husband in connection with “an action” against the insured law firm. Moroever, the letter closed by stating that the firm should place its insurance carrier on notice. The insured was sued a year later, during the time that the St. Paul policy was in effect.

Notably, the St. Paul policy, issued on a claims-made and reported basis, defined the term “claim” as a “demand received by an insured for money or services alleging an error, omission, negligent act or ‘personal injury’ in the rendering of or failure to render ‘professional legal services’ for others by you or on your behalf.” Additionally, the policy contained an exclusion barring coverage for any claim “[a]rising out of any error, omission, negligent act or ‘personal injury’ occurring prior to the inception date of this policy if any insured prior to the inception date knew or could have reasonably foreseen that such error, omission, negligent act or ‘personal injury’ might be expected to be the basis of a ‘claim’ or ‘suit.’” St. Paul disclaimed coverage for the suit on the basis that the claim was first made prior to the policy’s inception – when the insured received the letter advising it to place its carrier on notice – and on the basis that the insured was aware of the likelihood of a claim prior to the policy’s inception.

The insured argued that the pre-suit letter did not qualify as a “claim,” even though it warned the insured to place its carrier on notice, because it did not actually demand money or services. Looking to New Jersey case law on the issue, the court agreed with St. Paul that the letter constituted a claim even though it did not literally demand money or services, since such a demand could be inferred from the letter. As the court explained:

Here, as in the cases described above, the … letter stated that [counsel] represented Plaintiff in an “action” against the Firm and instructed the Firm to place its insurance carrier on notice. (1/26/06 Ltr.). The letter further referenced “tens of thousands of dollars in legal fees” that Plaintiff incurred following the allegedly wrongful actions … This reference can reasonably be construed as a demand to recover that money. As a result, the claim was first made … months prior to the initiation of the Policies’ term.

The court further noted that even if the letter did not constitute a claim, the policy’s prior knowledge exclusion operated to bar coverage. In considering the application of this exclusion, the court observed that per the Third Circuit’s decision in Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231 (3d Cir. 2006), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], it was required to apply a “mixed subjective-objective analysis in determining whether an insured knew or reasonably should have known that an act could result in a claim or suit.” The court concluded that the subjective knowledge part of this test was satisfied since prior to the policy’s inception, the insured received the letter accusing it of having cost the plaintiff tens of thousands of dollars and warning it to place its carrier on notice. The court further concluded that the objective portion of the analysis was satisfied since a “reasonable person in the insured’s profession” could have anticipated a future claim given the nature of the letter.

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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