In its recent decision in Lexington Ins. Co. v. Horace Mann Ins. Co., 2013 U.S. Dist. LEXIS 127544 (N.D. Ill. Sept. 4, 2013), the United States District Court for the Northern District of Illinois had occasion to consider the issue of what constitutes a claim for the purpose of triggering coverage under a professional liability policy.
Lexington insured Horace Mann under an insurance company errors and omissions policy, providing claims made and reported coverage for the period September 28, 2010 to September 28, 2010. The policy insured Horace Mann for claims arising out of any act, error or omission in its rendering of or failure to render services in connection with its business as an insurer. Notably, the Lexington policy defined “claim” as “1. a written demand for monetary damages; or 2. a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.” The Lexington policy further clarified that “the Corporate Risk Manager, General Counsel's Office, Claims Legal Department of [Horace Mann] shall notify [Lexington] of the setting of a trial, arbitration or mediation date within 60 days of becoming aware of the date.”
The dispute between Horace Mann and Lexington pertained to Horace Mann’s handling of a loss on a non-commercial auto policy it had issued to a Florida insured. The auto accident happened in May 2008. In June 2008, counsel for the injured party issued a time limits policy demand to Horace Mann, offering to settle its claim for the policy’s $25,000 limit of liability, but only if Horace Mann accepted the demand within twenty days. Horace Mann wrote back immediately to advise that it would take the demand under consideration but that it first needed to review the claimant’s medical records. The claimant thereafter withdrew its demand and filed suit against Horace Mann’s insured in August 2008. Horace Mann engaged in subsequent efforts to settle the matter, and in 2009 it retained outside counsel to analyze its own potential bad faith exposure. In a December 2009 email, counsel advised Horace Mann that if settlement were not reached, Horace Mann likely would lose a bad faith case.
In August 2010, the court in the underlying case scheduled a mediation. In anticipation of the mediation, counsel for the claimant wrote defense counsel in September 14, 2010 – two weeks prior to the inception of the Lexington policy – to discuss a potential bad faith claim against Horace Mann that could result in extracontractual exposure. The letter specifically warned defense counsel that Horace Mann would need to “open” its policy limits at the mediation if it desired to settle the case. Plaintiff’s counsel acknowledged in the letter that defense counsel would not be involved in evaluating the bad faith implications present by the claim, but nevertheless urged that Horace Mann be advised that plaintiff intended to explore extracontractual relief at the mediation, and that as such, the letter should be forwarded to Horace Mann for consideration. The letter was in fact forwarded to Horace Mann on September 20, 2010 – eight days prior to the inception of the Lexington policy. The mediation was held in December 2010 and proved unsuccessful. Twenty-seven days after the mediation, Horace Mann gave notice of potential claim to Lexington and advised that it was considering a settlement of the underlying claim for an amount up to $1.5 million. Settlement, however, was not reached prior to a jury awarding the underlying claimant $17 million, which ultimately was compromised for $7 million.
Lexington subsequently denied coverage to Horace Mann on the basis that the claim was not first made during the policy period, but instead was first made long prior to the inception of its policy. Lexington advanced two arguments in support of this position. Lexington first contended that the September 14, 2010 letter from plaintiff’s counsel to defense counsel constituted a “a written demand for monetary damages,” and thus fell within its policy’s definition of “claim.” Specifically, Lexington argued that by using language such as “extracontractual amounts” and “opening” the policy limit, plaintiff’s counsel signaled its intention to seek recovery directly from Horace Mann. Horace Mann argued in response that the letter at most was notice of a potential claim rather than an actual claim. The court agreed with Horace Mann, observing that:
[w]hile the letter is in "written" form, it is not addressed to Horace Mann. The letter is from [plaintiff’s] counsel to [defense] counsel. Because the letter was not addressed to Horace Mann, it can hardly be considered a demand on the same. The express policy language covers wrongful acts by Horace Mann, and therefore, requires that the written demand for damages be made upon the insured, Horace Mann, and not a third-party.
That the letter ultimately was forwarded to Horace Mann, prior to the policy’s inception, did not impact the court’s reasoning. In fact, explained the court, under Florida law, the underlying plaintiff could not assert a direct claim against Horace Mann prior to a verdict or settlement, which as of September 14, 2010, had not yet happened.
Lexington argued in the alternative that the September 14, 2010 letter advising of the mediation satisfied its policy’s second definition of claim; namely, a “a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.” While the mediation happened in December 2010, i.e., during the policy period, Lexington argued that the letter advising of the mediation should be considered when the claim was first made. The court rejected this argument as well, observing that “[a]t most, the letter constitutes notice of mediation, not the "alternative dispute proceeding" itself as defined by the policy language.” The court again relied on the reasoning that because the letter was written to defense counsel rather than Horace Mann, it could not satisfy the definition of claim. The court also rejected Lexington’s argument that Horace Mann was required to give notice of the mediation before it occurred. The court found no support for this position in the policy language. While the definition of claim required Horace Mann to give notice of a mediation within sixty days, the policy language was silent as to whether this notice must happen before or after the mediation. As such, and because Horace Mann gave notice of the mediation twenty-seven days after it happened, the court found that Horace Mann satisfied this policy condition.