New York Court Addresses Application of Pending And Prior Exclusion

In its recent decision in Executive Risk Indem., Inc. v Starwood Hotels & Resorts Worldwide, Inc., 2012 NY Slip Op 6183 (N.Y. 1st Dep’t Sept. 18, 2012), New York’s Appellate Division, First Department, had occasion to consider the application of a pending and prior exclusion in a professional liability policy.
The coverage dispute in the Executive Risk decision arose out of Starwood’s right to coverage for an underlying suit involving a contract between Starwood and another party for the construction and management of a luxury hotel. Starwood was sued for an amount in excess of $18 million for allegedly having caused delays and cost overruns on the project by failing to have fulfilled its responsibilities in implementing the hotel’s design. Notably, plaintiff wrote a demand letter to Starwood in October 2005 and later brought suit in July 2006. In August 2006, Starwood tendered its defense to its professional liability carrier, Executive Risk, which had issued successive claims made and reported professional liability policies to Starwood for the periods April 2005 to June 2006 and from June 2006 to June 2007. Starwood sought coverage under the 05-06 policy, or any other policy that may be applicable.
Executive Risk denied coverage under the 05-06 policy on the basis that the claim was not first made and reported under that policy. It also denied coverage under the 06-07 policy on the basis that plaintiff’s October 2005 claim letter and the subsequent lawsuit constituted a single claim, which necessarily was not first made during the 06-07 policy period. Executive Risk also denied coverage under the 06-07 policy based on the application of a “prior pending” exclusion. The lower court granted summary judgment in favor of Starwood, concluding that the claim was first made during the 06-07 policy period and that the exclusion was inapplicable.
On appeal, the court agreed that the claim could not be considered first made under the 05-06 policy. The court’s reasoning was based on way in which the term “professional services” was defined in the 05-06 policy versus how it was defined in the renewal. In the 05-06 policy, the “professional services” was defined as “[f]ranchiser, hotel and property manager, mortgage banker, mortgage broker, travel agent, title agent, real estate agent and real estate broker as well as incidental and related computer and print publishing services.” In the subsequent policy, however, “professional services” was more broadly defined to also include “interior and exterior design and decorating consulting services.” To qualify as a “claim” under either policy, the claimant had to bring suit or make a demand seeking to hold the insured responsible for a “wrongful act,” which in turn was defined as an act, error or omission in the insured’s “professional services.”
The court agreed with Starwood that underlying plaintiff’s October 2005 letter did not implicated an identified “professional service” under the 05-06 policy, since that policy’s definition of “professional services” did not include design work. As a result, reasoned the court, the plaintiff’s October 2005 letter did not allege a “wrongful act,” and it therefore followed that the letter did not qualify as a “claim” as that term was specifically defined. The court further held, however, that the July 2006 lawsuit, which also related to Starwood’s design services, and was filed during the 06-07 policy, qualified as a claim first made and reported during that policy period, since the 06-07 policy’s definition of “professional services” included Starwood’s design work.
While the court concluded that the lawsuit fell within the 06-07 policy’s insuring agreement in the first instance, it nevertheless concluded that the policy’s “prior pending” exclusion operated as a bar to coverage. The exclusion stated that coverage was unavailable “based upon, arising from, or in consequence of any written demand, suit, or other proceeding pending, or order, decree or judgment entered for or against any insured on or prior to [the June 10, 2006 inception date], or the same or substantially similar fact, circumstance or situation underlying or alleged therein.” Starwood argued that the October 2005 demand letter did not trigger this exclusion since a demand letter could not be “pending” within the meaning of the exclusion. Specifically, Starwood contended that “a demand is not generally understood to be something that is undecided or awaiting decision in the same sense as a judicial proceeding.” The court found Starwood’s argument flawed since it would render meaningless the word “demand” as used in the exclusion. The court further observed that the term “pending” is generally defined as “in question,” “open to discussion,” “under consideration” or “still under consideration.” The court concluded that “[w]ithout doubt, these synonyms all describe the status of [plaintiff’s] demand when the 06-07 policy commenced on June 10, 2006.”

Published In: General Business Updates, Construction Updates, Insurance Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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