In its recent decision in Netspend Corp. v. AXIS Ins. Co., 2014 U.S. Dist. LEXIS 97656 (W.D. Tex. July 18, 2014), the United States District Court for the Western District of Texas had occasion to consider what constitutes a claim for the purpose of a professional liability policy, and the consequences imposed on an insured for failing to report a claim within the applicable policy period.
AXIS insured Netspend under consecutive claims made and reported errors and omissions policies for the August 20, 2011 to August 20, 2012 (the “11 Policy”) and August 20, 2012 to August 20, 2013 (the “12 Policy”). The policies insured Netspend for professional liability in connection with its business of selling prepaid, reloadable debit cards. Netspend issued these cards through partner banks. Netspend had a dispute with one of these banks – INB – which in June 2011 claimed that it discovered a $10.5 million shortfall in the depository accounts it provided to Netspend’s customers.
This shortfall led to INB commencing litigation against Netspend on July 13, 2012, while te 11 Policy was still in effect. INB’s initial petition against Nespend sought a declaratory judgment as to the existence of the shortfall and Netspend’s responsibility with respect to the shortfall. While INB sought an accounting an injunctive relief, it did not seek money damages, nor did its petition contain any specific causes of action for negligence. On July 31, 2012, INB amended its petition to add a cause of action for breach of contract. Finally, on September 21, 2012, during the period of the 12 Policy, INB again amended its petition to add claims for breach of fiduciary duty, fraud, negligence, and unjust enrichment.
Netspend gave first notice of the suit to AXIS on September 12, 2012, which was after the expiration of the 11 Policy. AXIS denied coverage on the ground that at the latest, the claim was first made when INB first filed suit on July 13, 2012, and that as such, Netspend’s failure to have given notice until September 12, 2012 – some three weeks after the expiration of the 11 Policy – negated its right to coverage under that policy.
At issue in the ensuing coverage litigation as whether INB’s original petition qualified as a claim for a “wrongful act” under the 11 Policy, a term defined as a negligent act, error or omission, or a negligent breach of contract. AXIS argued that the original petition alleged such conduct. Netspend, on the other hand, claimed that a cause of action for negligence was not added until the filing of the second amended petition, and that as such, a claim alleging a “wrongful act” was not first made until the 12 Policy was in effect.
In considering the issue, the court noted that any doubts had to be resolved in favor of the insured. Notwithstanding, the court found numerous instances of alleged acts, errors or omissions in the original petition, both in the introduction section, which stated that Netspend’s management of its customers’ funds was “riddled with errors,” and in the fact section of the petition, which described in great detail Netspend’s alleged negligent breaches of contract. While the court agreed that the original petition contained allegations of intentional conduct, which would not qualify as “wrongful acts,” the court still concluded that the “only plausible inference to be drawn from the facts alleged—and, coincidentally, an inference favorable to the insured—is that NetSpend was negligent, or perhaps incompetent.” Such conduct, agreed the court, qualified as a claim alleging a “wrongful act.”
In so concluding, the court acknowledged that the phrase “riddled with errors” was used only once in the original petition, and that the original petition contained numerous allegations of intentional conduct. The court nevertheless rejected Netspend’s attempt to portray the original petition as one seeking relief solely with respect to intentional conduct, explaining:
NetSpend naturally tries to minimize the import of those words [“riddled with errors”], arguing, for example, it is nonsensical to seek injunctive relief to prevent unintentional conduct. This is not a case of “magic words,” where pleading an “error” magically opens the door to coverage. But the words are nevertheless important. INB’s characterization of NetSpend’s account management paints a picture of a company making mistakes, not intentionally defrauding its business partner. Had INB asserted a fraud claim, there would have been no facts to support it. There is simply no suggestion NetSpend intentionally created the shortfall. The only possible alternative is that the shortfall was created unintentionally, accidentally, or negligently. This is especially apparent when contrasted with the breach of contract allegations, whereby INB makes clear NetSpend is acting intentionally to deplete its accounts and leave INB stuck holding the bill. It is that intentional conduct INB sought an injunction to put an end to, not the negligence which already occurred and created the shortfall. INB then sought an accounting and a declaratory judgment holding NetSpend liable for its own negligence and requiring it to cover any shortfall.
Having determined that the original petition qualified as a claim for a wrongful act that was first made when the 11 Policy was still in effect, the court “easily” concluded that Netspend’s delay in reporting it until after the expiration of the 12 Policy “ends the coverage dispute.”