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Insured's Failure to Notify Insurer Of Attorney's Letter Seeking Settlement Resulted In No Coverage For Related Lawsuit Under "Claims First Made And Reported" Policies

What is a “claim”? This seemingly simple question has generated controversies requiring court adjudication of rights under claims made policies.

In Westrec Marina Management, Inc. v. Arrowood Indemnity Co., 2008 WL 2406143 (decided June 16, 2008), the California Court of Appeal affirmed a judgment in favor of Musick Peeler’s client, ruling that a letter to the insured’s attorney seeking compensation for employment discrimination was a “Claim” under a “Claims first made and reported” policy. Thus, the Court concluded, the insured’s failure to notify the insurer during the reporting period of the policy in effect when the letter was received resulted in the insured losing coverage for the subsequent discrimination lawsuit.

The insurer had issued two consecutive annual policies. Each policy covered losses incurred in connection with Claims first made during the policy period and required the insured to notify the insurer of the Claim within 30 days after the expiration of that policy. Each policy defined “Claim” to include “a written demand for civil damages or other relief commenced by the Insured’s receipt of such demand.”

A former employee of the insured filed a complaint with the California Department of Fair Employment and Housing (“DFEH”) alleging employment discrimination by the insured and requesting a right-to-sue letter. The DFEH issued the right-to-sue letter and notified the insured of the employee’s complaint and the right to sue letter.

A short time later, the employee’s attorney wrote to the insured describing alleged acts of gender discrimination against the employee by the insured’s male employees. The letter referred to the DFEH right-to-sue letter and stated that the attorney was “writing to see if [the insured] would prefer to attempt to resolve or mediate this matter, or if it will be necessary to file a lawsuit and have a jury decide the outcome.” The letter stated that it is often in an employer’s interests to resolve “discrimination claims” to avoid statutory attorneys’ fees that are awarded should the employee prevail. The letter did not demand a specific dollar amount.

The insured received the DFEH notice and the attorney letter during the first policy period. The insured did not notify the insurer within the 30-day period after the first policy expired. Only after the employee filed suit, during the second policy period, did the insured notify the insurer.

The insurer declined to defend or indemnify, stating that the insured had failed to timely tender the Claim. The insured contended neither the DFEH notice nor the attorney letter was a “Claim” and that the lawsuit was a separate Claim for which the insured provided timely notice.

The Court of Appeal agreed with the insurer. The Court stated that the attorney letter was a settlement demand seeking compensation for the alleged wrongdoing. Although the letter did not expressly demand payment or refer to any specific amount, the Court reasoned that its meaning was clear that, absent some form of negotiated compensation, the employee would file suit against the insured. Thus, the Court stated that the insistence on compensation by way of settlement in lieu of litigation constituted “a written demand for civil damages or other relief” within the ordinary meaning of “Claim.”

The Court chose not to decide the issue of whether the DFEH notice of the employee’s complaint was a “Claim.” (This issue is one of interest because it arises frequently in employment cases.)

Further, the Court held that the attorney letter and the subsequent lawsuit constituted a single Claim under a policy provision stating that all claims arising from the same or related facts are deemed a single claim. As the Claim was first made during the first policy period, the Court concluded the insured was required to notify the insurer during the reporting period of the first policy. Since the insured failed to give timely notice, the insured was not entitled to coverage under either of the policies.
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