Claim Made Before Policy Not Covered

Interrelated Acts & Claims

Insurance companies who write claims made policies are only required to pay to defend or indemnify an insured when the claim is made during the operative dates of the policy. The date the claim is made depends upon the definition of “claim” contained in the wording of the policy.

In W.C. and A.N.  v. Continental Casualty Company, United States Court of Appeals, Fourth Circuit, 2016 WL 682974 – F.3D – (December 30, 2015) the Fourth Circuit Court of Appeal was called upon to determine if a claim and suit fell within the coverage of the policy.

FACTS

In 2006, entities and individuals related to Appellant W.C. & A.N. Miller Development Company (Miller) were sued in a contract dispute. Subsequently, in 2010, Miller entered into a liability insurance contract with Continental Casualty Company (Continental). Miller was sued in 2010 in a fraudulent conveyance action seeking recovery on the judgment entered in the 2006 lawsuit. Continental, however, determined that the 2010 lawsuit alleged “interrelated wrongful conduct” with the allegations made in the 2006 lawsuit brought against entities related to Miller. Because allegations of such interrelated wrongful conduct constituted a “claim” first made in 2006, before the policy period, Continental denied coverage.

In 2014, Miller sued Continental for breach of the insurance contract and sought as damages the costs it incurred defending itself in the 2010 lawsuit. The district court determined that Continental properly denied coverage.

Haymount eventually secured a $14 million loan from General Motors Acceptance Corporation Residential (GMAC). Haymount then paid a finder’s fee to APC and terminated their agreement. Upon learning of the GMAC loan, IBG also sought payment of its fee and sent Haymount a list of lenders to whom IBG had introduced Haymount. The list of introduced lenders included GMAC. Haymount refused to pay the $3 million fee and terminated its agreement with IBG on June 25, 2004.

In 2006, IBG sued in the District of New Jersey seeking payment of the $3 million fee it claimed it was owed under the agreement with Haymount. IBG asserted causes of action for breach of contract, unjust enrichment, tortious interference, common law civil conspiracy, and state law statutory conspiracy. Through their motions to dismiss and for summary judgment, the defendants successfully narrowed the claims to one: IBG’s claim for breach of contract. On January 8, 2010, the district court entered judgement against Haymount, among others, on IBG’s breach of contract claim for the sum of $3 million plus interest, for a total judgment of $4,469,158.

On October 29, 2010, IBG again sued Haymount and related parties. The 2010 lawsuit alleged that the defendants took actions to render themselves judgment proof so that IBG could not collect on the judgment entered in its favor after the 2006 lawsuit. The complaint in the 2010 action detailed the Haymount development project, the ownership structure of Haymount, the events leading to the contract between IBG and Haymount, and the course of the 2006 lawsuit giving rise to the judgment in IBG’s favor.

Miller filed the lawsuit that is the subject of this appeal on February 12, 2014. Miller alleges that Continental wrongfully denied coverage under the policy and should be required to pay the costs Miller incurred defending the 2010 lawsuit.

THE POLICY

The policy contains several relevant provisions. The policy includes coverage for employment practices liability, directors and officers liability, and entity liability. General terms and conditions at the beginning of the policy apply throughout. Under the policy, Continental will provide coverage to Miller for claims against Miller made during the coverage period for a wrongful act by an insured person. The policy coverage period is November 1, 2010 through November 1, 2011. A “claim” is a demand for damages or relief, including a civil action, against an insured. The insurance policy covers claims made against subsidiaries of Miller such as Haymount.

The policy provides, however: “More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be considered as one Claim which shall be deemed made on   the date on which the earliest such Claim was first made.” In other words, if more than one claim involving interrelated wrongful acts is made against Miller or its subsidiaries, the multiple claims are considered a single claim made on the date on which the earliest of the claims was made. Further, the policy expansively defines “interrelated wrongful acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” From this language, Continental reasoned that the acts alleged in the 2006 lawsuit and the fraudulent conveyance and other acts alleged in the 2010 lawsuit were interrelated wrongful acts constituting a single “claim.” Under the terms of the policy, such a claim should be deemed to have been made in 2006, before the policy coverage period began on November 1, 2010. Continental therefore concluded the claim was not insured by the policy.

The district court agreed with Continental.

ANALYSIS

Under Maryland law, insurance policies are interpreted in the same manner as contracts generally; there is no rule in Maryland that insurance policies are to be construed most strongly against the insurer. Clear and unambiguous language must be enforced as written and may not yield to what the parties later say they meant.

The policy’s definition of interrelated wrongful acts is expansive. This definition is not ambiguous, particularly on the facts before the court, and will apply it in accordance with the ordinary meaning of the words used.

Therefore, the conduct alleged in the 2006 and 2010 lawsuits share a common nexus of fact and are, therefore, interrelated wrongful acts under the policy’s definition. As the district court observed, the two lawsuits are linked by (1) a multitude of common facts: in particular, that Haymount did not pay IBG the $3 million finder’s fee; (2) a common transaction: the contract between Haymount and IBG; and (3) common circumstances: namely, Haymount’s attempts to secure financing for its land development project in Virginia. These elements logically and causally connect the two lawsuits. Absent Haymount’s breach of its contract and other alleged torts, IBG would not have sued for damages in 2006, nor would it have sued for enforcement of the 2006 judgment in 2010.

The allegations in the 2006 and 2010 lawsuit arise out of the same land development project, involve the same contract to secure financing, implicate a dispute over the same fee, and were brought by the same claimant. This factual web creates a common nexus sufficient to make the claims brought against Miller in 2006 and 2010 interrelated under the policy’s broad definition of “interrelated wrongful acts.”

Because they involve interrelated wrongful acts, the 2010 lawsuit and the 2006 lawsuit are part of the same claim under the policy. Pursuant to the policy provisions the court had no option but to deem the claims in the 2010 lawsuit “first made,” on the date on which the 2006 lawsuit was filed-March 17, 2006. As the district court determined, because March 17, 2006 is outside the policy period, Continental properly denied coverage.

ZALMA OPINION

This case is a variation on the fortuity doctrine. You can’t buy insurance to protect you against an action that has already occurred. Since the suit against the insurer related to two interrelated wrongful acts the claim was first made four years before the inception of the policy and coverage was, therefore, unavailable.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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