Insured Must Report all Potential Claims or Lose Coverage
Every claims made policy requires, before the policy comes into effect, that the insured report all current claims and potential claims. Failure to disclose a potential claim will invariably cause the insurer to reject a claim reported after the policy came into effect but was know before.
In Alterra Excess & Surplus Co. v. Excel Title Agency, Western American Properties, No. 17-2186, United States Court Of Appeals For The Sixth Circuit (July 26, 2018) an insurance company sold a professional-liability insurance policy to a title and escrow agency, under which the insurance company would not cover claims that were known or foreseeable to the agency at the time of the policy’s inception. The insurance company subsequently declined to pay a claim arising from the agency’s erroneous transfer of an investor’s funds because, before the agency bought the policy, that investor had sent an email threatening to sue the agency for this transfer.
Alterra Excess & Surplus Insurance Company sold insurance policies against claims of professional liability. One customer for its services was the Excel Title Agency. On March 22, 2010, Excel submitted an application for professional liability indemnity, in an amount up to $1 million. This policy had a “claims made” period running from April 10, 2010 to April 10, 2011, with a February 15, 2006 “retroactive date,” and covered “damages arising out of or resulting from the performance or failure to perform ‘Professional Services.'”
The one limitation relevant in this appeal is the so-called “Known Circumstances Exclusion,” which excluded coverage for any “‘Professional Service’ performed and those services that should have been performed or were omitted prior to the effective date of the Policy if any ‘Insured’ knew or could have reasonably foreseen that the ‘Professional Service’ could give rise to a ‘Claim.'” Therefore, if before April 10th, 2010 Excel knew or could have reasonably foreseen that Excel would be the subject of a professional-services claim, then Alterra was not obliged to indemnify Excel for that claim.
In the summer of 2008, Excel had accepted large amounts of funds from investors in the real estate schemes of one Corey Howard. Under the plan that Howard had promised to those investors. Excel’s role was to serve as an escrow agent holding investor funds as earnest-money deposits, and then transfer funds to Howard when the properties closed. When Howard was able to acquire only a fraction of the properties he had promised to obtain, Excel on the direction of Howard nonetheless transferred large sums of the investors’ money to Howard, in amounts well in excess of that necessary to pay for the properties that Howard had secured.
Once the investors realized what Excel and Howard had done, they grew distressed. Beginning in September 2008, one investor, the Mt. Tai Asset Management Corp., contacted Excel and Howard to demand the return of the funds it had entrusted to Excel. Two other investors, Hanover Exchange and Lincoln Properties, did the same. All three of these investors ended up suing Howard and Excel; all three suits were resolved, and they are not directly at issue in this appeal.
This suit instead relates to the final investor in Howard’s scheme, Western American Properties (WAP), and its principal, James Perley. Perley sent the following email addressed to, among others, Howard and three Excel principals—Janel Chipman, Judy Stirnemann, and Jenny Kinnard:
I want you to know that unless suitable inventory or funds are returned by October 22, 2009, I will take all action available against you. There will be no extensions on the 90 days; you have to either deliver the suitable inventory or the money owed to me. … I will begin to proceed with all civil and criminal action, both state and federal, against you, Metro Equity Group, Peter Floratos, Kimiko Leong, Excel Title and Escrow, Janel Chipman, Judy Stirnemann, Jenny Kinnard … among others.
Perley’s demands did not achieve the return of funds he had sought. Instead, on December 10, 2009, WAP and Perley sued for misappropriation of funds in the U.S. District Court for the Central District of California against, among others, Howard, Excel, and the Excel principals. On September 12, 2012, the court granted an unopposed motion for summary judgment against Excel, and subsequently entered judgment against Excel in the amount of $1,546,986. Excel does not contest that it owes this liability to WAP.
Alterra, the insurer, responded to the suit by filing the action below, a request for a declaratory judgment that it was not obliged to so pay under the policy. Alterra then moved for summary judgment, and the district court granted that motion. The court below reasoned that Alterra was not required to indemnify Excel if the Known Circumstances Exclusion applied, and Perley’s threats to sue, as well as the similar threats made by other investors, made it clear that Excel did know of or could reasonably have foreseen a claim.
The district court properly granted summary judgment to Alterra. Under the Known Circumstances Exclusion to the indemnification policy—determined by the district court to be unambiguous and unchallenged in this respect by WAP on appeal—Alterra was not obliged to indemnify Excel for any claims known or reasonably foreseeable to Excel on April 10, 2010. That Perley and WAP might sue Excel was clearly such a foreseeable prospect at that time. In December 2009, Perley had followed through on his threat and sued Excel for exactly the things promised in his email.
Even if Excel only possessed the email, however, the clear threat of litigation expressed in the July 28, 2009 email unquestionably made WAP’s successful suit foreseeable prior to April 2010.
Because WAP’s claims were foreseeable, they are excluded by the policy’s Known Circumstances Exclusion. Michigan law makes clear that a claim by WAP was reasonably foreseeable to Excel. Perley’s email presented to Excel and its principals the very same facts and alleged violations of law forming the claim on which Perely later successfully sued Excel.
Even if the claim had yet to germinate—in the sense that Perley was not filing immediate suit at the time of the email and it was possible that the litigation might not ultimately commence—a claim was at least foreseeable at the time of the email, since all the things necessary for that claim were there.
That Perley suggested that there was a possibility in which he would not bring suit does not mean Excel could not at least foresee that a suit could well occur, since it was entirely foreseeable that the conditions under which Perley would be satisfied might not (and likely would not) be met. The fact that the district court hearing WAP’s subsequent suit against Excel did indeed determine that Excel was liable for its actions.
There is no conceivable reason to lie to an insurer about a potential claim. It only means the new insurer will exclude that claim and the existing insurer will be required to pay. The lie cost the insured more than a million dollars and the plaintiff lost the ability to collect the judgment since the only reason to sue the insurer was the fact that the insured lacked the assets to pay the judgment.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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