Claims-made insurance policies, especially in professional liability and financial lines, have been around for decades. Most policyholders and insurers understand the purpose of a claims-made policy compared to an occurrence-based policy. Yet every so often a case comes along that raises a new wrinkle about claims-made coverage. In a recent case before the Seventh Circuit Court of Appeals the court had to determine whether a new argument made in an ongoing lawsuit was an independent “claim” for purposes of a claims-made professional liability policy.
In Market Street Bancshares, Inc. v. Federal Insurance Co., No. 18-3395 (7th Cir. Jun. 19, 2020), the policyholder, a bank, became embroiled in a long-running lawsuit after a business deal collapsed. In the underlying suit, the bank was accused of failing to live up to its obligations by keeping collateral available for rent obligations under the business deal. The lawsuit had been going on for years when the bank purchased a claims-made professional liability policy.
During the damages phase of the litigation, the underlying plaintiff raised a new issue that was not contained in the complaint. The bank sought a defense from its insurance company and the insurance company declined the claim. The insurance company explained that the new argument was not a “claim” under the policy and, in any event, would relate back to when the lawsuit was filed, which was years prior to the inception of the policy.
The bank brought this litigation against the insurance company seeking a defense to the new argument. The district court granted summary judgment for the insurance company. The circuit court affirmed because the damages argument in the underlying lawsuit was not a “claim” under the parties’ insurance policy.
This is how the circuit court articulated the issue on appeal:
So, the critical question is: On its face, did the [underlying plaintiffs’] damages assertion—advanced about thirteen years into the lawsuit—potentially bring it within the policy’s coverage?
In affirming, the Seventh Circuit discussed the difference between claims-made and occurrence-based policies. As the court explained,The type of insurance purchased here is a claims-made, professional-liability policy. It provides that the insurer “shall pay, on behalf of [the bank], Loss on account of any Claim first made against [the bank] during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act while performing Professional Services, including failure to perform Professional Services.” “In a claims-made policy like this one, the pertinent risk is that an injured third party will assert a claim against the insured during the policy period.”
The court next evaluated the term “claim” under the policy. The policy defined “Claim” as: a. a written demand for monetary or non-monetary relief, including injunctive relief; b. a civil proceeding commenced by the service of a com-plaint or similar pleading; c. an arbitration proceeding commenced by the submission of a statement of claim or similar document; or
d. a criminal proceeding commenced by the return of an indictment, by or on behalf of a customer or by any party, against the bank for a Wrongful Act, including any appeal.
The policyholder argued that the underlying plaintiff’s written closing argument for damages relief was a written demand for monetary relief and was, therefore, a “claim” under the policy. The court rejected this argument because the new damages argument was part of the civil action commenced years before and the damages argument was not a separate “claim.” Because the term “civil action” spans the entire civil action brought by the underlying plaintiff, the underlying lawsuit, including the damages phase, comprised the claim that commenced years before the policy was purchased. The court’s analysis of the meaning of the term “claim” is worth the read.
The bottom line: an assertion cannot be a claim.