Applying New York law, the United States District Court for the Eastern District of New York has held that a criminal indictment constituted a related claim to a letter from a state attorney general to the insured.  Weaver v. AXIS Ins. Co., 2014 WL 5500667 (E.D.N.Y. Oct. 30, 2014).  In addition, the court held that a prior litigation exclusion barred coverage for the criminal indictment. 

In 2012, the president of the insured vending machine sales company was indicted in Florida federal court for conspiracy and fraud in the operation of the insured entity.  The indictment alleged that the president made fraudulent statements concerning expected profits from business opportunities offered by the vending machine sales company and provided promotional materials to customers after removing legal disclosures with warnings about the risks of the investment opportunity.  The president sought coverage under a claims-made policy with a policy period from 2010 to 2014.  The insurer denied coverage and contended that the 2012 criminal indictment was deemed first made in 2007 because it was related to a 2007 letter from the Maryland attorney general to the insured entity, in which the attorney general asserted that the insured made unlawful earning representations to customers and failed to provide investor disclosures as required by Maryland law.  The insurer further contended that a prior litigation exclusion barred coverage for the criminal indictment.  The president filed suit against the insurer seeking coverage for the criminal indictment.

The court first determined that the 2007 attorney general letter constituted a claim, which was defined in relevant part as a “written demand for monetary or non-monetary relief.”  Holding that the undefined term “demand” was unambiguous, the court reasoned that the 2007 letter was a demand because it was a “request for relief under a claim of right and put . . . [the insured] on notice that legal obligations [were] triggered.”  Additionally, the court explained that the 2007 letter sought “non-monetary relief” because the letter requested that the insured cease offering its business opportunities in Maryland and threatened court-ordered relief if the insured did not comply.

The court then determined that the 2012 indictment was a claim first made in 2007 because it alleged “Interrelated Wrongful Acts” to the 2007 attorney general letter.  The policy defined “Interrelated Wrongful Acts” as “any and all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally or logically connected facts, circumstances, situations, events, transactions, or causes.”  The policy provided that all claims arising from Interrelated Wrongful Acts constitute a single claim first made on the date of the earliest claim.  According to the court, the indictment and the 2007 letter arose from Interrelated Wrongful Acts and shared a “sufficient factual nexus” because each concerned the insured’s “alleged scheme to defraud customers in connection with the Vendstar business, specifically regarding unlawful representations about the expected profits and earnings of the Vendstar business opportunity and the omission of required disclosure information.”

The court also held that the prior litigation exclusion in the policy independently barred coverage for the indictment.  The prior litigation exclusion precluded coverage for “any claim made against any Insured . . . based on [or] arising out of . . . any demand, suit or other proceeding pending . . . against any Insured prior to [February 28, 2008] . . . or any Wrongful Act whenever occurring, which together with a Wrongful Act described in a. above, constitute Interrelated Wrongful Acts.”  The court held that the 2007 attorney general letter was a “demand” first made on November 26, 2007 and that the indictment and the 2007 letter alleged Interrelated Wrongful Acts.  Accordingly, the court concluded that the prior litigation exclusion applied.

Finally, the court held that there was no bad faith claim against the insurer under either New York or California law.  Under New York law, there was no bad faith claim because the bad faith claim was duplicative of the president’s breach of contract cause of action.  Under California law, the insurer did not act in bad faith because the policy barred coverage for the indictment.