Applying California law, the United States Court of Appeals for the Ninth Circuit has held that an insurer does not have a duty to defend a claim against a real estate company where the company first received a demand from the claimant five months before the policy’s inception. Carlson v. Century Surety Co., 2015 WL 1434943 (9th Cir. Mar. 31, 2015). The court also determined that the judgment entered against the insured in the underlying proceeding pursuant to a settlement with the claimants was unreasonable.

A couple brought a claim against a real estate company over a failed residential real estate transaction. The couple sent a demand letter and then filed suit. The real estate company tendered the claim to its insurer, but the insurer denied coverage after discovering that the demand letter was sent over five months before the policy incepted. The couple and the real estate company subsequently agreed to settle. In connection with the settlement, the couple filed an amended complaint increasing the asserted damages from $65,000 to $3 million and made the settlement contingent on receipt of declarations from the real estate company denying that it had received notice of the couple’s demand before the policy’s inception. The real estate company assigned its rights to the couple, who then brought suit against the insurer.

The trial court held that the insurer had breached its duty to defend, but the appellate court reversed. According to the appellate court, the insured company’s file contained the couple’s pre-policy demand letter, and the couple had no evidence to support its argument that the company may not have received the letter until over five months after it was sent. As such, the court held that the insured company had notice of the claim before the policy’s inception, and therefore the insurer had no duty to defend.

The court also held that, even if the insurer owed a duty to defend, the couple would be barred from recovering under the policy because no reasonable juror could conclude that the settlement between the company and the couple was not fraudulent. The court found that the couple’s amended demand and its requirements for certain declarations designed to trigger coverage under the policy were clear signs of a fraudulent settlement agreement.