Applying New York law, the United States Court of Appeals for the Second Circuit has affirmed a ruling that a letter asserting that a state government “may” bring an enforcement action against the insured if the insured did not “voluntarily” cease a particular activity, is a claim. Weaver v. Axis Surplus Ins. Co., No. 14-4180-cv (2d Cir. Mar. 7, 2016).

As set forth more fully in the district court opinion, which was summarized in a November 14, 2014 Executive Summary article, an executive at an insured vending machine sales company was indicted in Florida federal court for conspiracy and fraud. According to the indictment, the executive made fraudulent statements regarding the company. The executive sought coverage for the criminal proceeding under a claims-made D&O policy that incepted in 2010.

The insurer denied coverage on multiple grounds, including pursuant to the policy’s prior and pending litigation exclusion, which precluded coverage for any claim involving “any demand, suit or other proceeding pending” against an insured brought prior to February 20, 2008, “or any Wrongful Act, fact, circumstance or situation underlying or alleged therein.” The insurer asserted that the criminal proceeding involved a demand that was made in a 2007 letter sent from the Maryland attorney general to the insured entity. In the 2007 letter, the Maryland attorney general asserted that the insured made false earning representations to customers and failed to provide investor disclosures as required by Maryland law, and the attorney general threatened to bring an enforcement action against the entity if it did not cease its activities.

In the coverage litigation that followed, the district court ruled in favor of the insurer, and the insured appealed. On appeal, the policyholder conceded that the 2007 letter asserted a fact, circumstance or situation also alleged in the indictment, but argued that the 2007 letter was not a “demand” sufficient to trigger the prior and pending litigation exclusion. The Second Circuit disagreed, and affirmed the district court’s holding that the prior litigation exclusion barred coverage for the criminal indictment. According to the court, “a demand requires an imperative solicitation for that which is legally owed.” The 2007 letter requested that the insured entity provide certain documents and that the insured “voluntarily” cease and desist from vending machine sales in Maryland. The letter explained that the attorney general was acting pursuant to his “authority to investigate and take action against any person who violates” a consumer protection law, and stated that the failure of the insured entity to respond “may result in more formal legal action.” Because the court concluded that the letter underscored the authority of the attorney general to seek specific forms of monetary and nonmonetary relief, and threatened “more formal legal action” in the event that the insured entity did not respond, the letter constituted a “demand.”

Finding this to be a dispositive ground to affirm the district court’s grant of summary judgment, the court did not address the district court’s additional independent basis for granting summary judgment—that the Interrelated Wrongful Acts language of the policy operated to deem the indictment first made prior to the policy period.