A California federal district court, applying California law,  has held that an insurer was entitled to summary judgment that it had no duty to defend a suit against its insured because the insured failed to disclose a related claim in its application, and the claim therefore predated the policy period.  Kelly v. Starr Indem. & Liab. Co., 2017 WL 3457145 (S.D. Cal. Aug. 10, 2017).

 A real estate development company received a letter from an investor in August 2010 identifying two delinquent promissory notes and threatening legal action.  In May 2011, the company executed an application for a directors and officers liability policy and did not disclose the investor demand.  In November 2011, the investor sent another demand letter identifying additional delinquent promissory notes, alleging misrepresentations concerning anticipated payments on the original two delinquent notes, and again threatening legal action.  After the insured tendered the November 2011 letter, the insurer denied coverage based on the insured’s failure to disclose the August 2010 demand on its application.  The insurer also contended that coverage was barred based on the prior knowledge exclusion and the professional services exclusion, and because the claim was first made before the policy incepted.

In the coverage action that followed, the court held that the insured’s failure to disclose the August 2010 demand letter on the application precluded coverage. The application had asked the insured to confirm that no parties for whom the insurance was sought had knowledge of any fact, circumstance, situation or information that may give rise to a claim, and it further provided that, if any such knowledge or information existed, any claim “based upon, arising from, or in any way relating to” that information would be excluded from coverage.

The court determined that, when the insured completed the application, it had knowledge that the investor had asserted that it was liable for non-payment of the promissory notes.  Therefore, at the time of the application, the insured “had notice of a claim, whether actual or potential, arising from the [p]romissory notes,” and any claim that arose out of or related to the promissory notes would not be covered.  In reaching this determination, the court rejected the insured’s assertion that the August 2010 demand letter was merely a “bill” and its argument that the application language was ambiguous.  The court also rejected the insured’s argument that the insurer had waived the right to rely on the application language by including a non-rescindability clause in the policy, noting that “[i]t is well-established that rescission is not an exclusive remedy.”

The court ultimately concluded that that there was no coverage for the November 2011 demand because it arose out of or was related to the August 2010 demand and the claim predated the inception of the policy.