Applying Illinois Law, the United States District Court for the Northern District of Illinois has held that an insurer had no duty to defend a claim reported more than nine months after the end of the policy period. Wesco Ins. Co. v. Elements Architectural Grp., Inc., 2019 WL 5725440 (N.D. Ill. Nov. 5, 2019).
The insurer issued claims made and reported professional liability policies to an architecture firm for the policy periods of November 6, 2015 to November 6, 2016 and November 6, 2016 to November 6, 2017. During the initial policy period, in July 2016, the firm received a letter from a client for whom it had designed a house. The letter complained of a leak in connection with planters designed by the firm and demanded $62,000 from the firm for the resulting damages. The letter indicated that if payment were not made within fourteen days, the client would bring suit against the firm. The client, however, did not file suit as threatened but instead sent a second letter in February 2017. This letter complained about the planters again, as well as problems with a picture window. It demanded $92,000 and included an unfiled demand for arbitration. Six months later, in August 2017, the client sent a second demand for arbitration, seeking $200,000 in damages, adding complaints about the garage and the hot tub. Two weeks after receiving the second demand for arbitration, the firm first reported the matter to its insurer.
The insurer denied coverage under both policies, and in the coverage litigation that followed, the court held that the claim was first made during the initial policy period and that coverage was unavailable based on the insured’s failure to timely report the claim as required by that policy. In doing so, the court first concluded that the two letters and the two demands for arbitration constituted a single claim under the earlier policy, notwithstanding the fact that they raised different complaints about the design of the house. The court noted that the policies provide that “two or more covered claims arising out of a single wrongful act, or any series of related wrongful acts, will be considered a single claim.” According to the court, the demands all “flow[ed] from the same, singular wrongful act: [the insured’s] failure to provide acceptable professional architectural design services for the design of the home.”
Next, the court found no dispute that the insured failed to report the claim within sixty days of the end of the policy period as required by the policy’s notice provision. The court rejected the insured’s argument that it had no obligation to report the July 2016 letter because the client failed to carry through with its threat to bring suit within fourteen days. According to the court, a “demand received” is a claim and there is no exception in the policy for a demand that may be withdrawn, abandoned, or may have grown stale.
The court also rejected the insured’s attempt to invoke the estoppel doctrine set forth in Employers Insurance of Wausau v. Ehlco Liquidating Trust based on the insurer’s failure to immediately file a declaratory judgment action. The court held that under Ehlco an insurer is only estopped from raising policy defenses to coverage where it is found to have wrongfully denied coverage, and that was not the case here. According to the court, “the insurer may . . . refuse to defend the suit (and refuse to file a declaratory judgment action) if it is clear from the face of the underlying claim that the claim is not within the policy’s coverage.”