The U.S. Court of Appeals for the Seventh Circuit, applying Illinois law, has held that a written demand for monetary relief, made as part of an ongoing civil proceeding, cannot constitute a second Claim distinct from the Claim already initiated by the civil proceeding itself under a claims-made policy. Market Street Bancshares, Inc. v. Fed. Ins. Co., 2020 WL 3396303 (7th Cir. June 19, 2020). The court based its holding on both the policy’s text and the principles underlying claims-made coverage.
In 2001, a bank was involved in the sale of a restaurant franchise. The bank allegedly mishandled funds that should have been set aside for a specific contingency related to the sale and was sued. The suit wound its way through Illinois state courts for over a decade. Judgments (as to liability only) were entered against the bank in 2013 for breach of contract and in 2015 for conversion and breach of fiduciary duty. In 2014, the bank purchased a claims-made professional liability policy, which covered it for certain claims “first made” during the Policy Period – April 15, 2014 to April 15, 2017. In 2016, a bench trial was held concerning the damages the bank owed in connection with the 2015 liability judgments. At the bench trial, the plaintiffs were permitted to make a new argument that had not been raised previously and were awarded damages based on that argument.
The policy defined a Claim as either a “civil proceeding” or “a written demand for monetary … relief.” The bank asserted that the novel damages argument was a “written demand” Claim first made during the Policy Period and distinct from the civil proceeding Claim. The insurer asserted that there was no second Claim, only the first, uncovered, “civil proceeding” Claim. Coverage litigation ensued.
The court rejected the bank’s “Claim-within-a-Claim” argument based on the language of the policy and the purpose of claims-made insurance. Both, in the court’s view, supported the conclusion that each type of Claim must exclude the others. With regard to the text of the policy, allowing a “written demand” claim to arise from an assertion made within a “civil proceeding” would render the “civil proceeding” prong meaningless. With regard to the purpose of claims-made insurance, the court opined that allowing new Claims to crop up within existing civil proceedings would prevent the insurer from calculating claims-made premiums, as that calculation depends in part on clarity that Claims initiated prior to the policy period will not be covered. Having concluded that there was no second Claim at all, the court did not need to address issues of relatedness. A petition for rehearing was denied on July 10, 2020.