Applying California law, a federal district court has held that a request for payment of overdue legal fees does not constitute a claim for purposes of a D&O policy. Domokos v. Scottsdale Ins. Co., Case No. 5:20-cv-00366 (N.D. Cal. July 16, 2020). The court also held that the policy’s prior acts, breach of contract, and creditor claims exclusions did not bar coverage.
The insureds, the former CEO and general counsel of an electrical equipment producer, were sued in California state court in 2015 following their former company’s bankruptcy. Claimant, an attorney who provided legal services to the company, alleged that the insured officers fraudulently misrepresented the company’s financial condition and ability to pay the claimant’s fees. Prior to the inception of the insurance policy at issue, the claimant sent an email to the insureds demanding payment of the overdue invoices.
The insurer issued a claims-made-and-reported D&O policy to the company in 2012. The policy was cancelled in 2013 following the company’s bankruptcy, but it included an endorsement which extended the “Discovery Period” for three years. The policy defined “claim” to include “a written demand against any Insured for monetary damages or non-monetary or injunctive relief.” The policy excluded coverage for: (1) Wrongful Acts that occurred prior to the policy’s effective date or those that are Interrelated Wrongful Acts with a Wrongful Act that occurred prior to the policy’s effective date; (2) claims “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving” a breach of contract; and (3) claims “brought by, or maintained by, on behalf of, in the right of, at the direction of, at the behest of, or for the benefit of any person . . . who is a secured or unsecured creditor of the Company.”
The insurer denied coverage based on the above provisions, and the insureds brought suit. The insurer filed a motion to dismiss, asserting that it had no duty to defend or indemnify the insureds because the claim was not first made during the policy period or extended discovery period. Specifically, the insurer asserted that the claim was first made in 2012 when the claimant sent the email demanding payment for his overdue invoices.
The court denied the insurer’s motion to dismiss, holding that the 2012 email did not constitute a “claim” under the policy because it did not “indicate a threat of legal action or demand damages from [the insureds].” In rejecting the insurer’s argument that the email constituted a claim, the court explained that “not every vendor request for payment under a contract amounts to an insurance claim that must be reported to a company’s insurer.”
The court also held that coverage for the lawsuit was not barred by the prior acts/interrelated wrongful acts exclusion because the complaint alleged “specific communications following the [policy’s effective date]” that were not interrelated to the insured’s prior fraudulent statements. The court explained that, although “some of the alleged statements and actions occurred before [the policy’s effective date],” the lawsuit was based, in part, on conduct and statements by the insureds after the policy’s effective date.
The court likewise rejected the insurer’s argument that the policy’s breach of contract exclusion barred coverage because the insured’s liability “would not exist without the agreement for legal services.” In doing so, the court held that “the relevant question [is] whether the allegations in the Underlying Action in this case would stand absent the contract.” The court held that the claimant’s “fraud-related claims” regarding the insureds’ statements and omissions were not barred by this exclusion because they “do not rely on the existence of a contract.”
Finally, the court held that the policy’s exclusion for claims brought by creditors did not apply, holding that the exclusion was “unclear” because the policy did not define creditor and explaining that a reasonable interpretation of the exclusion would be to exclude coverage only “where the claim arises in a classic debtor/creditor relationship in a corporate context” such as that of a corporation and its bondholders.