Attorney Communications Regarding Undisclosed Contamination Found to Constitute Late-Noticed “Claim” Under Professional Liability Policy

The United States District Court for the Northern District of Illinois has held that communications from counsel for the buyer of a property concerning undisclosed contamination were sufficient to constitute a Claim against the Insured seller.  Lloyd’s Syndicate 3624 (Hiscox) v. Clow, 2022 WL 614940 (N.D. Ill. Mar. 2, 2022).  Because the Insured failed to provide notice of the Claim within the notice period, no coverage was available for the buyer’s subsequent lawsuit involving the contamination.

The trustee for a family trust purchased a professional liability insurance policy for the policy period of December 8, 2017 to December 8, 2018, which was renewed the following year.  The policy defined “Claim” as “any written assertion of liability or any written demand for financial compensation or non-monetary relief.”  The policy required that the Insured “give written notice to us of any claim as soon as possible, but in any event, no later than 60 days after the end of the policy period.”  The renewal policy (for the policy period of December 8, 2018 to December 8, 2019) was issued subject to the same relevant terms.

The trust sold a farm with contaminated soil necessitating expensive remediation.  The contamination was not disclosed prior to the sale.  On August 9, 2018, the buyer’s counsel sent an email advising that the remnants of an underground gas storage tank had been discovered and asking to open a dialogue because “the problem would materially impact the feasibility of the project that was contemplated.”  In a subsequent communication issued on August 24, 2018, the buyer’s attorney stated: “I believe your client had a legal duty to disclose this issue and failed to do so . . . . Please contact me with your thoughts on how we can amicably resolve this issue.”  On December 3, 2018, the buyer made a formal indemnification demand and ultimately brought suit against the seller on April 5, 2019.

The insured tendered the suit to its insurer on July 16, 2019, during the policy period of the renewal policy.  The insurer denied coverage on the grounds that the insured failed to provide timely notice of the Claim, which it contended was first made in connection with the December 3, 2018 indemnification demand.  The insured asserted that the Claim was not first made until its attorney actually opened and read the indemnification demand on December 11, 2018 (during the policy period of the renewal policy), so as to make it timely noticed under the renewal policy.  In the ensuing coverage litigation, discovery unearthed the August 2018 emails and subsequent communications exchanged between the parties prior to the December 3, 2018 indemnification demand. 

The court granted the insurer’s motion for summary judgment, determining that the August 2018 emails (and subsequent communications) from the buyer’s counsel were sufficient to constitute a Claim first made during the policy period of the 2017-2018 policy.  Because notice to the insurer was not provided within 60 days of the expiration of that policy’s policy period, coverage was barred.  In so holding, the court rejected the insured’s reliance on the “mend the hold doctrine” to argue that the insurer was precluded from relying on the August 2018 communications because it had disclaimed based solely on the December 3, 2018 indemnification demand.  The court observed that the insurer “has not changed its position, it merely changed the facts it is relying on,” and “[t]o hold otherwise would deny a party from availing itself of subsequent obtained information gained through discovery.”