Arbitration Demand Letter Constitutes a Claim Requiring Timely Notice

Applying Arizona law, a federal district court has held that an insured’s failure to provide notice of an arbitration demand letter barred coverage for the arbitration later filed against the insured.  Supima v. Philadelphia Indem. Ins. Co., 2019 WL 6770061 (D. Ariz. June 16, 2021).

The insured non-profit purchased eleven directors and officers liability insurance policies from October 2007 to July 2018.  The relevant policies defined Claim to include an “arbitration proceeding . . . which subjects an Insured to a binding adjudication of liability for monetary or non-monetary relief for a Wrongful Act.”  The claims-made policies also provided that “[i]n the event that a Claim is made against the Insured . . . the Insured shall, as a condition precedent to the obligations of the Underwriter under th[e] Policy, give written notice of such Claim . . . as soon as practicable to the Underwriter during th[e] Policy Period . . . but, not later than 60 days after the expiration date of th[e] Policy.”

In May 2013, the insured received a demand letter notifying the insured that the claimant, a wholesale company, wanted to arbitrate a contract dispute pursuant to a license agreement between the insured and the claimant.  The insured and the claimant subsequently communicated regarding potential arbitrators and other issues throughout 2013.  Later, in September 2016, the claimant filed a Statement of Claim with the American Arbitration Association, and in May 2017, the claimant filed a second Statement of Claim with the AAA’s International Centre for Dispute Resolution.  The insured provided notice of the May 2017 Statement of Claim to the insurer which, after initially reserving rights under the 16-17 policy, denied coverage under all policies because the insured did not report the initial arbitration demand letter during the 12-13 policy period. 

The court held that the May 2013 arbitration demand letter constituted a “Claim” under the 12-13 policy.  The letter informed the insured of the claimant’s intent to arbitrate pursuant to the licensing agreement and, according to Arizona statute, “[a] person initiates an arbitration proceeding by giving notice in a record to the other parties.[]”  The court further held that the 12-13 policy’s notice provision was clear and unambiguous, and the insured should have been aware that notice of the arbitration demand letter was required.  Finally, the court held that the insurer need not show prejudice when notice is not timely provided under a claims-made policy because “requiring the insurer to show prejudice would constitute an extension of coverage not contemplated in the original policy.”

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