Coverage Barred by Prior Litigation Exclusion, Regardless of Insured’s Actual or Reasonable Belief About Pre-Policy Demand Letter
A federal court in Florida has held that a prior or pending litigation exclusion in a claims-made policy applied where, prior to the inception of the policy, a member of the insured limited liability company sent a letter to another member demanding distributions and threatening to file a lawsuit. U.S. Liab. Ins. Co. v. Kelley Ventures, LLC, 2015 WL 5827903 (S.D. Fla. Sept. 30, 2015). The court granted the insurer’s motion for summary judgment even though there was a material dispute of fact as to whether the member subjectively and/or reasonably believed that a claim had been made against the insured LLC prior to the policy period.
When applying for a corporate D&O liability insurance policy, a member owning 50 percent of the insured venture limited liability company (insured member) answered “no” to the question whether any person or entity was aware of any fact that might result in a claim against the insured or any of its officers or directors. Prior to filing the application, however, the member who owned the other half of the insured LLC (claimant member) sent several letters demanding equal distributions from the LLC and threatening to file a lawsuit. The claimant member subsequently filed the underlying lawsuit against the LLC and the insured member during the policy period. The insurer denied coverage and filed a lawsuit seeking (1) rescission of the policy due to a material misstatement on the application, or, in the alternative, (2) a declaratory judgment that several provisions in the policy, including a prior or pending litigation exclusion, barred coverage.
On the insurer’s motion for summary judgment, the court held that coverage was barred by a prior or pending litigation exclusion, which barred coverage for any “pending or prior … claim [or] demand … of which an Insured had written notice before the inception … of th[e] Policy.” According to the court, the claimant member’s letters made detailed demands for distributions from the LLC prior to the policy period, and the exclusion thus applied regardless of whether the insured member subjectively or reasonably believed that the nature of the claims had changed over time.
As a separate and independent reason for granting summary judgment, the court also held that a “Percentage Shareholder Exclusion” for claims brought by an owner of more than 10 percent of the LLC’s shares applied to bar coverage. In so holding, the court rejected the argument that the exclusion did not apply to the claimant member because he allegedly brought the suit as a tenant against his landlord, rather than as a member against its LLC.
The court found a material dispute of fact remained as to whether the insured member subjectively or reasonably believed that the claimant member was asserting a potential claim against the LLC prior to the policy period. The court therefore declined to rescind the insurance policy as a matter of law because the insured member might have subjectively believed there was not a claim against the LLC when completing the application for insurance. For the same reason, the court also denied the insurer’s motion for summary judgment on the issue whether coverage was precluded by the “Full Prior Acts Coverage Provision,” which stated that coverage would not apply to claims based on wrongful acts prior to the inception of the policy that the “persons signing the Application had knowledge, or otherwise had a reasonable basis to anticipate.”