Pre-Policy Settlement Letter Deemed a “Claim,” Barring Coverage for Related Lawsuits

Applying California law, the United States Court of Appeals for the Ninth Circuit has held that a letter proposing an informal settlement received before the policy period constituted a claim, such that no coverage was available for subsequent related lawsuits.  Pac. Coast Surgical Ctr., L.P. v. Scottsdale Ins. Co., 2020 WL 5870257 (9th Cir. Oct. 2, 2020).

In 2013, the insured physicians group informed a partner physician that it was terminating his partnership interest and repurchasing his shares for an alleged violation of the partnership agreement’s non-compete provision.  By letter dated March 20, 2014, the partner physician disputed the physician group’s right to repurchase his shares and the enforceability of the non-compete provision.  The letter noted that the partner physician was “willing to attempt to settle [the] matter informally [before] submitting [it] to mediation,” and proposed that the physicians group purchase his interest and release him from the non-compete provision.  The partnership agreement required mediation before the partner physician could file suit.  In February 2015, the partner physician filed suit.  A few months later, another partner physician filed a lawsuit asserting similar allegations.

The insurer issued the policy for the policy period from March 30, 2014 to March 30, 2015.  The policy defined “Claim” to include “a written demand against any Insured for monetary damages or non-monetary injunctive relief.”  The policy also provided that “all Claims arising out of the same Wrongful Act . . .  shall be deemed to be a single Claim, and such Claim shall be deemed to have been made [at the time of the earliest Claim] regardless of whether such date is before or during the Policy Period.”

Based on the policy language, the insurer denied coverage for the lawsuits because they were related to the March 20, 2014 letter, which was sent ten days before the policy incepted.  The physicians group did not dispute the relatedness of the lawsuits and the letter but argued that the letter was not a claim because the letter was not a “demand.”

The district court reasoned that the letter constituted a Claim because the request to be released from the non-compete provision was a request for non-monetary relief and the offer to settle before submitting the matter to mediation was a threat of litigation.  In affirming the district court’s decision, the appellate court held that the letter was a Claim because it was an assertion of a legal right and rose above a mere request for explanation or strong statement of one’s position.  Accordingly, the court concluded that the policy did not afford coverage for the lawsuits because they related to a Claim first made before the inception of the policy.

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