A California state court of appeals recently held that an insurer properly denied coverage after its insured failed to timely report a “claim” after receiving a demand letter.  Westrec Marina Management, Inc. v. Arrowood Indem. Co., 2008 WL 2406143 (Cal.App. 2 Dist. June 16, 2008).

The insurer issued a directors and officers liability policy to Westrec.  Thereafter, Westrec’s employee filed a complaint with the Department of Fair Employment and Housing (DFEH) alleging employment discrimination by Westrec and demanding a right-to-sue notice.  The attorney for Westrec’s employee then sent a letter to Westrec on June 24, 2003 advising that the employee had received right to sue letters from DFEH and giving Westrec the opportunity to “promptly rectify the harm.”  The employee filed a lawsuit against Westrec on December 19, 2003.  Westrec notified its insurer of the action on January 30, 2004, tendered the defense, and requested indemnity.

The insurer declined to defend or indemnify its insured on the basis that either the complaint to the DFEH or the demand letter, or both, constituted a “claim” as defined in the policy and that the insured failed to provide timely notice of the claim.  Westrec filed a complaint against its insurer alleging breach of contract and breach of the implied covenant of good faith and fair dealing.  The trial court held that the complaint to the DFEH was not a “claim”, but that the demand letter to Westrec was a “claim” because it was a demand for a monetary settlement.

The Court of appeals affirmed the judgment that the demand letter was a written demand for civil damages or other relief and was therefore a “claim” under the policy.

For a full copy of the opinion, please click here.