The insured had two consecutive D&O policies. During the first policy period, the insured received a letter from an attorney that stated that his clients, the claimant waiters, were “deprived of tips and bonuses which amount to hundreds of thousands, and probably, millions, of dollars,” and “deprivation of these monies constitute[s] criminal violations, as well as civil RICO and the New York State Labor Law, and fraud and conversion.” The letter asked the insured to provide various documents and information, including information relating to the insured’s insurance status, to enable the attorney to comply with his “obligation to make a reasonable inquiry into the facts before filing a pleading with the courts.” The insured never notified its insurer about its receipt of the letter. After the inception of the second policy period, the claimants filed a lawsuit against the insured and the insured then notified its insurer of the filed lawsuit.
The insurer denied coverage on the grounds that the letter constituted notice of a claim made and insofar as the claim was first made against the insured prior to the second policy period, that policy would not cover the claim. The dispute was initially referred to a referee, who found that the letter did not constitute the making of a claim and, therefore, coverage was not precluded under the policy for the second policy period. The insurer appealed.
In confirming the referee’s finding that the letter does not constitute the making of a claim under these circumstances, the majority of the New York appellate court noted that as the policy fails to define the term “claim,” it was to be interpreted liberally and in favor of coverage. The court further noted that although the letter alleged that the insured unlawfully withheld money due to the employees, it did not demand any money and, despite stating that a lawsuit was being contemplated, the letter did not state that a lawsuit would be forthcoming. The court also noted that the letter “states unequivocally that counsel was seeking information in connection with his obligation to determine whether legal action was warranted nor did it state that the purpose of any such action would be the recovery of civil damages….” Noting that New York case law has yet to “ascribe…[a] generally accepted meaning to the term in the context of a claims-made policy,” the court concluded that the letter in question “falls short of a demand for money or services…or even the expression of a present intent to initiate legal proceedings.” Accordingly, the court held that the letter received by the insured “is not an assertion of a legally cognizable damage, a type of demand that can be defended settled and paid by the insured.”
Two judges dissented and believed that the word “claim” should be given a relatively expansive meaning, which would clearly define the letter as a “claim” against the insured because the in the letter, the attorney (i) referred to the waiters’ “wage claims;” (ii) accused the insured of wrongdoing and asserted that, because of that wrongdoing, the waiters had been deprived of “hundreds of thousands, and probably, millions, of dollars;” and (iii) warned of an impending lawsuit based on those “wage claims.”
