In its recent decision in Regency Title Co. v. Westchester Fire Ins. Co., 2013 U.S. Dist. LEXIS 162772 (E.D. Tex. Nov. 15, 2013), the United States District Court for the Eastern District of Texas had occasion to consider the date on which a claim was first made for the purpose of triggering coverage under a professional liability policy.

Westchester insured Regency Title Company (“Regency”) under a claims made and reported errors and omissions policy.  The policy defined the term “claim” to include:

1.   a written demand against any Insured for monetary or non-monetary damages;

4. a civil, administrative, or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document.

Subsequent to the policy’s issuance, Regency was named as a defendant in a lawsuit for alleged improper withdrawal of escrow funds in connection with an underlying real estate transaction.  A year prior to filing suit, however, plaintiff in the underlying action filed a complaint with the Texas Department of Insurance (“TDI”).  The TDI complaint involved the same facts as the later filed lawsuit, and it demanded payment of $100,000 or specific performance.  Subsequent to the filing of complaint with the TDI, but prior to the policy’s issuance, the TDI sent a letter to Regency advising of the complaint and of Regency’s opportunity to respond to the complaint.  Regency, in fact, answered the TDI complaint, and nearly a year prior to the inception of the Westchester policy, the TDI completed its investigation, concluding that Regency had not committed a violation of Texas Insurance Code. 

Westchester denied coverage to Regency for the underlying lawsuit on the basis that the claim was first made with the filing of the complaint with the TDI, and that the claim was made prior to the policy’s inception date.  In considering whether Westchester had a duty to defend Regency in the underlying matter, the court likened the “claims made” requirement to an exclusion that must be construed narrowly.  As such, explained the court, if there was any potential that the TDI complaint was not a “claim” as defined by the Westchester policy, then Regency would at the very least be entitled to a defense.

Regency argued that the TDI  complaint did not fall within the first definition of “claim,” of a written demand against any Insured for monetary or non-monetary damages, because the underlying plaintiff filed its complaint with the TDI and did not send any correspondence directly to Regency.   Specifically, Regency argued that “since the complaint was sent to a third party, the complaint does not constitute a ‘demand against an insured.’”  The court rejected this contention, noting that the policy’s first definition of claim only required a written demand “against any Insured,” not a written demand “sent to an insured.”  The court refused to read such an element into the definition of “claim,” finding it to be plain and unambiguous, explaining:

Regency is asking the court to add additional requirements to the definition in the policy. The policy does not indicate that the demand must be made directly to the insured. … The Exhibits indicate that Tower Custom Homes sent TDI a demand for money from Regency … that TDI sent that demand to Regency … that Regency responded directly to the demand … and that TDI sent Regency's response to Tower Custom Homes … .  Tower Custom Homes made a demand against Regency, Regency was informed of the demand, and Tower Custom Homes was informed that Regency was informed of its demand. Had Tower Custom Homes sent the demand to Regency through the U.S. mail with a return receipt requested, the exact same results would have occurred, except that Regency may or may not have sent Tower a response.

The court further observed that even if the TDI complaint did not constitute a written demand made against any insured, then it fell within the fourth definition of “claim” as a civil, administrative or regulatory investigation filed against the insured.  Regency argued that the TDI complaint did not fall within this definition of “claim” because TDI’s actions did not constitute an “investigation” within the meaning of the policy.  Specifically, Regency pointed to a phrase in TDI’s letter to Regency advising that it was “evaluating” whether Regency had committed a violation of the Texas Insurance Code.   Regency also argued that the brevity of TDI’s involvement (its file was closed within a matter of weeks) precluded its evaluation from being considered a formal investigation.  The court rejected this parsing of TDI’s actions, noting that the TDI’s letters made several references to its investigation, and that the duration of its investigation was irrelevant, since “the policy does not indicate that a detailed investigation or an exhaustive investigation must take place, but merely that there is an investigation.”  With this in mind, the court easily concluded that TDI’s actions came within the definition of “claim,” explaining:

…  TDI's actions are consistent with an investigation. TDI sent a letter to Regency asking specifically for information from Regency and that Regency supply TDI with "supporting documentation". … TDI was attempting to obtain information from Regency. Such an action could naturally be considered the first step in a "systematic examination", which is one definition for "investigation" that Regency has put forward. … Moreover, the very fact that TDI found no violation of the Texas insurance laws indicates that TDI must have conducted some type of investigation in order to make such a finding.

Accordingly, the court agreed that TDI action constituted a “claim,” and that as such, the “claim” against Regency was first made prior to the policy’s inception date.  The court, therefore, granted Westchester’s motion to dismiss, holding that it had no duty to defend or indemnify Regency in connection with the underlying lawsuit.