In Philadelphia Consolidated Holding Corporation v. LSi-Lowery Systems, Inc, -- F.3d --, 2015 WL 127368 (8th Cir. Jan. 9, 2015), the United States Court of Appeals for the Eighth Circuit, applying Missouri law, affirmed the district court’s grant of summary judgment for insurer when the insured failed to give notice within the policy period of a claims made professional liability policy.
In 2007 and 2008, Philadelphia Consolidated Holding Corporation (which was doing business as Philadelphia Insurance Companies) (PIC) issued two claims made policies to LSi-Lowery Systems, Inc. (LSi). “The 2007 policy was effective from April 23, 2007 to April 23, 2008; [and] the 2008 policy was effective from April 23, 2008 to April 23, 2009.” Id. at *2 n.5.
This case arose out of a dispute between LSi and Hodell-Natco Industries, Inc. (Hodell). LSI sold business software to Hodell, and Hodell was dissatisfied with the product. In 2007 and early 2008, Hodell communicated its dissatisfaction to LSi on several occasions, including through its attorneys. One of those letters, dated July 24, 2007, indicated that Hodell would “pursue all legal and equitable remedies available to it” if its concerns were not addressed. Id. at *2. Later, on January 23, 2008, Hodell requested that LSi refund Hodell all of the money Hodell had paid to LSi for “software licenses and maintenance fees.” Id.
On November 21, 2008, Hodell filed suit against LSi for “fraud, breach of contract, negligence, and negligent misrepresentation arising from the performance issues with the software.” Id. “On December 8, 2008, LSi first notified PIC of Hodell’s claims against it.” Id.
Under the terms of the 2008 policy, LSi was required to notify PIC of “‘any claim first made against you during the policy period[,]’” and the policy excluded coverage for “‘any claim . . . [for] any wrongful act committed prior to the policy period . . . which you had any basis to believe might reasonably be expected to give rise to a claim under this Policy.” Id. at *3. PIC argued that no coverage was available to LSi because Hodell’s complaints to LSi were not first made during the 2008 policy period, and because Hodell’s pre-litigation demands constituted “claims” sufficient to trigger the notice provision of the policy. The court agreed.
Both the 2007 and 2008 policies defined a claim, in part, as a “‘demand for money.’” Id. at *4. Thus, the court found that the January 23, 2008 request for a refund constituted a claim under the policy. And, because that demand was made prior to the start of the 2008 policy (April 23, 2008), and because LSi did not notify PIC of the demand until December 8, 2008, the notice was untimely, and coverage was barred. Id.
In so ruling the court emphasized that, “[u]nder a claims made policy, notice is especially important.” Id. at *3 (citation omitted). This is because, “[u]nder a claims made policy, notice defines the limits of the insurer’s obligation – if there is no timely notice, there is no coverage.” Id. at *4 (citation omitted). Furthermore, the court noted that prejudice to the insurer is not arequirement under Missouri law when analyzing waiver under a claims made policy. See id. at *5. As a result, there was no coverage under the second PIC policy because a claim had been made against the policyholder before the policy incepted, and there was no coverage under the first PIC policy because the policyholder had not reported the claim it had received prior to the expiration of the policy.
Philadelphia Consolidated Holding Corporation reinforces the centrality of notice to coverage under claims made policies. Policyholders who fail to notify their insurer of demands for money when those demands are made run the risk that they will not be able to successfully pursue coverage once the claimant actually files suit.