The U.S. Court of Appeals for the Second Circuit affirmed a ruling of the District Court, finding that a letter from a state government agency, stating that it “may” bring an enforcement action against the insured if the insured did not voluntarily cease a certain activity, was a “demand” under the insured’s directors and officers (D&O) liability policy and, therefore, constituted a claim. Weaver v. Axis Surplus Ins. Co., No 14-4180 (2d Cir. Mar. 7, 2016)
In Weaver, the plaintiff, former CEO of MultiVend, LLC, was the subject of a criminal prosecution by the U.S. Department of Justice. He sought coverage for his defense costs under MultiVend’s D&O liability policy (the “Policy”), and sued MultiVend’s insurer, defendant Axis Surplus Insurance Company (“Axis”), for breach of contract and declaratory judgment when Axis refused to provide such coverage. Id. Slip Op. at 2. Axis denied coverage on several grounds, including under the Policy’s prior pending litigation exclusion, which precluded coverage for “any Claim … in any way involving … any demand, suit or other proceeding pending … against the Insured on or prior to [February 20, 2008], or any Wrongful Act, fact, circumstance or situation underlying or alleged therein.” Id. at 3.
Axis argued that in November 2007, the Maryland attorney general had sent a letter to MultiVend that asserted that MultiVend made false earning representations to customers and failed to provide investor disclosures as required by Maryland law. The attorney general threatened to bring an enforcement action against the entity if it did not cease its activities. Id. at 4. The November 2007 letter (the “2007 Letter”) requested that MultiVend provide certain documents and information, and that MultiVend “acknowledge in writing that it will immediately cease” the requested activity. The 2007 Letter stated that “[f]ailure to respond may result in more formal legal action.” Id. Axis denied coverage on grounds, inter alia, that the 2007 Letter was a “demand” that constituted a “claim” barred by the prior pending exclusion of the Policy.
Plaintiff argued that the 2007 Letter did not constitute a demand within the meaning of the Policy because the state government only requested that MultiVend “voluntarily” cease the activity, and further that the Letter failed to provide notice of any “drastic legal repercussions.” The Second Circuit found this argument unpersuasive. The Court noted that under New York law, “a demand requires an imperative solicitation for that which is legally owed,” as distinguished from a request carrying no legal consequences. Id. at 4. It found that because the 2007 Letter threatened “more formal legal action” if MultiVend failed to respond, it was sufficient to constitute a “demand” under the Policy. Id. Therefore, the Court affirmed the District Court’s finding that coverage for defense of the plaintiff’s criminal prosecution was precluded based on the prior pending exclusion of the Policy.
While this ruling favored the position of the insurer, the Court’s analysis of the wording of the 2007 Letter and its conclusion that such wording was a demand should be kept in mind by insurers when considering requests for coverage based on writings that are not strictly pleadings, or do not otherwise fit neatly within the terms of the applicable policy.