ARTICLE
8 June 2023

Coverage Barred By Related Claim Made Prior To Policy Period And Prior Knowledge Exclusion

WR
Wiley Rein

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The insured sought coverage for the lawsuit, and the insurer denied coverage, asserting that the letter and the lawsuit constituted a single claim made before the policy incepted.
United States New York Insurance

Applying New York law, the United States District Court for the Southern District of New York has held that no coverage exists under a professional liability policy because the lawsuit for which the insured sought coverage was based on largely the same facts, circumstances, and alleged legal violations as a claim made before the policy's inception. Pine Mgmt. Inc. v. Colony Ins. Co., 59 F.4th 364, 2023 WL 2575082 (S.D.N.Y. Mar. 20, 2023).

Prior to the policy's inception, the insured management and development company received a letter from the claimant's attorneys advising it of claims against it arising from the insured's management and asserting that the insured had breached its fiduciary duties, had not acted in good faith, had breached contracts, and demanding an accounting. Subsequently, also during the policy period, the insured was sued in a lawsuit by ten companies it managed alleging breach of contract, breach of fiduciary duty, inspection of books and records, and an accounting.

The insured sought coverage for the lawsuit, and the insurer denied coverage, asserting that the letter and the lawsuit constituted a single claim made before the policy incepted. The insurer further asserted that, because the insured knew it had committed a "Wrongful Act" prior to the effective date of the policy, the lawsuit was precluded from coverage by the policy's prior knowledge exclusion, which expressly excluded from coverage any Claim "arising out of a Wrongful Act . . . occurring prior to the Policy Period if, prior to the effective date . . . the insureds had a reasonable basis to believe that they had committed a Wrongful Act."

The court agreed with the insurer. First, the court held that the letter constituted a "Claim" under the policy, which was defined to include "a written demand received by the insureds for monetary, nonmonetary, or injunctive relief." Second, the court concluded that the letter and the lawsuit were a single claim made prior to the policy period because they alleged related conduct. Third, the court determined that, under New York's standard, the insured had both subjective and objective knowledge that it had committed a "Wrongful Act" prior to the policy period, and thus the prior knowledge exclusion further applied to preclude coverage for the lawsuit.

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