ALERT: A Demand Letter or Refund Request May Constitute a ClaimPrint PDFShare
Most business owners know that when they are sued, they should immediately report the claim to their insurer in order to ensure coverage. But, a recent Eighth Circuit Court of Appeals decision, Philadelphia Consol. Holding Corp. v. LSi-Lowery Systems, Inc., 775 F.3d 1072 (8th Cir. 2015), explains that the requirement to notify the insurer may be triggered long before suit is filed: a demand letter, or even an email seeking a refund, can be a “claim.”
LSi-Lowery sold business software to Hodell. From March to June 2007, Hodell sent numerous emails to LSi-Lowery complaining about the performance of the software, seeking a refund, and threatening to take legal action unless performance was immediately improved. Hodell’s lawyers sent a demand letter dated July 24, 2007 threatening litigation within a few days. Hodell did not sue immediately, though. In January 2008, it sent additional communications seeking a refund. It did not file suit against LSi-Lowery until November 2008. LSi informed its insurer, Philadelphia, of the lawsuit in December 2008.
LSi-Lowery had two claims-made policies with Philadelphia: one for claims made in 2007 and one for claims made in 2008. Philadelphia denied coverage under both policies, arguing that (1) LSi-Lowery did not provide any notice during 2007, so there was no coverage under the 2007 policy; and (2) the 2008 policy only covered claims “first made” during the policy period, and Hodell’s claim was “first made” to LSi-Lowery in 2007. The first of these issues was uncontested on appeal. The key question was whether the 2007 emails and demand letter constituted a claim that predated the 2008 policy.
The Eighth Circuit’s analysis began with the principle that under a claims-made policy, notice is especially important; if the insured does not give notice within the contractually specified period, there is simply no coverage whether or not the insurer was prejudiced. The Eighth Circuit reviewed the contents of the 2007 emails and letter and affirmed the District Court’s conclusion that the 2007 communications constituted a claim. First, the Eighth Circuit noted that in a previous case, it had held that a demand letter from an attorney could constitute a claim. See Berry v. St. Paul Fire & Marine Ins. Co., 70 F.3d 981, 983 (8th Cir. 1985). It concluded that the 2007 emails and demand letter constituted a claim because they showed that Hodell blamed LSi for the software problems, requested that LSi fix the problem, and expected LSi to pay the associated costs.
LSi argued that the 2007 communications were not a claim because they were not a specific demand for money. The Eighth Circuit rejected this argument, on the basis that Hodell’s proposal for a refund and proposal of a “settlement” were, in effect, a demand for money. LSi also argued that the 2007 communications from Hodell represented dissatisfaction with contract performance, rather than a claim of negligence; because the policy did not cover breach-of-contract claims, the 2007 communications could not constitute a claim under the policy. The Eighth Circuit also rejected this argument, explaining that Hodell had not limited itself to a breach-of-contract claim, but had instead made clear that it intended to pursue all legal and equitable remedies.
Philadelphia v. LSi-Lowery was decided under Missouri law, but the key principles would be the same under Minnesota law. See Cargill, Inc. v. Evanston Ins. Co., 642 N.W.2d 80, 86-87 (Minn. Ct. App. 2002) (under a claims-made policy, if notice is not given within the contractually specified period, there is no coverage even if the insurer was not prejudiced; letter requiring insured to take action, even without any specific deadline or demand for money, was a “claim”); Land O’Lakes, Inc. v. Employers Mut. Ins. Co. of Wis., 846 F.Supp.2d 1007 (D. Minn. 2012) (under Minnesota law, “potentially responsible party” letter from EPA was a “suit” for purposes of triggering duty to defend).
Philadelphia v. LSi-Lowery is a useful reminder that coverage counsel should be consulted as soon as a demand letter or other communication threatening litigation is received. For more information, please contact your Briggs and Morgan attorney or a member of our Insurance Coverage practice.