Court Rejects Claim Within a Claim Under Claims-Made Policy

By Don R. Sampen, published, Chicago Daily Law Bulletin, August 11, 2020

The 7th U.S. Circuit Court of Appeals recently held that an argument for the award of damages in underlying litigation first made against the insured more than a decade after the litigation commenced, was not a “claim” that could give rise to coverage under a claims-made policy in effect when the argument was first asserted.

The case is Market Street Bancshares, Inc. v. Federal Insurance Co., 962 F.3d 947 (7th Cir. 2020). The insured, Peoples National Bank of McLeansboro, was represented by Sharp-Hundley P.C. of Mount Vernon. Walker Wilcox Matousek LLP of Chicago represented the insurer, Federal.

Peoples Bank became embroiled in litigation with bank customers Terry and Robert Newman over loan obligations in connection with the Newmans’ sale of a restaurant franchise business and assumption of lease agreements. The litigation began in 2003 regarding the bank’s alleged failure to make a line of credit available to cover lease obligations.

The Newmans’ case did not go to trial until 2016, at which time they made a new argument for damages that had not been pleaded in their complaint or earlier asserted in the case. The argument related to the bank’s obligations under a so-called pledge agreement. Although not earlier asserted, the trial court allowed it and ultimately awarded damages based on the pledge agreement.

While that damages issue was pending, Peoples Bank notified Federal and sought coverage under a claims-made professional liability policy issued by Federal to the bank in 2014. The policy had a three-year term and covered “claims” first made against the bank during that period.

The policy defined the term “claim” as, among other things, “a. a written demand for monetary or non-monetary relief, including injunctive relief; [or] b. a civil proceeding commenced by the service of a complaint or similar pleading….”

Peoples Bank contended the new damage argument constituted “a written demand for monetary… relief” first made during the policy period, and, thus, gave rise to coverage. Federal, however, disagreed, taking the position that the damage argument was not a “claim” and, even if it was, it would be regarded has having been “first made” when the litigation was commenced in 2003, well outside the policy period.

Peoples Bank sued Federal in state court for coverage, which action was removed to federal court. Federal then counterclaimed for a declaration of no coverage and obtained a summary judgment in its favor. Peoples Bank appealed, but by the time it did so, it obtained a favorable decision on the underlying pledge agreement damage argument. The issue on appeal thus concerned defense costs.

Analysis

In an opinion by Judge Michael S. Kanne, the 7th Circuit affirmed. He stressed the policy’s definition of “claim” as including either a written demand for money during the policy period, or a civil proceeding commenced during that period.

According to Kanne, for the new damages argument to be a “claim” within the policy period, the “written demand” would necessarily constitute a “claim” within the “civil proceeding,” in sum, a claim within a claim. And, he said, “This cannot be.”

It cannot be because a “written demand” would then engulf the “civil proceeding” definition, rendering the latter meaningless and surplusage. Rather than that interpretation, Kanne said that once a “civil proceeding” against the insured is commenced, no other claim may form within that claim. Typically, he observed quoting Illinois case law, when items are separated by a semicolon — as these two parts of the definition were — “only one could apply at a time.”

Kanne also relied on the purpose of a claims-made policy, which, he said, indicates that each type of “claim” excludes the others. Overlapping claims would muddy the insurer’s risk exposure, which otherwise is easily identifiable under a claims-made policy, making the policy less expensive than an occurrence policy.

In sum, because the pledge agreement argument was made within the “claim” commenced in 2003, the argument was not itself a claim and fell outside of coverage. The court therefore affirmed summary judgment for Federal.

Key point

Once a “civil proceeding” or lawsuit is commenced against an insured, no allegation or argument made within the proceeding is a new “claim” for purposes of a claims-made policy, but is part of the same “claim” as the civil proceeding.