Southern District of New York Precludes Coverage Under Insurer’s Professional Liability Policy for Settlement of Claim Arising Prior to Inception of Policy

In Colony Ins. Co. v. AIG Specialty Ins. Co., the United States District Court for the Southern District of New York considered a claim under a professional liability policy brought by Colony Insurance seeking reimbursement for extra-contractual damages paid on a “claims made” commercial general liability policy. The underlying claim concerned a construction defect lawsuit against a number of defendants, including a Colony insured. In September 2013, the underlying plaintiffs’ counsel sent a demand letter to Colony, stating that unless it paid its $2,000,000.00 policy limits as part of a global settlement, the underlying plaintiffs and the Colony insured would proceed to pursue a bad faith action against Colony. As Colony had previously determined that the lawsuit was not covered under its policy, it declined to participate in the settlement.

The underlying lawsuit was subsequently settled, with the underlying plaintiffs agreeing to the dismissal of the claims against the Colony insured without prejudice, while accepting the assignment of the insured’s rights under the policy. The underlying plaintiffs then proceeded to institute a second action against the insured, based upon the same essential allegations as the previous action. The insured again sought coverage from Colony, which was denied. Colony instituted a declaratory judgment action seeking a determination that it was not obligated to provide coverage. Pursuant to its agreement with the underlying plaintiffs, the insured did not defend the case.

In July 2014, the matter proceeded to trial and a judgment of slightly over $20 million. The underlying plaintiffs’ counsel sent a letter to Colony demanding payment of the full judgment, at which time Colony made a claim under a professional liability policy covering claims arising from October 1, 2013 to October 1, 2014. The underlying plaintiffs brought a garnishment action against Colony, which was ultimately settled for $5 million. Colony sought indemnification from its professional liability insurer for the portion of the verdict that exceeded its policy limits. Colony’s claim was denied, and it subsequently brought suit against its professional liability insurer.

In analyzing a motion for summary judgment brought by the defendant professional liability insurer, the Court began by noting that the policy at issue provided coverage for “all sums which the Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Insured and reported to the Company during the Policy Period for any Wrongful Act of the Insured[.]” The Court observed that under applicable New York law, the term “claim” as used in a CGL policy is not limited to the filing of actions, but can also encompass a demand letter. The Court determined that as the September 2013 letter raised the potential of a bad faith action for extra-contractual damages, a claim for such damages arose when the letter was sent. The Court also concluded that the July 2014 demand for payment of the excess judgment did not present a new claim for purposes of policy coverage. As the excess judgment was entered in a lawsuit concerning the same construction project at issue in the initial lawsuit, the Court held that there was a “sufficient factual nexus” between the July 2014 demand for payment and the initial September 2013 demand.

The Court therefore held that the subject claim arose on September 2013, prior to the inception of the subject policy. Accordingly, the Court concluded that there was no coverage under the policy, and granted the defendant insurer’s motion for summary judgment.