In the case of Pine Management v. Colony Insurance Company, 23-624-cv (2dCir. Mar. 26, 2024), the United States District Court of the Southern District of New York provided essential guidance regarding when a pre-suit demand constitutes a claim triggering the obligation to notify your liability insurer under New York law.
Factual Background
Pine Management, Inc. (Pine) manages, develops, and acquires rental apartment buildings throughout New York. Pine purchased professional liability insurance from Colony Insurance Company (Colony) to commence on August 1, 2018 (the policy).
On or about July 17, 2018, counsel for plaintiff, Jerome Schneider (Schneider) sent a demand letter to Pine outlining potential claims by Schneider against Pine. Among the claims, Schneider, on behalf of ten limited liability companies managed by Pine, alleged allegations of wrongdoing, including claims of fiduciary duty breaches, nondisclosure of material facts, and violations of operating agreements. It also explicitly demanded document production and alleged unauthorized payments by Pine (the demand letter).
Schneider's counsel sent the demand letter to Pine, and Pine received the letter from Schneider's counsel before the policy coverage began with Colony on August 1, 2018.
Schneider subsequently filed a complaint in New York State Court on behalf of the ten limited liability companies managed by Pine (the Schneider Complaint). The Schneider Complaint alleged causes of action against Pine including breach of contract, breach of fiduciary duty, inspection of books and records, and an accounting.
Pine notified Colony of the Schneider Complaint pursuant to the requisite policy provisions (the claim). The policy covered claims relating to real estate development services. The policy read:
"Colony agrees to pay on behalf of Pine, loss in excess of the deductible amount and up to the limits of liability provided that such loss results from a claim first made and reported in writing during the policy period and arises out of a wrongful act committed on or after the retroactive date and before the end of the policy period."
The policy defines a claim as "a written demand received for monetary, non-monetary, or injunctive relief." It also provides that, "Two or more claims arising out of a single wrongful act, or any series of related wrongful acts, will be considered a single claim and each wrongful act will be deemed to have occurred on the date of the first such wrongful act."
In this regard, Colony denied Pine's request for coverage. Colony's basis for denial rested on the fact that the claim was made prior to the policy period by way of the demand letter, and thus, the claim did not meet the requirement of being first made and reported during the policy period for coverage to be triggered. Pine then sued Colony for breach of contract and failure to defend and indemnify.
Was the Letter Sent by Plaintiff's Counsel a Claim?
A claim under the policy is defined as "a written demand received for monetary, nonmonetary, or injunctive relief." The court determined that the demand letter constituted a claim under the plain language of the policy. The demand letter detailed potential causes of action against Pine, and relayed important legal analysis as well as probable outcomes should the case procced to litigation. It also requested a meeting to discuss and the production of certain documents.
In response, Pine argued that the demand letter was not a claim for three main reasons. First, it argued that the demand letter was a summary of points of law and a request to review documents and therefore did not constitute a claim. However, precedent persuaded the court that "a letter setting forth a request under a claim of right, including an entitlement to documents is sufficient to put an insured on notice of the legal consequences of any failure to comply." Weaver v. Axis Surplus Ins. Co., 639 F.App.'x 764, 766-67(2d Cir. 2016).
Further, "even where monetary damages are not requested, a demand that an insured rectify a problem can be sufficient to constitute a claim." McCabe v. St. Paul Fire & Marine Ins. Co., 79 A.D.3d 1612, 1614 914 N.Y.S.2d 814, 816 (4th Dep't 2010). The demand letter in the case at hand specified alleged misconduct against Pine, laid out legal theories of the case, provided legal authority for the demands, requested documents as well as an accounting, and requested that the parties meet to discuss the claims. All of this together, the court ruled, was sufficient to qualify as a claim.
Second, Pine argued that the letter used "precatory language" to provide simple notice of a potential claim if differences could not be resolved. The court disagreed with this assertion as the demand letter contained language mentioning litigation and surmised that the claims were serious enough to survive any kind of summary judgment or other pre-trial judgment attempting to strike it down.
Third, Pine argued that the nature of the requested meeting in the demand letter was not clearly delineated and cannot be characterized as a last-ditch effort to avoid litigation. The court did not find this argument persuasive. "Although counsel did not specifically state that the purpose of the requested meeting was to demand monetary damages or other relief, the implication of the demand letter is that counsel requested the meeting for this reason." Seneca Ins. Co. v. Kemper Ins. Co., No, 02 CIV. 10088 (PKL), 2004 WL 1145830 (S.D.N.Y. May 21, 2004), aff'd, 133 F.App'x (2d Cir. 2005).
Pine's Knowledge of the Wrongful Act Predated the Policy Period
Colony argued that Pine's claims were not covered by the policy because Pine's knowledge of the alleged wrongful acts against it predated the effective date of the policy. The policy excluded, "any claim arising out of a wrongful act… occurring prior to the policy period if, prior to the effective date, Pine had a reasonable basis to believe that it had committed a wrongful act."
New York law requires that Pine had both actual and constructive knowledge of the wrongful act. Liberty Ins. Underwriters, Inc. v. Corpina Piergrossi Overzat & Klar LLP, 78 A.D.3d 602, 604, 913 N.Y.S.2d 31, 33 (1st Dep't 2010). Constructive or subjective knowledge means that one had knowledge of the facts relating to the wrongful act before the effective date of the policy. Actual or objective knowledge requires proof that a reasonable insured "might expect such facts to be the basis of a claim."
Here, Pine received the demand letter and was made at least subjectively aware that a wrongful act had occurred. The allegations made in the demand letter put Pine on notice that Schneider was alleging acts of misconduct against it. The truth or falsity of the allegations was of no import. The crux of the issue was whether or not Pine was aware of the allegations. Wrongful acts do not have to be proven true, the insured simply must know and understand that the wrongdoing was alleged. Therefore, the court concluded that Pine had subjective and constructive knowledge of the wrongful acts before the applicable policy period.
The demand letter also put Pine on notice that there was at least some reason to anticipate a claim. This would satisfy the objective or actual knowledge prong because a reasonable insured would have known that it had committed at least an alleged wrongful act. The court only required that there be "some basis" to know a claim may be filed. Therefore, Pine was both subjectively and objectively aware that it was accused of engaging in a wrongful act before the inception of the policy. Since the demand letter and the Schneider Complaint were treated as a single claim by the court, the claim was not covered.
The Alleged Wrongful Acts Predate the Retroactive Date
The policy in the case at hand allows coverage for claims "that arise out of a wrongful act committed on or after the retroactive date and before the end of the policy period." The policy specified that in a series of wrongful acts, the wrongful act is deemed to have occurred on the date of the first wrongful act. Colony argued that even if one of the wrongful acts alleged against Pine was committed before the coverage period, there should not be coverage for any related acts.
The court looked to guidance of Nomura Holding America, Inc. v. Fed. Ins. Co, 629 F.App.'x 38, 40(2d Cir. 2015) to determine if the alleged wrongful acts should be viewed as related. The Nomura Court found that the proper inquiry is whether "the underlying claims are based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions, or events."
The Schneider Complaint lists a long litany of infractions caused by Pine's mismanagement of its properties. The allegations relate to the same entity, namely Pine, in its operation of real estate development services and involve the same plaintiffs. The court concluded that the claims were related because they involved the same "facts, circumstances, transactions, or events." Since all the facts alleged in the Schneider Complaint either preceded or related to the wrongful acts, Colony's policy did not apply and it was not required to cover Pine's losses nor did it have a duty to defend. Therefore, a judgment on the pleadings was granted.
Ultimately, the court sided with Colony, finding that Pine's initial receipt of the demand letter while otherwise did constitute a claim under the policy, was properly denied because it was not made within the policy period. Furthermore, Pine was deemed to have prior knowledge of the alleged wrongful acts included in the demand letter and the Schneider Complaint and the court concluded that the claims were related and predated the policy's retroactive date. This ruling resulted in a denial of Pine's coverage claims. The court's decision and ruling emphasizes the importance of understanding policy terms and timelines in insurance disputes.
This article originally appeared on Wood Smith Henning & Berman.
About the Author:
Jacqueline Murphy is a partner at Wood Smith Henning & Berman, LLP. jmurphy@wshblaw.com.