Lawyer's "Please Be Advised..." Letter Found Not To Constitute a "Claim"

D&O COVERAGE – CLAIMS-MADE POLICY – WHAT CONSTITUTES A "CLAIM"
Yale Club of New York City, Inc. v. Reliance Ins. Co. in Liquidation
(1st Dept., decided 9/2/2008)

As the name implies, under "claims-made" insurance policies, only claims made and reported during a policy period qualify for coverage. The policy in force on the date the insured became aware and gave notice of a "claim" is the policy that must respond with defense and indemnification coverage, provided the negligent act, error or omission giving rise to the claim occurred after a specified “prior acts” or “retroactive” date.

Yale Club of New York City was the insured under two "claims-made" insurance policies issued by Lloyds, London and Reliance, providing directors and officers liability coverage for the years ending on November 23, 1993 and November 23, 1994, respectively. On August 12, 1993, while Yale Club was insured under the Lloyds policy, it received a letter from an attorney representing certain waiters and other employees at the Yale Club who alleged to have been "deprived of tips and bonuses." The letter requested information to enable compliance with counsel's stated "obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." Yale Club did not notify Lloyds about the letter.

In February 1994, after coverage had commenced under the Reliance policy, the attorney instituted an action against Yale Club on behalf of 13 Yale Club employees represented by his firm. Yale Club notified Reliance of the claim the following month, which disclaimed coverage under its policy on the ground that the August 1993 letter constituted notice of a claim made.

Some years later, the Yale Club settled with the waiters for $370,000. Shortly thereafter Reliance went into liquidation and the Yale Club submitted a proof of loss to its Ancillary Receiver for the sum of the $370,000 settlement, plus $405,005.07 in attorney fees, as well as interest at 9% from May 2000. Like Reliance, the Ancillary Receiver of Reliance asserted that the date of the Yale Club's receipt of the August 1993 lawyer's letter constituted the date upon which the waiters' claims were first made, and, since this date occurred prior to the policy period, denied coverage.

The issue of the August 1993 letter's effect on Reliance's liability to Yale Club was submitted to a referee, who found that "the letter was merely a request for information; the claim was properly filed after the Reliance coverage began." Yale Club successfully moved New York County Supreme Court to confirm the referee's report, and the New York Superintendent of Insurance, as Ancillary Receiver for Reliance, appealed.

In a 3-2 decision, the First Department AFFIRMED the judgment for Yale Club, Justice Tom writing the majority's opinion, which began:

At issue is whether a letter received by an insured constitutes a "claim" within the meaning of a claims-made insurance policy. Although the term is undefined in the insurance contract, defendant Superintendent of Insurance, as Ancillary Receiver for Reliance Insurance Company, contends that case law dictates that the letter be treated as a claim. Since there is an ambiguity as to what constitutes a claim under the Reliance policy, such ambiguity must be construed against the insurer under the doctrine of contra proferentum. In the context of ongoing attempts by the union representing the insured's employees to resolve the parties' dispute, the letter, which neither makes any demand for payment nor advises that legal action will be forthcoming, is insufficient to state a claim.

The majority rejected the Superintendent's invitation, absent a definition in Reliance's policy on what constituted a "claim", to resolve any ambiguity in that term by speculating on the parties' intent. Instead, the majority, noting that New York law ascribes no generally accepted meaning to the term in the context of a claims-made policy, held that under established New York case law, the term has been defined as, for instance, "a demand received by the Insured . . . for money or services":

While the disputed letter certainly conveys the suggestion that a lawsuit was being contemplated, it also states unequivocally that counsel was seeking information in connection with his obligation to determine whether legal action was warranted. Moreover, the letter does not even state that the purpose of any such action would be the recovery of civil damages, merely alleging that the Yale Club's actions variously "constitute criminal violations, as well as civil violations of RICO and the New York State Labor Law, and fraud and conversion."

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Counsel's letter to plaintiff falls far short of a demand for money or services (Retirement Fund of the Fur Mfg. Indus. v Republic Ins. Co., 755 F Supp 625 [SDNY 1991], affd 948 F2d 1275 [2d Cir 1991]), or even the expression of a present intent to initiate legal proceedings (see In re Ambassador Group, Inc. Litig., 830 F Supp 147, 155 [EDNY 1993]). Any action that might have been contemplated in pursuit of the employees' claim is implicitly conditioned upon the outcome of counsel's investigation of its merit. Thus, the letter received by plaintiff is not "an assertion of a legally cognizable damage, . . . a type of demand that can be defended, settled and paid by the insurer" (Evanston Ins. Co., 132 AD2d at 185).

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Defendant's sole basis for seeking reversal of the judgment against the Liquidation Bureau is his contention that the claim arose prior to the inception of the Reliance policy and, thus, outside the scope of its coverage.

Defendant's contention lacks a sound factual predicate. To sustain his attack on the judgment would require this Court to assign an expansive meaning to the term "claim" under uncertain and contentious circumstances. It is uncontested that the workers on whose behalf the letter sought information were represented by a union, and it is apparent that the union was engaged in efforts to resolve the dispute on their behalf and on behalf of the rest of its members employed at the Yale Club. Plaintiff's mere awareness that an action was being contemplated by the attorney for the 13 Yale Club employees was hardly tantamount to notice that an action would be brought, since his investigation could have revealed that suit was unwarranted or subsequent events could have rendered an action unnecessary. The mere awareness of alleged wrongdoing is not a "claim" within the meaning of the typical claims-made policy (see Purcigliotti, 240 AD2d at 206).

The two-justice dissent disagreed with the majority's assessment of the August 1993 lawyer's letter and distinguished the case law authority upon which the majority relied:

From its very first sentence, the Letter could not have been a plainer statement that its subject matter was the claim being made on behalf of certain named employees of the Yale Club. The sentence read: "Please be advised that our office represents the above named employees of the Yale Club with respect to wage claims..." In the Letter, the waiters claimed, among other things, "that they [had] been deprived of tips and bonuses which amount to hundreds of thousands, and probably, millions, of dollars." The Letter further alleges that "[t]he deprivation of these monies constitute[s] criminal violations, as well as civil violations of RICO and the New York State Labor Law, and fraud and conversion." It requests 13 sets of relevant documents and information, as well as insurance information. Significantly, the Letter states that pursuant to court rules "counsel is under an obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." It is reasonable to assume that were it not for "court rules", counsel would have already filed the summons and complaint.

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Further, I contend that both the Yale Club and the majority improperly cite to the nonbinding U.S. District Court opinion in Ambassador to support their contention that the Letter was not a claim because it was not a "demand for money or services." In Ambassador, the state insurance commissioner sent two letters to the insurer stating that it "had uncovered facts which [led] him to conclude that certain former directors and officers were guilty of acts falling within the scope of coverage afforded by the ... policy." In re Ambassador Group, Inc. Litig., 830 F. Supp. at 151 (E.D.N.Y. 1993). The policy did not define the term "claim" and the District Court held that neither of the two letters in question constituted a claim as the term is normally viewed. Id.

In reaching its decision, the Ambassador court relied heavily upon the fact that the policy characterized the reporting of a "claim" to the insurer as giving notice and the reporting of a "claim" directly to the directors and officers as the making of a claim. Id. at 154. The court also relied upon the fact that the letters under evaluation did not specify an alleged wrongdoing nor did they contain a demand for relief. Id. at 155. Thus, the Ambassador court found that the letters in question did not constitute a claim. Id. at 156.

Notwithstanding, Ambassador is distinguishable from the instant case insofar as in this case, the Letter very clearly alleges wrongdoing. Furthermore, in Ambassador, the letters were sent to the insurance company and here, the Letter was sent directly to the directors and the officers of the Yale Club who had knowledge of the ongoing dispute with the wait staff over tips. This fact clearly undercuts the majority's characterization that the Letter constituted merely a notice of a potential claim. See also Retirement Fund of the Fur. Mfg. Indus. v. Republic Ins. Co., 755 F. Supp. 625 (S.D.N.Y. 1991), aff'd, 948 F.2d 1275 (2d Cir. 1991) (disputed letter was not found to be a "claim" in part because the letter was sent to the insurer and not the party against whom a claim was later made).