Demand for Refund Constitutes a Claim under Professional Liability Policy Says Eighth Circuit

In Philadelphia Consolidated Holding Corp. v. LSI-Lowery Systems Inc., 2015 U.S. App. LEXIS 349 (8th Cir. Jan. 9, 2015), the Eighth Circuit affirmed the district court’s grant of summary judgment in favor of Philadelphia Consolidated Holding Corporation, d/b/a/ Philadelphia Insurance Companies (PIC).  The Eighth Circuit found that PIC was not required to defend and indemnify its insured, LSI-Lowery Systems, Inc. (LSi) because LSi failed to satisfy the policies’ claims made and reported requirement.

In the underlying suit, LSi sold business software to the claimant, Hodell-Natco Industries, Inc. (Hodell) in March 2007.  Immediately after the software went live, Hodell complained about the software’s defects. Hodell’s complaints demanding resolution of the problems and/or reimbursement continued for over a year.  Hodell also warned about possible legal action as early as March 2007. Finally, Hodell sued LSi in December 2008. LSi then promptly notified PIC for the first time about the suit and the claims giving rise to the suit.

PIC had issued to LSi two consecutive claims-made-and-reported professional liability insurance policies, one for the April 2007 to April 2008 period (the 2007-2008 policy) and another for the April 2008 to April 2009 period (the 2008-2009 policy). While the 2007 policy defined a “claim” as a demand for money, the 2008 policy expanded the definition to include a demand for money or services.

In finding for PIC, the district court noted that the 2007-2008 policy clearly provided no coverage since LSi failed to report the claim within the 2007-2008 policy period.  For the 2008-2009 policy, the district court held that the requirements for coverage were not satisfied because Hodell’s complaints to LSi prior to the inception of that policy constituted a claim.

On appeal, the Eighth Circuit affirmed the district court. It disagreed with LSi’s contention that Hodell’s complaints could not constitute a claim because there never was a specific demand for money.  The court found the plaintiff’s proposal to “settle” the matters in exchange for a reimbursement of the monies Hodell paid to LSi was essentially a demand for money, and in turn, a claim. Consequently, the Eighth Circuit concluded that LSi was not entitled to coverage.

This case represents a victory for insurers. The Eighth Circuit utilized a practical and sensible understanding of the presuit negotiations between the policyholder and claimant in recognizing that a claim had been made prior to the policy period in which the reporting took place.