In In re Ancillary Receivership of Reliance Insurance Company, 2008 NY Slip Op. 06690 (1st Dep’t., September 2, 2008), the New York Supreme Court, Appellate Division, addressed the meaning of the word “claim” when that term is undefined in a claims-made policy. The Court held that a letter, “which neither makes any demand for payment nor advises that legal action will be forthcoming, is insufficient to state a claim.” Id. at *2.
Plaintiff, Yale Club of New York, was the insured under two “claims-made” insurance policies issued by Lloyds, London and Reliance Insurance Company (“Reliance”). Id. While the plaintiff was insured under the Lloyds policy, it received a letter from an attorney representing certain waiters and other employees, who alleged that they had been deprived of tips and bonuses. Id. At the time the letter was sent, the Yale Club was involved in an ongoing dispute with the local waiters’ union concerning these issues, and the letter concerned those waiters who had declined union representation regarding their individual claims. The first sentence of the letter stated, “Please be advised that our office represents the above named employees of the Yale Club with respect to wage claims . . .” Id. at *8 (Catterson, J. dissenting). The second paragraph of the letter began, “They claim, among other things, that they have been deprived of tips and bonuses which amounted to hundreds of thousands, and probably, millions, of dollars.” Id. at *10 (in dissent). Finally, the letter requested information and documents to enable compliance with the court rules requiring “a reasonable inquiry into the facts before filing a pleading with the courts.” Id. at *2.
The Yale Club did not notify Lloyds of the letter and, after coverage under the Reliance policy had commenced, the waiters filed suit. Id. Reliance disclaimed coverage on the grounds that the letter constituted notice of a claim. Id.
A Referee, to whom the issue was submitted, found that “the letter was merely a request for information; the claim was properly filed after the Reliance coverage began.” Id. Reliance argued, before the Referee and on appeal, that because the Yale Club was already involved in a dispute with the employees’ union regarding the same accusations that were raised in the letter, the letter “could not have been viewed in any other light than as a claim.” Id. at *3.
Because the lack of a definition for the word “claim” created an ambiguity in the policy’s language and New York law ascribes no generally accepted meaning to the term in the context of a claims-made policy, the Court was required to resolve the ambiguity against the insurer. Id.
The operative question before this Court is the meaning to be ascribed to the word “claim,” a term that defendant concedes is undefined in the Reliance policy. 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.” Id. at *3.
The Court held that the “letter to plaintiff falls far short of a demand for money or services or even the expression of a present intent to initiate legal proceedings” because any action was “implicitly conditioned upon the outcome of counsel’s investigation of its merits.” Id. at *4 (internal citations omitted). As a result, “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.’” Id. (citations omitted).
Addressing the defendant’s argument that, given the circumstances, the letter must be considered a claim, the Court stated:
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. Id. at *5. As a result, the Court held that the defendant’s argument that the letter must be recognized as containing a claim relies on hindsight and must be rejected as speculative. Id.
The Court held that “[u]nder these circumstances, the subject letter requesting documents and information in support of counsel’s ‘inquiry into the facts’ does not suffice to state a demand for payment so as to warrant the conclusion that a claim arose at such time.” Id. at *6.
Two judges dissented, writing that “claim” should be “given its ordinary understanding of a demand by a third party against the insured for money damages or other relief owed.” The dissent concluded a “claim” does not require something akin to an express demand for payment combined with an express threat that legal action will be forthcoming.
J. Ben Vitale is an Associate in the firm’s Insurance and Commercial Litigation Practices. Mr. Vitale received his bachelor’s degree from the University of Florida and his law degree from Vanderbilt University.