Emails Constituted a “Demand for Money” and Amounted to a Claim Prior to Policy’s Coverage Date, Eighth Circuit Declares

The U.S. Court of Appeals for the Eighth Circuit, affirming a district court’s decision, has ruled that email communications made prior to the initial date of coverage under a claims-made insurance policy constituted a demand for money and, therefore, amounted to a claim.   

The Case

LSi-Lowery Systems, Inc., sold businesssoftware to Hodell-Natco Industries, Inc., that went live on March 1, 2007. Hodell allegedly began experiencing performance problems immediately. Beginning in March 2007, Hodell sent emails to LSi that complained that the system was unstable and slow, affecting Hodell’s “bottom line each day at very real levels”; that if “we don’t see immediate results on the system performance … I will recommend … that we start the process of taking legal action”; and that “our attorneys have now been brought into the loop.”

On November 21, 2008, Hodell sued LSi in the U.S. District Court for the Northern District of Ohio, asserting claims for fraud, breach of contract, negligence, and negligent misrepresentation arising from performance issues with the software.

On December 8, 2008, LSi first notified its insurance carrier, Philadelphia ConsolidatedHolding Corporation, d/b/a Philadelphia Insurance Companies (“PIC”) of Hodell’s claims against it. PIC, which had issued a “claims made” professional liability insurance policy to LSi in 2008, maintained that LSi had no coverage under that policy because it covered claims “first made” during the policy period and Hodell had “first made” a claim against LSi before the policy had gone into effect.

PIC sought a judgment that it was not required to defend and indemnify LSi with respect to Hodell’s lawsuit. The district court found there was no coverage under the policy because the communications between Hodell and LSi from March 2007, when Hodell first experienced problems with the software, and April 23, 2008, the starting date of the policy, constituted a claim. Therefore, the district court granted summary judgment in favor of PIC, and LSi appealed.

The Eighth Circuit’s Decision

The Eighth Circuit affirmed.

In its decision, the circuit court found that the communications between the parties showed that “Hodell blamed LSi for the functionality problems of the [] software, requested that LSi fix the issues, and expected LSi to pay the associated costs.” The communications between Hodell and LSi prior to the date coverage began under the policy constituted a “demand for money” and, therefore, amounted to a “claim,” the circuit court ruled.

The Eighth Circuit rejected LSi’s assertion that PIC should have been required to show that it had been prejudiced by LSi’s failure to give timely notice, concluding that applicable Missouri law did not require an insurer to show prejudice under a claims made policy.

The case is Phila. Consol. Holding Corp. v. LSi-Lowery Sys., No. 13-3381, No. 13-3397 (8th Cir. Jan. 9, 2015).