Broader Coverage May Still Be No Coverage At All: The First Department’s Application of the Prior Pending Claim Exclusion

The recent decision by New York’s Appellate Division, First Department in Executive Risk Indemnity, Inc. v Starwood Hotels & Resorts Worldwide, Inc., serves as a grim reminder to insureds to pay careful attention at the time of policy renewal to existing demands from third parties, applicable terms and conditions of expiring and renewal policies, differences in the scope of coverage, and appropriate disclosures. Those who do not run the risk of foregoing the insurance they thought they had without even realizing it.

This insurance coverage dispute arose out of Starwood’s efforts to obtain coverage for a claim asserted against it by the developer of a luxury hotel. By letter dated October 25, 2005, the developer demanded damages in excess of $18 million from Starwood, allegedly based upon delays and cost overruns caused by Starwood’s failure to implement the hotel’s design, and threatened legal action if the dispute could not be resolved. Nine months later, on July 21, 2006, the developer sued Starwood and was ultimately awarded $44 million in damages. Starwood incurred more than $10 million in defense costs.

After receiving the Complaint, by letter dated August 16, 2006, Starwood sought coverage from its insurer, Executive Risk, pursuant to either of two claims-made professional liability policies, the first of which spanned April 10, 2005 to June 10, 2006, and the second of which spanned June 10, 2006 to June 10, 2007. Executive Risk denied coverage under the 05-06 policy, claiming that the notice of suit was not timely. It also denied coverage under the 06-07 policy on the basis that the developer’s October 2005 claim letter and the subsequent lawsuit constituted a single claim made in October 2005, which necessarily was not made during the 06-07 policy period. In the ensuing insurance coverage action, the Trial Court granted summary judgment to Starwood, concluding that the October 2005 demand letter did not constitute a “claim” under the 05-06 policy and that the lawsuit commenced in July 2006 was a claim first made during the 06-07 policy period. Executive Risk, therefore, was obligated to defend and indemnify Starwood under the 06-07 policy.

The First Department reversed, declaring that Executive Risk had no duty to defend or indemnify Starwood under either policy. No coverage was available under the 05-06 policy based on the October 25 demand because, the Court concluded, the definition of “claim” in that policy did not include Starwood’s work for the developer within the narrow scope of “professional services” covered under the 05-06 policy.

Under the 06-07 policy, the covered “professional services” were defined more broadly and encompassed Starwood’s design work, such that the July 2006 lawsuit qualified as a valid claim. That claim, however, could not survive application of the 06-07 policy’s “prior pending” exclusion for claims “based upon, arising from, or in consequence of any written demand, suit, or other proceeding pending . . . against any insured on or prior to [the June 10, 2006 policy inception date] . . . .” . The Court rejected on two independent grounds Starwood’s contention that the October 2005 demand letter fell outside this exclusion. First, it would render meaningless the word “demand” as used in the exclusion. Second, the meaning ascribed to the term “pending” — including “open to discussion,” “under consideration,” and “still in debate,” — aptly described the status of the October 2005 demand letter at the time the 06-07 policy commenced on June 10, 2006. Accordingly, the “prior pending” exclusion barred Starwood’s claim under the 06-07 policy.

Executive Risk highlights the fact that — even if the renewal of an existing policy contains broader coverage terms — other terms and conditions of successive claim-made policies may operate to create gaps in coverage for otherwise covered claims, leaving a policyholder facing potentially significant exposure from an uncovered claim for both defense costs and damages.

John T. Wolak is a Director in the Gibbons Business & Commercial Litigation Department.
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