The California Court of Appeal has held that, under a claims-made policy, a claim is “first brought” at the place the insured receives a third party’s demand letter. (National Cas. Co. v. Sovereign Gen. Ins. Svcs. (2006) 40 Cal.Rptr.3d 591)
Facts
National Casualty Company (National) issued a liability policy to Sovereign General Insurance Services, Inc. (Sovereign), a surplus lines broker. The policy provided coverage for wrongful acts committed anywhere in the world provided that the claim was first brought in the United States, and so long as the claim was first made during the policy period. The policy defined a “claim” as a demand or assertion of a legal right seeking damages, and included any arbitration proceeding to which any insured was required to submit.
Under agreements with Certain Underwriters at Lloyd’s, London (Lloyd’s), Sovereign issued certificates of insurance and processed claims. Sovereign’s agreements with Lloyd’s required that all matters “arising under, out of or in connection with” the agreements had to be arbitrated in London in accordance with the laws of England.
In a letter addressed to Sovereign’s offices in California, Lloyd’s asserted that it had suffered losses as a result of Sovereign’s breach of the agreements and that Lloyd’s intended to recover all losses arising out of Sovereign’s actions. Lloyd’s then demanded $5 million to settle its claims, and also demanded arbitration. Sovereign tendered the claims to National.
National agreed to defend Sovereign, but reserved its rights to assert that Lloyd’s claims were brought outside the territorial limits of National’s policy. National then brought a declaratory relief action, contending that the coverage for a “claim … first brought in the United States” meant that a claimant had to initiate a legal proceeding in the United States. Essentially, National asserted that Lloyd’s claim was “brought” when Lloyd’s initiated an arbitration proceeding in London and that, therefore, the claim fell outside the territorial limit of National’s policy.
Holding
The Court of Appeal rejected National’s interpretation of the policy, finding it was not reasonable to interpret the phrase “claim first brought” as a limitation to a particular territory given the fact that the policy purported to cover wrongful acts committed anywhere in the world. The Court also found the phrase “claim first brought” to be ambiguous because the policy defined a “claim” to include not only a lawsuit, but also a mere demand for damages. Therefore, the Court concluded, Lloyd’s “brought” the claim when Lloyd’s mailed the demand letter to Sovereign’s offices in California.
Comment
This case illustrates that, once a California appellate court determines that a policy term is ambiguous, the court will use the parties’ “objective reasonable expectations” to resolve the ambiguity (usually in favor of the insured).