|March 2, 2012|
Previously published on March 1, 2012
On February 28, 2012, in United Westlabs, Inc., et al. v. Greenwich Insurance Company, et al., the Delaware Supreme Court affirmed a trial court’s ruling that there was no coverage under two separate claims-made professional liability policies for a lawsuit filed against an insured corporation and two of its officers, due to the corporation’s failure to disclose prior litigation in its applications for policies issued by Greenwich Insurance Company and AXIS Surplus Insurance Company.
Prior to applying for the two policies, the insured corporation, a hospital laboratory services provider, became embroiled in a breach of contract and copyright dispute with the claimant, a company that provided billing software and technical support to the insured. The dispute resulted in demand letters, an arbitration and a lawsuit in the Central District of California. The arbitration and lawsuit were dismissed without prejudice soon after they were commenced. Although the insured corporation and the claimant subsequently attempted to resolve their differences, the dispute resulted in an additional lawsuit in the Central District of California almost two years later, during the insurers’ respective policy periods.
After Greenwich and AXIS denied coverage for the lawsuit, the insureds filed a coverage action in Delaware. The Superior Court granted the insurers’ motions for summary judgment against the insureds on two grounds.
First, the Superior Court held that the later lawsuit that the insureds submitted for coverage was not a “claim first made” during either of the insurers’ policy periods because that lawsuit was interrelated to the claims made against the insured corporation prior to the policy periods. The Superior Court rejected the argument that the policies’ interrelated claims provisions were only intended to aggregate claims for purposes of limits of liability and deductibles, finding instead that it was “clear that the Interrelated Claims provision also serves to aggregate multiple claims for the purposes of excluding claims that significantly relate to claims made prior to the policy period.” The court applied the interrelated claims provisions notwithstanding the fact that the subsequent claim was asserted against new defendants and included new causes of action and allegations of conduct that occurred during the insurers’ policy periods.
Second, and most significantly for purposes of the subsequent appeal, the Superior Court held that the insured corporation’s failure to disclose the prior litigation in its applications for the insurers’ policies was a material misrepresentation as a matter of law, preventing recovery under the policies pursuant to title 18, section 2711 of the Delaware Code. The two applications contained similar questions inquiring whether the insured had been involved in any lawsuits in the past five years.
On appeal, the Delaware Supreme Court affirmed the Superior Court’s judgment on the basis that the insured corporation’s failure to disclose the prior litigation was a material misrepresentation as a matter of law that precluded coverage under the policies. The Delaware Supreme Court did not reach the interrelated claims issue.