Prior Knowledge Exclusion Does Not Require Absolute Certainty of Future Claim

Applying Michigan law, the United States Court of Appeals for the Sixth Circuit has held that an insured had prior knowledge of a potential claim following a letter from an investor demanding compensation for losses and threatening legal action.  Alterra Excess & Surplus Co. v. Excel Title Agency, 2018 WL 3599597 (6th Cir. July 26, 2018).

The insured title company acted as an escrow agent in a client’s real estate investment scheme.  When the scheme collapsed, several investors sought remuneration from the insured and the client.  In one email, an investor advised that if the insured did not return the investor’s funds by a particular date, the investor would “begin to proceed with all civil and criminal action, both state and federal, against you.”  Eight months after receipt of that email, the insured completed an application for a professional liability policy, where the insured answered “no” to a question regarding the insured’s knowledge of “any circumstances, acts, errors or omissions that could result in a professional liability claim against” it.  When the investor later brought suit against the insured and the insured sought coverage for the claim, the insurer denied coverage based on the prior knowledge exclusion in the policy that barred coverage for professional services performed prior to the policy’s inception “if any Insured knew or could have reasonably foreseen that the Professional Service could give rise to a Claim.”

In the subsequent coverage litigation, both the district court and the appellate court ruled for the insurer.  The appellate court held that the clear threat of litigation in the investor’s email made the investor’s later lawsuit foreseeable prior to the insured’s completion of the application and the inception of the policy.  The court rejected the insured’s argument that a claim was not foreseeable because the email merely threatened litigation, rather than affirmatively promised to begin litigation, and suit was not imminent.  The court explained that the fact that it remained possible that the investor might not file a suit did not mean the potential for a suit was not foreseeable.  Accordingly, the court held that no coverage was available for the investor’s claim based on the policy’s prior knowledge exclusion.