In Maxus Capital Group, LLC v. Liberty Surplus Ins. Corp., the Northern District of Ohio reiterated the rule that under a claims-made policy, the policyholder must notify its carrier of all claims, including a demand letter, during the policy period (or the extended reporting period) to receive a defense and coverage for an underlying lawsuit. In this case, the policyholder, Maxus Capital, failed to do this.
Through several loan agreements, Maxus Capital loaned several million dollars to PTM Technologies in exchange for a promissory note and security in PTM Technologies’ collateral. Maxus Capital attempted to secure its interest in PTM Technologies’ collateral by filing a UCC financing statement. However, PTM Technologies’ name was misspelled on the Financing Statement.
Unaware of the misspelling, Maxus Capital assigned its loan agreements with PTM Technologies to GE Capital. Under the assignment, Maxus Capital warranted that it possessed a “first priority perfected security interest” in PTM Technologies’ collateral and that it “had not taken any action or failed to take any action that would prohibit or prevent [GE Capital] from holding a first priority perfected security interest” in the collateral. Maxus Capital also agreed that in the event of a breach of these warranties, it would repurchase the loan agreements from GE Capital.
Maxus Capital’s PTM Technologies eventually filed for bankruptcy. In the bankruptcy, PTM Technologies pursued an adversarial proceeding against GE Capital seeking to void the security interest in the collateral based on the misspelling of PTM Technologies’ name on the UCC financing statement. During the adversarial proceeding, GE Capital sent a letter to Maxus Capital requesting that Maxus Capital comply with its obligations under the assignment agreement and repurchase the loan agreements because of the misspelling of PTM Technologies’ name. Maxus Capital ignored the letter. The bankruptcy court agreed with PTM Technologies and voided GE Capital’s security interest.
GE Capital then initiated a lawsuit against Maxus Capital for breach of contract. Maxus Capital notified its insurer, Liberty, of the lawsuit and requested a defense and indemnification. Liberty denied coverage and the district court agreed. The policy defined “claim” to include “receipt of a civil action, suit, proceeding or demand naming the Insured seeking Damages and/or Professional Service arising out of a Wrongful Act by the Insured….” Based on the plain meaning of the word “demand,” Liberty argued and the court agreed that GE Capital’s letter to Maxus Capital requesting the repurchase of the loan agreements was a demand, and therefore a “claim” under the policy. The court concluded that Maxus Capital’s failure to notify Liberty of GE Capital’s letter during the policy period or the 60-day extended reporting period was late notice. Because of Maxus Capital’s late notice, it was not entitled to coverage for the GE Capital lawsuit under Liberty’s policy.
You can read the entire opinion here.