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You are here: Home / Claims-made and Reported / New York Federal Court Finds Insured’s Failure to Provide Notice of Subpoena Did Not Bar Coverage for Later Lawsuit

New York Federal Court Finds Insured’s Failure to Provide Notice of Subpoena Did Not Bar Coverage for Later Lawsuit

April 3, 2020 by Christina Gallo

Applying New York law, the U.S. District Court for the Southern District of New York held that because a subpoena duces tecum previously issued to the insured by a post-judgment creditor of a non-insured entity was not a “claim” against the insured, the subpoena and a later-filed lawsuit against the insured could not qualify as “related claims” deemed first made when the subpoena was issued. The court also held that the “warranty exclusion” in the application for the policy (where the insured warranted that it was “not aware of any incident or circumstance which may result in a claim”) did not bar coverage for the lawsuit, even though the insured failed to disclose the subpoena in the application. Protective Specialty Insurance Co. v. Castle Title Insurance Agency, Inc., No. 7:17-cv-08965 (S.D.N.Y. Feb. 3, 2020).

Beginning in 2012, a bank’s assignee secured judgments in two foreclosure actions involving several mortgages that the bank had issued to a non-insured entity. In July 2015, the assignee served the insured, Castle Title Insurance Agency, with a post-judgment subpoena for documents necessary to establish the rights and interests in the foreclosed properties. The insured did not provide notice of the subpoena to its insurer, Protective Specialty Insurance Co., under its claims-made-and-reported professional liability policy then in effect. In April 2016, during the subsequent policy period, the bank’s assignee filed a lawsuit against Castle Title for negligent and fraudulent delay in submitting real estate documents involving the foreclosed properties for recording by the county clerk. Castle Title provided notice of the lawsuit to its insurer under its renewal policy.

Although Castle Title provided notice of the lawsuit, Protective Specialty denied coverage for the lawsuit on the basis that the insured failed to timely report the subpoena (under the prior policy), which, together with the lawsuit, constituted a “related claim” first made during the prior policy. The policy defined “claim” to include “a written demand by subpoena upon an Insured as a non-party to litigation or arbitration involving Professional Services provided by such Insured.”

Protective Specialty argued that the phrase “involving Professional Services by [the insured]” modified “subpoena” not “litigation or arbitration” and that the subpoena was a “claim” because it involved professional services that the insured had rendered in connection with the foreclosed properties. Conversely, Castle Title argued that the subpoena was not a “claim” as it was issued to it as a nonparty to litigation involving the foreclosure of mortgages, not litigation involving its services.

Rejecting Protective Specialty’s argument, the court found that the only reasonable interpretation of “claim” was that the adjectival clause “involving professional services” modified the nouns that it immediately followed, which was “litigation or arbitration,” and that to qualify as a “claim” under the policy, the “claim” must be a subpoena issued in a “litigation or arbitration” involving professional services by Castle Title. Accordingly, the court found that the post-judgment subpoena issued to the insured by a judgment creditor of a separate entity was not a “claim” because it “was for the purpose of enforcing the judgment, not questioning Castle Title’s professional services.”

Notably, in a footnote, the court observed that even if the subpoena were a “claim,” the subpoena and the lawsuit could not be “related claims” because the “subpoena” did not contain any allegations of a “wrongful act,” and thus there could be no “nexus” of “wrongful acts” between the subpoena and the lawsuit.

In addition, the court held that the “warranty exclusion” in the application for the policy did not bar coverage for the lawsuit because the undisclosed subpoena was not a “claim,” noting that at the time Castle Title completed the application for the policy, it had no reason to believe that a claim was pending against it since the subpoena simply sought information that the assignee might use to try to collect against the defendants in the foreclosure action rather than “suggest[ing] that [the insured] owed anybody anything.”

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About Christina Gallo

Christina Gallo is an associate at Carlton Fields in New York. Connect with Christina on LinkedIn.

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