Hotel Finds No Room In[n] Its Claims Made Policies (NY)

This case involves disputed claims for coverage under two successive professional liability policies issued by Executive Risk to Starwood Hotels.  Here, in Executive Risk v. Starwood Hotels & Resorts, the Appellate Division, First Department found Executive Risk had no duty to defend or indemnify Starwood in the underlying action based on a “prior pending” exclusion in the second policy.

In 2001, Starwood entered into a contract for the construction and management of a luxury hotel with Castillo.  The contract required Starwood to provide Castillo with a design guide for the hotel, as well as review and approve plans for the hotel and for the selection of its interior designer.  However, on October 25, 2005, Castillo wrote to Starwood, complaining that Starwood had caused delays and cost overruns by failing to meet its responsibilities in implementing the hotel’s design.  As such, Castillo demanded $18,294,500 in damages, stating that it was prepared to resort to arbitration, mediation or litigation if its differences with Starwood could not be resolved.  On July 21, 2006, Castillo brought the underlying action against Starwood in federal court.

Here, the relevant insurance policies were “claims made” or “claims made and reported” policies under which coverage was available only with respect to claims first made and reported in writing during the applicable policy period or extended reporting period.  The first policy covered April 10, 2005 to June 10, 2006, and the second policy covered June 10, 2006 to June 10, 2007.

As an aside, Executive’s 2005-2006 policy did not provide coverage to Starwood because Castillo’s letter did not allege a “Wrongful Act,” that is, an act, error or omission committed solely in the performance of or failure to perform Professional Services.  In this case, the acts alleged did not fall within the  limited definition of Professional Services of 2005-2006 policy.  Thus, Starwood had to look to the 2006-2007 policy for coverage.

The Appellate Division found that the second policy’s “prior pending” exclusion applied, by which no coverage under the policy was available “based upon, arising from, or in consequence of any written demand, suit, or other proceeding pending, or order, decree or judgment entered for or against any insured on or prior to the inception date of the policy or the same or substantially similar fact, circumstance or situation underlying or alleged therein.”  While the lower court concluded that the “prior pending” exclusion did not apply, the Appellate Division used common sense (and a thesaurus) to find that Castillo’s October 2005 demand letter was in fact “pending” when the second policy commenced on June 10, 2006 and, therefore, coverage was precluded under that exclusion for the Castillo litigation.

Thanks to Joe Fusco for his contribution to this post.  If you have any questions, please email Paul at pclark@wcmlaw.com