The United States District Court for the Eastern District of Pennsylvania recently found that an insurer had a duty to defend but, not a duty to indemnify in a matter involving a claims made policy. The issue was whether, prior to the inception of a policy of insurance, the insured had reason to know that based on its actions a claim could reasonably be anticipated. In the underlying case, the plaintiff alleged that the insured, prior to the inception of the insured’s insurance policy, emailed derogatory and damaging confidential information about plaintiff to a third party.

The insured timely notified the insurer and averred that it did not furnish confidential or damaging information, and that the emails referenced were forged. After defending the insured for over a year, the insurer initiated a declaratory judgment because the alleged conduct occurred prior to the effective date of the policy, and the insured knew of should have known that it would be the basis of a claim. Such knowledge violates an exclusionary provision which disclaims coverage for claims arising from any act or omission the insured had a basis to believe, prior to the policy inception, might reasonably be expected to be the basis of a claim.

The court found that the mere allegation that the insured sent emails disclosing confidential information does not establish that the insured had knowledge that something it did could give rise to a claim against it. Moreover, the policy states that it will provide coverage even for fraudulent claims, so it must do so until the final adjudication of the underlying action. Unfortunately, the only way to determine whether the insured had the requisite knowledge is if the finder of fact determines that the insured disseminated the information. If so, the claim would not be covered under the policy and the insurer would not have to indemnify the insured. Alternatively, if the finder of fact determines that the insured is not liable in the underlying action, there would be nothing to indemnify.

To disclaim or not to disclaim, that is the question…especially when it comes to fraudulent claims remember that when disclaiming on the basis of prior knowledge, an insurer should have some indication, other than the allegations, that speaks to that knowledge. Thanks to Tiffany Davis for his contribution.  Please email Brian Gibbons with any questions.