Court Opinion

ID: 2768610
Source: CourtListenerOpinion
Date Created: 2015-01-09 17:00:46.823904+00
Date Added: 2024-06-11T10:46:13.734404
License: Public Domain

United States Court of Appeals
                          For the Eighth Circuit
                      ___________________________

                              No. 13-3381
                      ___________________________

Philadelphia Consolidated Holding Corporation, doing business as Philadelphia
                           Insurance Companies

                     lllllllllllllllllllll Plaintiff - Appellee

                                        v.

                          LSI-Lowery Systems, Inc.

                          lllllllllllllllllllll Defendant

                        Hodell-Natco Industries, Inc.

                    lllllllllllllllllllll Defendant - Appellant

                The Integrated Business Solutions Group, Inc.

                         lllllllllllllllllllll Defendant
                      ___________________________

                              No. 13-3397
                      ___________________________

Philadelphia Consolidated Holding Corporation, doing business as Philadelphia
                           Insurance Companies

                     lllllllllllllllllllll Plaintiff - Appellee

                                        v.
                               LSI-Lowery Systems, Inc.

                         lllllllllllllllllllll Defendant - Appellant

   Hodell-Natco Industries, Inc.; The Integrated Business Solutions Group, Inc.

                               lllllllllllllllllllll Defendants
                                       ____________

                       Appeal from United States District Court
                    for the Eastern District of Missouri - St. Louis
                                    ____________

                             Submitted: September 8, 2014
                                Filed: January 9, 2015
                                    ____________

Before RILEY, Chief Judge, SMITH and KELLY, Circuit Judges.
                              ____________

KELLY, Circuit Judge.

       LSi-Lowery Systems, Inc. (LSi), and Hodell-Natco Industries, Inc. (Hodell),
appeal the district court’s1 grant of summary judgment in a declaratory action filed
by Philadelphia Consolidated Holding Corporation, d/b/a Philadelphia Insurance
Companies (PIC). PIC filed the action in the Eastern District of Missouri to
determine whether PIC was required to defend and indemnify its insured, LSi, with
respect to a lawsuit filed by Hodell in the Northern District of Ohio. The district
court found LSi did not have coverage under either of its policies2 with PIC because
it did not provide notice of Hodell’s claims or potential claims to PIC as required

      1
        The Honorable Catherine D. Perry, Chief Judge, United States District Court
for the Eastern District of Missouri.
      2
          LSi had two consecutive policies with PIC.

                                             -2-
under the policy. Hodell and LSi appeal.3 Having jurisdiction under 28 U.S.C.
§ 1291, we affirm.

                                   I. Background

      LSi is a firm that provides computer and technology consulting services. In
December 2004, LSi sold business software4 to Hodell. LSi also agreed to develop
an add-on program for the software. As part of its implementation services, LSi
evaluated Hodell’s hardware and software requirements and performed testing. The
software went live on March 1, 2007, and Hodell immediately began experiencing
performance problems.

       Most of the undisputed facts are documented in emails between Hodell and
LSi. On March 13, 2007, Kevin Reidl of Hodell emailed Dan Lowery of LSi,
complaining the system was unstable and slow, affecting Hodell’s “bottom line each
day at very real levels.” He demanded “an around-the-clock effort by ALL parties
involved to get our company back off of its knees.” In a March 14, 2007, email, LSi
acknowledged that, “if we do not get Hodell happy, we can expect a legal issue.” On
March 20, 2007, Hodell emailed LSi, “If we don’t see immediate results on the
system performance . . . I will recommend . . . that we start the process of taking legal
action.”

      3
       Hodell filed its notice of appeal on October 29, 2013, and the case was
docketed under case number 13-3381. LSi filed its notice of appeal on October 30,
2013, and it was docketed under case number 13-3397. The Integrated Business
Solutions Group, Inc., is a wholly owned subsidiary of LSi and did not file a notice
of appeal. The Hodell and LSi cases were consolidated on November 1, 2013.
      4
        The business software was developed by another company that was not a party
to the declaratory action.

                                          -3-
       On April 11, 2007, LSi emailed the business-software developer stating Hodell
was “close to throwing the system out” and warning that “[i]f they throw the system
out, they will for sure get legal with us all.” On April 25, 2007, Hodell emailed LSi
asking “who will pay for damages.” That same day, Hodell emailed LSi that “our
attorneys have now been brought into the loop.”

       On June 5, 2007, Hodell emailed LSi a list of tasks and stated if they were not
completed, “we will be turning communications over to our legal advisors.” Lowery
of LSi responded the same day that Hodell’s threats of “going to court” had left him
“shaken” and that the problems had “hit [him] financially very hard as well.” In a
June 25, 2007, email, Hodell demanded LSi correct everything “or reimburse
Hodell-Natco for the expense.” On June 29, 2007, Hodell informed LSi it would “be
receiving correspondence from our legal advisors.” On July 6, 2007, an internal
email at LSi acknowledged that, without “big performance improvements” on the
Hodell project, LSi would “receive a letter from [Hodell’s] lawyers . . . [p]robably
stating their demands for money.”

      On July 24, 2007, Hodell’s attorneys sent a letter to LSi, that read as follows:

      Please be advised that we have been retained by Hodell-Natco
      Industries, Inc. . . . .

      Hodell-Natco has been more than patient in extending the opportunity
      to [LSi] to provide integrated software with the agreed functionality.
      However, as of the date of this letter, the integrated software falls far
      short of the promised performance and we are compelled to declare
      [LSi] in material default of their agreements with Hodell-Natco,
      including the Development Agreement.

      ....

      Throughout the development process, it has been our client’s objective
      to obtain integrated software with the agreed functionality operating at

                                         -4-
      acceptable performance levels. With the limited resources you have
      devoted to this project, that result simply has not occurred. If possible,
      our client would like to avoid litigation, but given the severe impact
      upon its business, Hodell-Natco will pursue all legal and equitable
      remedies available to it. You are requested to have your attorneys
      contact the undersigned within five (5) business days of the receipt of
      this letter to discuss an amicable resolution to this matter.

On July 26, 2007, LSi acknowledged receipt of the letter, asking Hodell, “[Y]ou are
asking for remedies (ie money?) Correct?” An email from LSi the next day again
addressed the “legal letter” and Hodell’s dissatisfaction with LSi’s performance.

        On January 23, 2008, Hodell sent LSi an email stating, “We are offering you
the chance to resolve this situation by refunding the TOTAL funds we’ve paid to LSI
[sic] that are related to software licenses and maintenance fees.” LSi responded,
“[W]e must remain partners through out [sic] your migration. I cannot do that
effectively under a threat of being sued every day. So all I am saying is if you are,
then do it.” Hodell emailed, “[D]on’t you carry professional liability insurance for
this type of issue? . . . In an effort to avoid a dragged-out lawsuit, we made a proposal
to resolve this in a manner that gave us a small amount of relief, far short of our total
cost . . . If we do not see relief, I can’t assure you of no [sic] suit.”

      On November 21, 2008, Hodell filed suit against LSi and others in the
Northern District of Ohio, asserting claims for fraud, breach of contract, negligence,
and negligent misrepresentation arising from the performance issues with the
software. On December 8, 2008, LSi first notified PIC of Hodell’s claims against it.
The issue before us is whether LSi gave PIC timely notice of Hodell’s claim for
purposes of coverage under either policy.

                                          -5-
                                    II. Discussion

       PIC issued two successive “claims made” professional liability insurance
policies to LSi in 2007 and 2008.5 In order for LSi to have coverage under either
policy, LSi was required to provide notice to PIC during the policy period of any
“claim made against [it]” or “any circumstance which could reasonably be expected
to give rise to a claim.” In the 2007 policy, a “claim” was defined as “a demand
receive [sic] by the Insured for money, including the service of suit or institution of
arbitration proceedings involving the Insured.” In the 2008 policy, the definition of
a “claim” changed to “a demand received by you for money or services, including the
service of suit or institution of arbitration proceedings involving you arising from any
alleged wrongful act.” (Emphasis added). Both policies defined a “wrongful act” as
a “negligent act, error, or omission committed or alleged to have been
committed . . . in the rendering of professional services”and “professional services”
as “services rendered to others for a fee . . . in the conduct of your profession.”

       In its coverage section, the 2007 policy provided coverage for “any Claim first
made against the Insured and reported to the Company by written notice during the
Policy Period”; provided “such Claim is by reason of a Wrongful Act committed[]
During the Policy Period” or committed “Prior to the Policy Period . . . and [t]he
Insured had no basis to believe that such Wrongful Act might reasonably be expected
to give rise to a Claim under this Policy.” In contrast, the 2008 policy provided
coverage for “any claim first made against you during the policy period . . . arising
out of a wrongful act committed . . . prior to the end of the policy period.” Under the
exclusion section, the 2008 policy stated “[t]his policy does not apply to any
claim . . . arising out of, resulting from, based upon or in consequence of, directly or
indirectly, any wrongful act committed prior to the policy period . . . which you had

      5
      The 2007 policy was effective from April 23, 2007, to April 23, 2008; the
2008 policy was effective from April 23, 2008, to April 23, 2009.

                                          -6-
any basis to believe might reasonably be expected to give rise to a claim under this
Policy.”

       PIC maintains LSi has no coverage under the 2007 policy because LSi did not
notify PIC of any claim or potential claim during the 2007 policy period. PIC further
contends LSi has no coverage under the 2008 policy because the 2008 policy covered
claims “first made” during the policy period and Hodell “first made” a claim against
LSi before the 2008 policy went into effect. Hodell and LSi assert summary
judgment was inappropriate because there is a genuine issue of material fact whether
LSi received notice of an actual or potential claim before Hodell filed its lawsuit in
November 2008.

       We review a grant of summary judgment de novo, “viewing the record most
favorably to the nonmoving party and drawing all reasonable inferences for that
party.” Munroe v. Cont’l W. Ins. Co., 735 F.3d 783, 786 (8th Cir. 2013). We also
review the district court’s construction of an insurance policy and interpretation of
state law de novo.6 Id.

       Under Missouri law, the terms of an insurance policy are given “the meaning
which would be attached by an ordinary person of average understanding if
purchasing insurance.” Seeck v. Geico Gen. Ins. Co., 212 S.W.3d 129, 132 (Mo.
banc 2007) (quotation omitted). Because insurance policies are contracts, the general
rules of contract construction are used in interpreting an insurance policy. Todd v.
Mo. United Sch. Ins. Council, 223 S.W.3d 156, 160 (Mo. banc 2007). The policy is
read as a whole to determine the parties’ intent, and the language used in the policy
is given its plain and ordinary meaning. Thiemann v. Columbia Pub. Sch. Dist., 338
S.W.3d 835, 839–40 (Mo. Ct. App. 2011). If, giving the language used its plain and

      6
          The parties agree Missouri law applies.

                                          -7-
ordinary meaning, the intent of the parties is clear and unambiguous, the policy is
enforced according to its terms. Seeck, 212 S.W.3d at 132.

       A claims made policy “provides coverage when the act or omission is
discovered and brought to the attention of the insurer, regardless of when the act or
omission occurred.” Wittner, Poger, Rosenblum & Spewak, P.C. v. Bar Plan Mut.
Ins. Co., 969 S.W.2d 749, 754 (Mo. banc 1998). Under a claims made policy, notice
is especially important. Grissom v. First Nat’l. Ins. Agency, 371 S.W.3d 869, 874
(Mo. Ct. App. 2012).

      Notice must be given to the insurer during the policy period. If the
      insured does not give notice within the contractually required policy
      period, there is simply no coverage under a claims made policy, whether
      or not the insurer was prejudiced. This is because the event which
      invokes coverage in a claims made policy is transmittal of notice of the
      claim to the insurer. The very essence of a claims made policy is notice
      to the carrier within the policy period.

Id. at 874 (quotation omitted). Under a claims made policy, notice “defines the limits
of the insurer’s obligation—if there is no timely notice, there is no coverage.”
Lexington Ins. Co. v. St. Louis Univ., 88 F.3d 632, 634 (8th Cir. 1996).7

       The district court concluded there was no coverage under the 2007 policy
because LSi did not give notice of a claim or potential claim to PIC within the 2007
policy period. Hodell and LSi do not dispute this fact. We agree with the district
court that, “[b]y the plain language of the [2007] policy, there is no coverage.”

      7
       Timely notice under a claims made policy “allows the insurer to more
accurately fix its reserves for future liabilities and compute premiums with greater
certainty.” Lexington, 88 F.3d at 634 (quotation omitted).

                                         -8-
       The district court also found there was no coverage under the 2008 policy
because it concluded the communications between Hodell and LSi from March 2007,
when Hodell first experienced problems with the software, and April 23, 2008, the
starting date of the 2008 policy, constituted a claim. In its email communications
with LSi, Hodell complained about the problems with the software and demanded LSi
fix the problems and cover the associated costs. The emails discussed Hodell’s intent
to bring in its “legal advisors” and LSi’s expectation of being sued if the software
problems were not corrected. In addition to the emails, the July 2007 letter from
Hodell’s attorneys advised LSi that the firm had been retained by Hodell, that Hodell
was unhappy with the performance of the software, and that “Hodell-Natco will
pursue all legal and equitable remedies available to it.” The letter requested that LSi
“have [their] attorneys contact the undersigned within five (5) business days of the
receipt of this letter to discuss an amicable resolution of this matter.” Cf. Berry v. St.
Paul Fire & Marine Ins. Co, 70 F.3d 981, 983 (8th Cir. 1995) (letter sent by attorney
“sufficiently demanding in tone and substance to qualify as a ‘claim’ within the
meaning of the policy”). We agree with the district court that the communications
“show that Hodell blamed LSi for the functionality problems of the [] software,
requested that LSi fix the issues, and expected LSi to pay the associated costs.”

        Hodell and LSi assert the district court erred in finding the communications
constituted a claim because it relied on the 2008 definition of a claim—which
included “a demand for money or services”—but should have analyzed the
communications under the 2007 definition of a claim—which defined a claim solely
as “a demand for money.” Hodell and LSi argue that Hodell did not make a claim
against LSi prior to the start date of the 2008 policy because Hodell did not make a
specific demand for money. As an initial matter, we question whether the definition
of a claim in the 2007 policy would apply when determining coverage under the 2008
policy. Yet, we note that the definition of a claim in the two policies is the same in
one key respect: Both include a “demand for money.” The January 23, 2008, email
from Hodell to LSi proposed “a chance to resolve this situation” with a refund of the

                                           -9-
money Hodell paid “related to software licenses and maintenance fees.” Hodell’s
email to LSi later that day asked LSi about its professional liability insurance and
noted that, “[i]n an effort to avoid a dragged-out lawsuit, we made a proposal to
resolve this in a manner that gave us a small amount of relief, far short of our total
cost. . . . If we do not see relief, I can’t assure you of no [sic] suit.” While Hodell did
not make a demand for a specific dollar amount, it proposed a “settlement” in
exchange for a refund of the money Hodell paid for products and services.
Regardless of which definition applies, the result is the same: The communications
between Hodell and LSi prior to the date coverage began under the 2008 policy
constituted a “demand for money” and therefore amounted to a “claim.”

      Hodell and LSi alternatively argue LSi was not required to give notice to PIC
because the communications between Hodell and LSi represented dissatisfaction with
LSi’s performance of its contract—which would not be covered under the
policy—rather than a claim of negligence. The undisputed evidence shows Hodell
complained to LSi about the same acts and omissions Hodell eventually alleged in the
underlying litigation. Further, Hodell never limited itself to a breach-of-contract
claim. While the evidence may support the assertion Hodell believed LSi had
breached its contract, Hodell made it clear to LSi it intended to pursue all legal and
equitable remedies—not just a suit premised on breach of contract.

      Hodell and LSi further assert PIC should have been required to show it was
prejudiced by LSi’s failure to give timely notice. This Court and others interpreting
Missouri law have long held that Missouri law does not require an insurer to show
prejudice under a claims made policy. See Lexington, 88 F.3d at 635 (“[The insurer]
need not prove prejudice to deny coverage if the [insured] failed to report the [] claim
during the policy term”); Wittner, 969 S.W.2d at 754 (“The prejudice requirement is
generally not held to apply to claims made policies.”).

                                           -10-
       Hodell and LSi argue Lexington and Wittner are inapposite to the facts of this
case because PIC denied LSi’s claim based on an exclusion in the 2008 policy, and
Missouri law construes exclusions strictly against the insurer.8 This argument ignores
the fact that the district court found—and we agree—that the undisputed facts show
Hodell made a claim against LSi prior to the 2008 policy period. The 2008 policy
only provided coverage for claims “first made against [LSi] during the policy period.”
Accordingly, there was no coverage under the 2008 policy in the first instance, and
we need not determine whether Missouri law would require PIC to show prejudice
before denying coverage based on an exclusion.

                                  III. Conclusion

      Accordingly, we affirm the judgment of the district court.
                     ______________________________

      8
        Hodell and LSi rely upon Missouri regulation 100-1.20 which provides: “No
insurer shall deny any claim based upon the insured’s failure to submit a written
notice of loss within a specified time following any loss, unless this failure operates
to prejudice the rights of the insurer.”

                                         -11-