A federal district court has ruled that a third-party administrator’s professional liability policy does not afford coverage for a claim against the TPA arising from an excess judgment against the TPA’s insurer-client.  American Claims Mgmt., Inc. v. Allied World Surplus Lines Ins. Co., 2020 WL 5257795 (S.D. Cal. Sept. 3, 2020).

The insured acted as a TPA for an auto liability insurer.  After a car accident involving an insured driver, the injured victims made a settlement demand for the $30,000 policy limit.  The TPA did not resolve the claim within the limit.  The victims obtained a $21 million jury verdict and the right to proceed against the driver’s insurer for bad faith.  The insurer settled with the victims for $15 million and commenced arbitration against the TPA, ultimately obtaining an $18.5 million award.

The TPA’s E&O insurer denied coverage.  Coverage litigation ensued.  On cross-motions for summary judgment, the court ruled that the TPA’s E&O policy did not cover the loss.

First, the court ruled that a “Claims Services Exclusion” applicable to claims “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged . . . lack of good faith or fair dealing in the handling of any claim or obligation arising under an insurance contract or policy” barred coverage.   After noting the prefatory language that was even broader than language requiring a “minimal causal connection or incidental relationship,” the court ruled that the automobile insurer’s assertions that the TPA carried out its claims handling obligations in bad faith was sufficient to implicate the exclusion.  The court also concluded that only an “allegation” of bad faith was necessary, even if no bad faith was proved.

Second, the court applied a “Dishonest Act” exclusion, which barred coverage for any claim “brought about or contributed to by any dishonest or fraudulent act or omission or any willful violation of any statute, rule, or law by any Insured.”  In so doing, the court rejected the insured TPA’s argument that it was not found to have committed fraud, concluding that the exclusion applied more broadly.  The court also ruled that while the alleged dishonest acts of the insured TPA all came after the initial underlying settlement offer had lapsed, they still “contributed to” the loss because, according to the arbitration panel, the TPA’s failure to provide the automobile insurer with information to help protect itself in the claim for extra-contractual liability contributed to the loss.

Third, the court applied a contract exclusion barring coverage for claims “for any actual or alleged liability under any express contract or agreement, unless such liability would have attached in the absence of such contract or agreement.”  The court determined that the contract exclusion on its face barred coverage for the automobile insurer’s claim that the TPA breached the terms of their agreement.

Finally, the court granted summary judgment on the insured’s bad faith claim, finding that, because there was no coverage, there could be no cognizable bad faith claim under California law.