Threat of Bad Faith Does Not Constitute a “Claim” Under Insurance Company’s Professional Liability Policy

An Ohio federal court, applying Ohio law, has held that a letter threatening a bad faith action against an insured insurance company did not constitute a “Claim” for the purposes of the company’s errors and omissions insurance. Columbia Cas. Co. v. State Automobile Mut. Ins. Co., 2024 WL 1331984 (S.D. Ohio Mar. 28, 2024). The court further held that the company’s payment of the jury verdict against its own insured did not constitute “Loss” from a covered “Claim.”

The insured insurance company provided general liability coverage to a motel that was sued for the wrongful death of one of its guests. After filing the wrongful death lawsuit, the estate sent the company a written settlement demand for the $1 million policy limit under the motel’s general liability policy. The estate’s letter asserted that the company’s failure to tender the policy limit could result in excess exposure and “would be tantamount to bad faith,” which the estate warned it would hold the company “accountable” for if the settlement demand were rejected. The company opted not to settle. A year later, the estate sent a letter demanding $5 million and asserting that the company had “squandered the opportunity” to settle for less. After the company did not accept this second settlement demand, the wrongful death lawsuit proceeded to trial, and a jury awarded $12 million in damages to the estate. The company and the motel filed an appeal, for which the company secured a bond to guarantee payment of the verdict amount. When the appeal concluded unsuccessfully, the company paid the full verdict amount to the estate.

Shortly after the jury returned its verdict, the company provided notice to its errors and omissions carrier, seeking coverage for the portion of the verdict that exceeded the $1 million policy limit. The company also provided a copy of the initial settlement demand letter and advised its errors and omissions carrier that it had retained bad faith counsel. The errors and omissions carrier denied coverage on the basis that the company’s notification was a “notice of a Wrongful Act that could give rise to a future Claim” rather than a “Claim” because no bad faith action had been filed against the company. The company disputed the coverage denial, arguing that the second settlement demand letter was a “conditional claim” that ripened into an actual “Claim” when the jury returned the excess-of-limits verdict.

In the ensuing coverage litigation, the court sided with the errors and omissions carrier and found that the second settlement demand letter did not constitute a “Claim for a Wrongful Act” committed by the insured company because the letter did not affirmatively assert the bad faith action or demand money damages stemming from bad faith exposure. The court reasoned that although the demand letter “could be interpreted as threatening a bad faith action against State Auto, it does not affirmatively assert such an action . . . , nor does it demand monetary damages or non-monetary relief from State Auto stemming from its potential bad faith exposure.” Moreover, the court concluded that the underlying state court verdict and judgment addressed the motel’s liability, not the insurance company’s. In addition, the court concluded that the insured company’s payment of the $12 million jury verdict did not constitute “Loss” it was “legally obligated to pay” on account of a covered “Claim” because no Claim had been made and the insured’s liability to pay the amount arose from its agreement to guarantee payment of the appeal bond, rather than from any bad faith liability.


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