In Columbia Casualty Co. v. State Auto Mutual Insurance Co., the Sixth Circuit Court of Appeals concluded, under Ohio law, that a demand letter to a general liability insurance carrier’s insured containing allegations of bad faith on the general liability carrier’s part did not amount to a “claim” against the general liability insurer under an errors and omissions policy issued to the general liability carrier.
The underlying insured under the general liability policy was a Florida motel that faced a wrongful death suit from the estate of a murder victim killed allegedly due to the motel’s negligence. The motel held a $1 million-each occurrence general liability policy with its insurer. The estate initially sent the motel a $1 million demand to settle the action. The estate also directed the demand to the general liability carrier and explained that refusal to settle would be akin to bad faith under Florida law. About a year later, the estate sent a second demand letter, likewise directed to both the motel and the carrier, which sought to settle all claims the estate had against the motel for $5 million. The second letter emphasized the motel’s insurer’s alleged bad faith conduct in failing to accept the earlier $1 million offer. After the motel’s general liability insurer again failed to accept the offer, a jury returned a $12 million verdict against the motel.
The general liability insurer notified its E&O carrier of the verdict, seeking coverage for the excess amount. The E&O provider informed the general liability insurer that it would consider the judgment a notice of circumstances. Meanwhile, the motel exhausted appeals of the judgment, whereupon the general liability insurer paid the full judgment amount of $13.3 million, including post-judgment interest. The E&O provider denied coverage, asserting that no “claim” had been made against the general liability insurer under the E&O policy, and filed for declaratory judgment. The district court granted summary judgment in favor of the E&O provider, which the general liability insurer appealed.
The issue on appeal was whether the second demand letter for $5 million amounted to a “claim” against the insured general liability carrier under the E&O policy. The court concluded that, while the demand letter clearly constituted a “written demand for monetary damages,” as “claim” is defined under the E&O policy, it sought payment from the motel, not from the general liability insurer, and therefore did not assert a “claim” against the general liability insurer.
First, the court noted that an insurer only becomes liable in bad faith upon the rendering of a judgment in excess of the insured’s policy limit. It reasoned that the second demand letter predated any basis for a bad faith claim against the general liability insurer, so the demand did not assert a bad faith claim at that time. The court found further support for the lack of a claim based on the policy’s reporting deadline distinction between claims and circumstances, finding that treating a potential claim as a claim would render superfluous the policy’s language regarding potential claims.
The court rejected the general liability insurer’s theory that the letter asserted a “conditional claim” that thereafter ripened into a claim upon judgment. It first observed division among courts recognizing such “conditional claims.” Notwithstanding this division, the court determined that because the expiration date of the settlement offer preceded the ensuing judgment, any conditional claim would have expired prior to the contingency of the conditional claim. The court rejected the general liability insurer’s explanation that the expiration applied only to the amount, not the demand itself, because a demand for some unspecified amount of money is not enough to trigger coverage.
The court finally opined in the alternative that even if the $5 million demand constituted a claim against the general liability insurer, the claim was not “for a Wrongful Act in the rendering or failing to render Professional Services.” While the court acknowledged that the demand clearly asserted bad faith allegations against the general liability insurer, that is distinct from seeking payment based on those allegations. The court reasoned that although the allegations might have contributed to the estate’s leverage over the general liability insurer, the allegedly bad faith conduct “did not … transform the estate’s demand into a bad faith claim.”
Accordingly, the court found there was no coverage for the general liability carrier under the E&O policy issued to it.
