Claims Made and Reported policies are their own animal. Proper reporting of claims is vital to ensure coverage for any loss. Knowing what constitutes a "claim" that must be reported and when and how to report the claim can be challenging. Apparently these challenges exist even for insurance carriers reporting claims to their own errors and omissions carriers as State Auto recently learned.

Columbia Cas. Co. v. State Auto Mut. Ins. Co.,
2024 WL 1331984 (S.D. Ohio Mar. 28, 2024)

State Auto involved a coverage dispute and bad faith claims between State Auto and its errors and omissions carriers, Columbia Casualty and Ace American. The dispute stemmed from State Auto's failure to settle a self-described "brutal and shocking" claim that was made against its insured, The Waves of Hialeah ("The Waves").

State Auto's policies with Columbia and Ace American were claims made and reported policies that generally covered State Auto for its bad faith exposures. Columbia Casualty held the first layer of coverage above State Auto's self-insured retention. Ace American's policy provided coverage in excess of the self-insured retention and Columbia Casualty's policy limits.

Both the Columbia Casualty and Ace American policies contained similar terms. Of relevance to the opinion, the policies provided that:

The Insurer shall pay on behalf of the Insureds that Loss resulting from any Claim if such Claim is first made against the Insureds during the Policy Period or the Extending Reporting Period, if applicable, for a Wrongful Act in rendering or failing to render Professional Services.

State Auto and The Waves Predicament

The Waves is a hotel in Florida that was insured by State Auto under a $1,000,000 CGL Policy. Tragically, a young woman was raped and murdered at the hotel. The woman's estate ("Estate") brought a lawsuit against The Waves a short time after her death. State Auto was informed of the lawsuit and provided The Waves with a defense without a reservation.

In August 2016, State Auto received an offer from the Estate to settle all claims against The Waves for the $1,000,000 policy limit. The demand letter stated the Estate would view any rejection of the demand as bad faith. For some reason, State Auto chose to reject this demand.

In July 2017, the Estate issued a new demand and offered to settle the claims against The Waves for $5,000,000. The demand contained a section dedicated to State Auto's bad faith liability and referenced State Auto's failure to previously settle for the policy limits and how this exposed State Auto to bad faith liability. State Auto did not accept the offer.

The case was tried in December 2017 and resulted in a jury verdict of $12,000,000 plus post-judgment interest.

Post-Verdict Activity

Less than a week after the verdict, State Auto informed Columbia Casualty and Ace American of the verdict and sought coverage for portions of the verdict that exceeded the self-insured retention. State Auto apparently provided the carriers with the August 2016 and December 2017 demand letters from the Estate and also informed the carriers that it was hiring bad faith counsel to review the situation.

Columbia Casualty and Ace American responded to State Auto that its notification would not be treated as a "claim" under the policies as neither The Waves or the Estate had formally made a claim against State Auto. Instead, Ace American and Chubb would treat the submissions as notice of a wrongful act that could give rise to a future "claim" against State Auto. State Auto did not immediately dispute Ace American and Columbia Casualty's position.

During this same time frame, State Auto and The Waves chose to appeal the verdict against The Waves. The Waves was financially unable to secure a bond to stay execution during the appeal and State Auto stepped in to secure a bond on The Waves' behalf. By doing so, State Auto effectively guaranteed payment of the judgment. Eventually, The Waves' appeal was denied and State Auto paid the entirety of the final judgment.

Columbia Casualty and Ace American Deny Coverage

After State Auto paid the judgment, it sought reimbursement from Columbia Casualty and Ace American. Both carriers denied coverage to State Auto on the basis that their policies were not triggered as "there was no Claim for a Wrongful Act" made against State Auto. The carriers pointed out that during the pendency of The Waves' appeal, State Auto had continuously affirmed that The Waves had not yet asserted a bad faith against State Auto for failing to settle.

State Auto disputed Ace American and Columbia Casualty's position. In doing so, State Auto pointed to the 2016 and 2017 demands from the Estate that noted State Auto would be acting in bad faith if it refused to settle.

Declaratory Judgment

The carriers could not resolve their coverage dispute and Columbia Casualty filed a declaratory judgment action. State Auto counterclaimed for bad faith and breach of contract and a third-party complaint against Ace American. All parties eventually moved for summary judgment on all issues.

The Court found for Columbia Casualty and Ace American on the coverage issue. In doing so, the Court noted that the policies required State Auto to show it suffered a covered "Loss" from a "Claim" and State Auto had failed to do either.

The Court rejected State Auto's arguments that the 2017 Demand letter and its threats of bad faith constituted a "Claim" under the policies. The policies defined a "Claim" as:

  1. A written demand for monetary damages or non-monetary relief; or
  2. A civil proceeding in a court of law or equity or arbitration…

The Court pointed out that the 2017 Demand was an offer to settle The Waves' liability to the Estate and not any claims the Estate or The Waves might have against State Auto. Further, even though the 2017 Demand referenced bad faith, it was not a civil proceeding against State Auto. The court viewed this as a mere allegation of a wrongful act and not a claim for monetary damages.

Similarly, the Court noted that the underlying lawsuit only addressed The Waves' liability to the Estate and not State Auto's liability. Even though the excess judgment may have allowed for an actionable claim against State Auto, there was no evidence that The Waves made any demands or threats of a bad faith action against State Auto after the judgment was entered.

Additionally, the Court found that State Auto had not shown it had suffered a "Loss" as it was defined in the policies. The policies defined "Loss" as

Damages, settlements, judgments…for which the Insured is legally obligated to pay on account of a Claim.

The Court's decision on this point turned on the legally obligated language. The Court determined that State Auto's legal liability to The Waves for bad faith was never adjudicated. Instead, State Auto had paid the excess judgment before The Waves or the Estate filed a bad faith claim and had never incurred a legal liability to do so.

Because no "Claim" had been made against State Auto and State Auto had not suffered a "Loss" it was not entitled to any coverage for its payment of the excess judgment.

Safe Auto is a reminder that Claims Made and Reported Policies come with all kinds of hurdles not present in occurrence based policies. While most issues involve timely reporting of incidents, even disputes over what constitutes a Claim can cause problems with securing coverage. Of course, State Auto's loss was self-inflicted and never would have arisen if it had simply paid the Estate's policy limit demand for the catastrophic and shocking claim against The Waves.

Need Assistance with a Bad Faith Situation?

Kirk Presley enjoys helping individuals and other lawyers with bad faith cases.

If you would like to speak with him about a bad faith case email him at [email protected] or call him at (816) 931-4611.

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