The insured allegedly noticed several matters, including a securities class action, under the extended reporting period of its D&O policy after it had obtained a new D&O policy from another insurer. The original D&O insurer refused to pay submitted defense costs and the insured brought an action seeking a declaration of coverage and asserting a bad faith claim.
In support of its bad faith claim, the insured alleged that the insurer’s refusal to pay defense costs lacked a reasonable basis and was improperly retaliatory. The Court interpreted the applicable Ohio bad faith standard to require the insured, in order to support a bad faith claim, to demonstrate that the insurer’s refusal to pay a claim was made “without reasonable justification” and was “totally arbitrary and capricious.” The insurer moved to dismiss the bad faith claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
The insurer’s principal argument in support of its motion to dismiss was that its policy contained neither a duty to defend nor a duty to advance defense costs so no bad faith could be found. The Court concluded, however, that the allocation provision contained in the applicable policy “clearly contemplate[d] the advance payment of defense costs.” The allocation provision in question provided that if the insured and the insurer agreed to an allocation, the insurer would advance defense costs, and if they did not agree to an allocation, the insurer would advance those defense costs it believed to be covered until a different allocation was negotiated, arbitrated or judicially determined. On the basis of the allocation provision, the Court held that the insurer had not satisfied the requirements of 12(b)(6) because it had failed to demonstrate that there was no possibility that it had an obligation to pay the insured’s defense costs.
The insurer additionally argued that the insured’s retaliation allegations were based on inadmissible confidential settlement correspondence. The Court declined to rule on the admissibility of the correspondence in question because of its obligation, at the motion to dismiss phase, to assume that the insured’s allegations were true.
On March 20, 2008, the Court denied the insurer’s motion to reconsider based on a factual error in its March 11, 2008 decision. The Court upheld its earlier ruling that the insurer had failed to demonstrate that there was no set of facts under which the insureds could be entitled to relief on their bad faith claim.