Chubb Custom Insurance Company v. Grange Mutual Casualty Company et al

Filing 125

ORDER denying in part 68 Motion for Summary Judgment; granting 69 Motion for Partial Summary Judgment. Signed by Judge George C Smith on 9/29/11. (lvw1)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION

Chubb Custom Insurance Company,
Plaintiff,
-v-

Case No. 2:07-cv-1285
JUDGE SMITH
Magistrate Judge King

Grange Mutual Casualty Company, et al.,
Defendants.

OPINION AND ORDER
This matter is before the Court on the Motion for Summary Judgment filed by Plaintiff
Chubb Custom Insurance Company (“Chubb”) (Doc. 68), and the Motion for Partial Summary
Judgment filed by Defendants Grange Mutual Casualty Company, et al. (collectively “Grange” or
“Defendants”) (Doc. 69). These motions are fully briefed and ripe for review. For the reasons
that follow, the Court DENIES in part Chubb’s Motion for Summary Judgment, GRANTS
Grange’s Motion for Partial Summary Judgment, and DEFERS ruling on Chubb’s Motion for
Summary Judgment as it relates to Grange’s bad faith counterclaim.
I.

BACKGROUND
This case involves an insurance coverage dispute between Chubb and Defendants

(Grange). Chubb and Defendants are all insurance companies, and each of the Defendants is a
named insured under an Insurance Company Professional Liability Policy that Chubb issued for
the Policy Period July 1, 2004, to July 1, 2005 (the “Policy”). Under the Policy, Chubb generally

agreed to indemnify these Defendants (Grange) for losses arising from Grange’s performance of
claims handling and adjusting (the specifics of this agreement will be detailed below).
The parties dispute whether the Policy provides coverage for Grange in connection with
two class action lawsuits initiated in Arkansas against Grange by its own insureds. The first class
action, styled Hensley, et al. v. Computer Sciences Corp., et al. (the “Hensley Action”), was
brought against Grange in 2005, and other insurance companies, generally alleging that these
insurers had improperly used certain computer software in connection with the processing of
claims. Grange was dismissed without prejudice from this lawsuit in December 2007. Shortly
before the dismissal of the Hensley Action, the second class action lawsuit, styled Gooding et al.
v. Grange Indemnity Insurance Co. et al. (the “Gooding Action”), was filed against Grange, and
no other defendants. Shortly thereafter, the Gooding Action was settled pursuant to a
“Stipulation of Settlement” submitted to the Arkansas court. Chubb received a copy of the
Stipulation of Settlement, and Grange sought indemnification for payments made in connection
with the Stipulation of Settlement in the Gooding Action and reimbursement for defense costs
incurred in the Hensley Action and/or the Gooding Action.
A few days later, Chubb initiated this action seeking declaratory relief. Chubb seeks
declaratory judgment that the Hensley Action, the Gooding Action, and the Stipulation of
Settlement are not covered under the Policy (Count I); that there is no “Loss” under the Policy
and therefore no coverage (Count II); that it has no duty to indemnify Grange because the
“benefits due exclusion” applies (Count III); and that its advancement of defense costs to Grange
was reasonable and proper and should be reimbursed (Count IV). Grange filed an answer and a
Counterclaim alleging claims of breach of contract (Count I), indemnification (Count II), and
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estoppel (Count IV), in connection with its request for coverage relating to the Hensley Action,
the Gooding Action and/or the Stipulation of Settlement in the Gooding Action. Additionally,
Grange asserts a counterclaim for bad faith (Count III) and seeks an award of punitive damages in
connection with this counterclaim.
On February 15, 2011, both parties moved for summary judgment. Chubb moves for
summary judgment on all claims. Grange requests the granting of summary judgment in its favor
as to Counts I, II, and III of Chubb’s Complaint, the granting of partial summary judgment as to
Count IV of Chubb’s Complaint, and the granting of summary judgment as to Count II of its
Counterclaim. These motions are fully briefed and ripe for disposition.
II.

THE POLICY
The Policy provides that Grange is “covered” under “Insuring Clause 1”. Pursuant to

“Insuring Clause 1” of the Policy, and “in consideration of payment of the premium and subject to
the Declarations, limitations, conditions, provisions and other terms of [the] Policy,” Chubb
agreed:
To pay on behalf of the Insureds for Loss which the Insureds shall become
legally obligated to pay as a result of any Claim first made against the Insureds
during the Policy Period or, if elected, the Extended Reporting Period, arising out
of any Wrongful Act committed by the Insureds or any person for whose acts the
Insureds are legally liable during or prior to the Policy Period while performing
Insurance Services including the alleged failure to perform Insurance Services.
(Bold terms are presented as in the original and represent defined terms in the Policy) (Doc. 2-1).
Section 26 of the Policy defines “Wrongful Act” as follows:
Wrongful Act means any error, misstatement, misleading statement, act, omission,
neglect or breach of duty committed, attempted, or allegedly committed or
attempted, by the Insureds or any person for whose acts the Insureds are legally
liable, which arises solely from the Insureds or any person for whose acts the
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Insureds are legally liable, performing Insurance Services or Financial Services
including alleged failure to perform Insurance Services or Financial Services.

Id.
Section 26 of the Policy, as amended by Endorsement No. 11, defines “Insurance
Services” in part as follows:
Insurance Services means only those services rendered or required to be rendered
by or on behalf of the Insureds solely in the conduct of the Insureds’ claims
handling and adjusting; insurance risk management; insurance pool management;
safety engineering, inspection and loss control operations; personal injury
rehabilitation operations; salvage operations; recovery subrogation services;
premium financing operations; actuarial consulting services; credit and
investigatory services; insurance agency and brokerage operations; policy
recission/cancellation; reinsurance intermediary; underwriting manager; program
administer; insurance consultant; notary public; or managing general agent[.]
Id.
Section 26 of the Policy, as amended by Endorsement No. 3 to the Policy, defines “Loss”
as follows:
Loss means the total amount which the Insured becomes legally obligated to pay
as a result of each Claim or Claims in each Policy Period and the Extended
Reporting Period, if exercised, made against the Insureds for Wrongful Acts for
which coverage applies, including, but not limited to, damages, judgments,
settlements, costs and Defense Costs.
Loss does not include:
a.

regular or overtime wages, salaries or fees of the directors, officers or
employees of the Insured Organization;

b.

loss of the actual money, securities, property or other items of value in the
custody or control of the Insureds; or diminution in value or damages
resulting from the diminution in value of money, securities, property or any
other item of value unless caused by a Wrongful Act of the Insureds in
the execution or implementation of investment advice or investment
decisions;
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c.

fines or penalties imposed by law, including, but not limited to, punitive or
exemplary damages; or the multiplied portion of any multiplied damage
award; or any other matters or sanctions which may be deemed uninsurable
under the law pursuant to which this Policy shall be interpreted;

d.

any amounts which constitute premiums; fees and charges; return or refund
of premiums; commissions or taxes; or loss arising out of any commingling
of funds; or

e.

principal, interest, or other moneys either paid, accrued or due as the result
of any loan, lease or extension of credit.

Id.
Section 4 of the Policy sets forth exclusions applicable to “Insuring Clause 1.” One of
these exclusions is the following (which is referred to by the parties as the “benefits due
exclusion”):
for any amounts which constitute benefits, coverage or amounts due or allegedly
due, including any amount which constitutes interest thereon, from the Insureds
as:
i.

an insurer or reinsurer under any policy or contract or treaty of insurance,
reinsurance, suretyship, annuity or endowment; or

ii.

an administrator under any employee welfare benefit plan[.]

Id.
Regarding “Defense and Settlement,” Section 7 of the Policy provides as follows:
Subject to this Section, it shall be the duty of the Insureds and not the duty of
[Chubb] to defend Claims made against the Insureds.
The Insured shall have the sole obligation under this Policy to retain defense
counsel, which shall be subject to the approval of [Chubb].
The Insured agrees not to settle any Claim, incur any Defense Costs or otherwise
assume any contractual obligation or admit any liability with respect to any Claim
without [Chubb’s] written consent, which shall not be unreasonably withheld.
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[Chubb] shall not be liable for any settlement, Defense Costs, assumed obligation
or admission of liability to which it has not consented.
[Chubb] shall have the right and shall be given the opportunity to effectively
associate with the Insureds in the investigation, defense and settlement, including
but not limited to the negotiation of a settlement, of any Claim that appears
reasonably likely to be covered in whole or in part by this Policy.
The Insureds agree to provide [Chubb] with all information, assistance and
cooperation which [Chubb] reasonably requests and agree that, in the event of a
Claim, the Insureds will do nothing that may prejudice [Chubb’s] position or its
potential or actual rights of recovery.
Defense Costs are part of and not in addition to the Limits of Liability set forth in
ITEM 2. of the Declarations for this Policy, and the payment by [Chubb] of
Defense Costs reduces such Limits of Liability.
Id.
Section 26 of the Policy defines Defense Costs as follows:
Defense Costs means that part of Loss consisting of reasonable costs, charges,
fees (including but not limited to attorneys’ fees and experts’ fees) and expenses
(other than regular or overtime wages, salaries or fees of the directors, officers of
employees of the Insured Organization) incurred in defending or investigating
Claims and the premium for appeal, attachment or similar bonds.
Id.
III.

THE UNDERLYING ACTIONS AGAINST GRANGE
In 1998, Grange began efforts to increase profits by reducing “loss leakage,” which is a

term used to characterize claim settlements that are in excess of a fair and reasonable amount.
That is, Grange wanted to reduce, in its view, overpayments that were in excess of fair and
reasonable amounts. By reducing these payments, Grange’s profits could increase. In support of
this effort, Grange entered into a licensing contract with a software company enabling it to use the
company’s proprietary claims handling software. The basic function of the software was to

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provide Grange’s adjusters a numerical range within which to settle each general damage bodily
injury claim. Grange’s management prohibited the disclosure of the use of this software to
insureds, which was consistent with its confidentiality agreement with the software provider.
As discussed above, two class action lawsuits were filed against Grange by its insureds
alleging improper use of software in the claims process. The first lawsuit, the Hensley Action,
involved hundreds of insurers and extensive discovery. Chubb advanced over $1.8 million to
Grange for defense costs in the Hensley Action, and it also reserved the right to seek
reimbursement for these defense costs. The Hensley plaintiffs alleged in part that, through the use
of the software, Grange and the other insurers, “systematically and uniformly pay insured persons
less for their bodily injury claims than they would be legally entitled to recover as damages from
the owner or operator of an uninsured or underinsured vehicle. . . . As a result of the [insurers’]
deceptive actions related to the use of [the software] . . . the [plaintiffs] were damaged because
they received payments from the [insurers] that were less than they were legally entitled to
recover as damages from the owners or operators of an uninsured or underinsured motor
vehicle.” (Doc. 2-4, p. 26). Thus, the gravamen of the Hensley Action was that Grange and
other insurers were improperly using software to evaluate and underpay what their insureds were
entitled to recover as general damages for bodily injury sustained due to the conduct of an
operator of an uninsured or underinsured motor vehicle.
Grange was ultimately dismissed without prejudice from the Hensley Action apparently in
order to facilitate settlement between Grange and the plaintiffs in the second class action, the
Gooding Action. The gravamen of the Gooding Action was virtually the same as in the Hensley

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Action, but the claims of the class were only against Grange. The parties in the Gooding Action
entered the Stipulation of Settlement shortly after that case was initiated.
The Stipulation of Settlement defined the “SETTLEMENT CLASS” as “[e]ach and
every person who, during the CLASS PERIOD: (a) was insured under an automobile insurance
policy that was issue by GRANGE; and (b) submitted a BODILY INJURY CLAIM[.]” (Bold
and all caps terms are presented as in the original and are defined terms in the Stipulation of
Settlement) (Doc. 71-5, ¶ 36). Excluded from the settlement class were: (1) any person whose
bodily injury claim, during the class period, was resolved by litigation or arbitration in a
proceeding in which the value of the bodily injury claim was determined; (2) any person who had
a pending bodily injury claim; (3) any person who had already received payments equal to or
greater than the applicable policy limits for the bodily injury claim; and (4) any person having a
specified connection with Grange, counsel, or the government, as well as persons electing to be
excluded from the class. Id. Section I of the Stipulation of Settlement defines “bodily injury
claim” as follows:
“BODILY INJURY CLAIM” means a claim for loss from bodily injury or
injuries paid by GRANGE during the CLASS PERIOD to an INSURED
PERSON under the UM/UIM provisions of a policy of private passenger
automobile insurance issued by GRANGE, in connection with which [the
software] was used in evaluating the amount of bodily injury damages.
(Doc. 71-5, ¶ 3).
The “payments to class members” provision of the Stipulation of Settlement provides that
the “ELIGIBLE CLASS MEMBERS will receive supplemental cash payments for GENERAL
DAMAGES from GRANGE under the FINAL SETTLEMENT.” Section I of the Stipulation
of Settlement defines “general damages” as follows:
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“GENERAL DAMAGES” means that amount of money representing only those
specific elements of bodily injury damages (including but not limited to, pain and
suffering, permanent impairment, disability, and loss of enjoyment of life which
were estimated using [the software] and paid as part of an INSURED PERSON’S
individual BODILY INJURY CLAIM, as determined by the books and records
of GRANGE, and does not include disgorgement, punitive, restitution or similar
damages.
(Doc. 71-5, ¶ 20). The amounts paid to “eligible class members” was calculated as follows:
Each ELIGIBLE CLASS MEMBER will be paid a cash payment reflecting a
13% differential (as described below) in the amount of GENERAL DAMAGES
previously paid for such BODILY INJURY CLAIM; provided, however, that the
total of (i) the amount previously paid for such BODILY INJURY CLAIM, and
(ii) the additional amount paid pursuant to this paragraph 59 shall not exceed the
policy limit applicable to that BODILY INJURY CLAIM. The cash payment to
ELIGIBLE CLASS MEMBERS will be calculated as follows: the GENERAL
DAMAGES previously paid to the ELIGIBLE CLASS MEMBERS will be
divided by .87, with the result of that calculation being decreased by the
GENERAL DAMAGES previously paid by GRANGE. For example, if the prior
total UM/UIM payment by GRANGE was $10,000, and the GENERAL
DAMAGES portion of that payment was $7,000, then the cash payment would be
$7,000/.87=$8045.98-$7,000=$1,045.98.
(Doc. 71-5, ¶ 59). Regarding the “13% differential,” the Stipulation of Settlement provides as
follows:
GRANGE, PLAINTIFF, and the SETTLEMENT CLASS have agreed for
purposes of this SETTLEMENT to use 13% as a negotiated method to estimate
GRANGE’S average savings from use of [the software] on bodily injury claims
during the CLASS PERIOD. Given the defenses presented and the inherent risk
to all from litigation, GRANGE, PLAINTIFF, and the SETTLEMENT CLASS
agree that this method is reasonable and appropriate.
(Doc. 71-5, ¶ 103).
The Stipulation of Settlement provides that the total amount of payments available to the
class members would not exceed $5,473,248. Grange agreed to pay class counsel’s attorneys’
fees and expenses in an amount not to exceed $3,160,801.

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IV.

SUMMARY JUDGMENT STANDARD
The standard governing summary judgment is set forth in Rule 56 of the Federal Rules of

Civil Procedure, which provides that “[t]he court shall grant summary judgment if the movant
shows that there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Under Rule 56, “[a] party may move for summary judgment,
identifying each claim or defense--or the part of each claim or defense--on which summary
judgment is sought.” Therefore, a party may move for “partial summary judgment” as a means to
resolve only certain claims or defenses.
Summary judgment will not lie if the dispute about a material fact is genuine; “that is, if
the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is appropriate,
however, if the nonmoving party fails to make a showing sufficient to establish the existence of an
element essential to that party’s case and on which that party will bear the burden of proof at trial.
See Muncie Power Prods., Inc. v. United Techs. Auto., Inc., 328 F.3d 870, 873 (6th Cir. 2003)
(citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)); see also Matsushita Electric
Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).
When reviewing a summary judgment motion, the Court must view all the facts, evidence
and any inferences that may permissibly be drawn from the facts, in favor of the nonmoving party.
Matsushita, 475 U.S. at 587. The Court will ultimately determine whether “the evidence presents
a sufficient disagreement to require submission to a jury or whether it is so one-sided that one
party must prevail as a matter of law.” Liberty Lobby, 477 U.S. at 251-53. Moreover, the
purpose of the procedure is not to resolve factual issues, but to determine if there are genuine
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issues of fact to be tried. Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir. 1978). The Court’s
duty is to determine only whether sufficient evidence has been presented to make the issue of fact
a proper question for the jury; it does not weigh the evidence, judge the credibility of witnesses,
or determine the truth of the matter. Liberty Lobby, 477 U.S. at 249; Weaver v. Shadoan, 340
F.3d 398, 405 (6th Cir. 2003).
In responding to a summary judgment motion, the nonmoving party “cannot rely on the
hope that the trier of fact will disbelieve the movant’s denial of a disputed fact, but must ‘present
affirmative evidence in order to defeat a properly supported motion for summary judgment.’”
Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989) (quoting Liberty Lobby, 477
U.S. at 257). The existence of a mere scintilla of evidence in support of the opposing party’s
position is insufficient; there must be evidence on which the jury could reasonably find for the
opposing party. Liberty Lobby, 477 U.S. at 252. The nonmoving party must present “significant
probative evidence” to demonstrate that “there is [more than] some metaphysical doubt as to the
material facts.” Moore v. Phillip Morris Companies, Inc., 8 F.3d 335, 340 (6th Cir. 1993). The
Court may, however, enter summary judgment if it concludes that a fair-minded jury could not
return a verdict in favor of the nonmoving party based on the presented evidence. Liberty Lobby,
477 U.S. at 251-52; see also Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir. 1994).
Moreover, “[t]he trial court no longer has a duty to search the entire record to establish
that it is bereft of a genuine issue of material fact.” Street, 886 F.2d at 1479-80. That is, the
nonmoving party has an affirmative duty to direct the court’s attention to those specific portions
of the record upon which it seeks to rely to create a genuine issue of material fact. In re Morris,
260 F.3d 654, 665 (6th Cir. 2001).
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V.

POLICY CONSTRUCTION
For the purpose of their respective summary judgment motions, the parties do not dispute

that Ohio law governs the construction or interpretation of the Policy. An insurance policy is a
contract between the insurer and the insured. Pilkington N. Am., Inc. v. Travelers Cas. & Sur.
Co., 861 N.E.2d 121, 125 (Ohio 2006). And under Ohio law, “[t]he construction of written
contracts . . . is a matter of law.” Alexander v. Buckeye Pipe Line Co., 374 N.E.2d 146,
paragraph one of the syllabus (Ohio 1978). When a court is confronted with an issue of
contractual interpretation, the court must give effect to the intent of the parties to the agreement.
Westfield Ins. Co. v. Galatis, 797 N.E.2d 1256, 1261 (Ohio 2003). The court must examine an
insurance contract as a whole and presume that the intent of the parties is reflected in the
language used in the policy. Cincinnati Ins. Co. v. CPS Holdings, Inc., 875 N.E.2d 31, 34 (Ohio
2007) (citing Kelly v. Med. Life Ins. Co., 509 N.E.2d 411, paragraph one of the syllabus (Ohio
1987)).
Contract terms are to be given their plain and ordinary meaning. Gomolka v. State Auto.
Mut. Ins. Co., 436 N.E.2d 1347, 1348 (Ohio 1982); Alexander, 374 N.E.2d at paragraph two of
the syllabus (“Common words appearing in a written instrument will be given their ordinary
meaning unless manifest absurdity results, or unless some other meaning is clearly evidenced from
the face or overall contents of the instrument.”). Technical terms will be given their technical
meaning, unless a different intention is clearly expressed. Foster Wheeler Enviresponse, Inc. v.
Franklin County Convention Facilities Auth., 678 N.E.2d 519, 526 (Ohio 1997).
“A court will resort to extrinsic evidence in its effort to give effect to the parties’
intentions only where the language is unclear or ambiguous, or where the circumstances
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surrounding the agreement invest the language of the contract with a special meaning.” Kelly,
509 N.E.2d at 413; see Galatis, 797 N.E.2d at 1261 (noting that it is well-settled Ohio law that
when the language of a written contract is clear, an Ohio court may look no further than the
writing itself to find the intent of the parties). An ambiguous provision in an insurance policy is
one that has more than one reasonable interpretation. Hacker v. Dickman, 661 N.E.2d 1005,
1006 (Ohio 1996). But a provision is not ambiguous solely because it could have been more
clearly drafted. Milburn v. Allstate Ins. Co. Prop. & Cas., 2009 WL 3320557 (Ohio App. 10th
Dist. Oct. 15, 2009) (citing Rucker v. Davis, 2003 WL 21404511 (Ohio App. 4th Dist. June 17,
2003)). “As a matter of law, a contract is unambiguous if it can be given a definite legal
meaning.” Galatis, 797 N.E.2d at 1261 (citing Gulf Ins. Co. v. Burns Motors, Inc., 22 S.W.3d
417, 423 (Tex. 2000)).
Furthermore, “[w]here exceptions, qualifications or exemptions are introduced into an
insurance contract, a general presumption arises to the effect that that which is not clearly
excluded from the operation of such contract is included in the operation thereof.” Home
Indemn. Co. of New York v. Plymouth, 64 N.E.2d 248, paragraph two of the syllabus (Ohio
1945). Accordingly, in order for an insurer to defeat coverage through a clause in the insurance
contract, it must demonstrate that the clause in the policy is capable of the construction it seeks to
give it, and that such construction is the only one that can be fairly placed upon the language.
Andersen v. Highland House Co., 757 N.E.2d 329, 332 (Ohio 2001). “The insurer, being the one
who selects the language in the contract, must be specific in its use; an exclusion from liability
must be clear and exact in order to be given effect.” Lane v. Grange Mut. Cos., 543 N.E.2d 488,
490 (Ohio 1989).
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VI.

DISCUSSION
The parties’ motions for summary judgment center on whether Grange is entitled to

indemnification for payments made or expenses incurred in connection with the Hensley and
Gooding lawsuits. Because the cross-motions for summary judgment address the same or similar
issues, the Court will address them together. The Court will begin its analysis by setting forth the
general arguments of the parties.
Chubb argues that it is entitled to summary judgment in its favor for three separate
reasons. First, Chubb argues that it has no obligation under the Policy to provide coverage in
connection with the Hensley or Gooding lawsuit, including the corresponding Stipulation of
Settlement filed in the Gooding Action, because the facts establish that neither of these lawsuits
are within the scope of the Policy’s “Insuring Clause 1”. Second, Chubb argues that there is no
coverage in connection with the Hensley and Gooding lawsuits because there has been no “Loss”
as that term is defined and construed in the Policy and at law. Third, Chubb contends that there is
no coverage in connection with the Hensley and Gooding lawsuits because the Policy’s benefits
due exclusion applies. Chubb further argues that, because it had no duty to defend Grange in
connection with the Hensley or Gooding lawsuits, it is entitled to reimbursement for the funds it
advanced to Grange for defense costs. Lastly, Chubb asserts that if the Court determines that
there is no coverage under the Policy, Grange’s bad faith counterclaim should be dismissed as a
matter of law.
Grange argues that there is coverage under the Insuring Clause 1 because the facts
establish the requirements of this provision. Next, Grange argues that there has been a “Loss” as
that term is defined in the Policy, and no public policy doctrine applies to preclude coverage on
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this basis. Grange additionally argues that the benefits due exclusion does not apply. Lastly,
Grange argues that, even if this Court determines that there is no coverage under the Policy, it
should be permitted to retain the advanced costs under Chubb’s separate and distinct duty to
defend, and its bad faith claim should not be dismissed.
Based on the arguments of the parties, it is clear that there are three central issues for the
Court to resolve. First, the Court must resolve whether Grange’s expenses incurred and
payments made relating to the Hensley and Gooding lawsuits arose out of any “wrongful act”
committed by Grange “while performing insurance services,” and therefore are covered under the
Policy’s Insuring Clause 1. Second, the Court must resolve whether Grange incurred a “loss” as
that term is defined for the purpose of the Insuring Clause 1. Third, the Court must resolve
whether the Policy’s benefits due exclusion applies so as to preclude coverage under the Policy.
To the extent necessary, the Court will address issues relating to Grange’s defense costs and the
bad faith claim. The Court will address these issues in turn.
A.

Coverage under Insuring Clause 1 of the Policy based on Grange’s
“Wrongful Act”

The Policy provides under Insuring Clause 1 that Chubb agreed to cover Grange for
“Loss” which Grange is legally obligated to pay as a result of any claim made against Grange
“arising out of any Wrongful Act committed by” Grange “while performing Insurance
Services[.]” For there to be coverage under this provision, Grange must show that there is a claim
against it arising out of any “wrongful act” committed by Grange “while performing insurance
services.” It is not disputed that the Hensley and/or Gooding Actions constitute a “claim” under
this provision. Chubb argues, however, that the wrongful conduct that was at issue in the

15

Hensley and Gooding Actions occurred before “insurance services” were performed, and
therefore it did not occur “while performing insurance services.” In support of this argument,
Chubb characterizes Grange management decisions relating to the implementation of the software
as “intentional business practices” that occurred before the software was used in the claims
adjusting process. (Doc. 71, p. 29). Also, Chubb, citing cases involving “all-risk” property
policies or coverage disputes relating to breaches of contracts, such as Univ. of Cincinnati v.
Arkwright Mut. Ins. Co., 51 F.3d 1277 (6th Cir. 1995) and Newman v. XL Specialty Ins. Co.,
Case No. C-1-06-781, 2007 WL 2982751 (S.D. Ohio Sept. 24, 2007), argues that Grange
engaged in “morally hazardous” business behavior in deciding to implement the software, and
therefore should be precluded from coverage for non-fortuitous losses due to deliberate business
plans. Chubb’s arguments are not persuasive.
The Policy defines “wrongful act” to mean “any error, misstatement, misleading statement,
act, omission, neglect or breach of duty committed, attempted, or allegedly committed or
attempted” by Grange “which arises solely from” Grange “performing insurance services.” The
definition of insurance services includes “claims handling and adjusting.” According to Chubb,
the alleged wrongful conduct committed by Grange did not arise “solely” from Grange performing
insurance services. Chubb essentially reasons that the wrongful conduct alleged in the Hensley
and Gooding Actions did not arise solely from Grange performing insurance services because
Grange made its decision to purchase and implement the software before it used the software, and
because Grange entered a confidentiality agreement with the software provider before it was used.
But the gravamen of the lawsuits against Grange was that it improperly used the software in order
to underpay the plaintiffs for general damages on bodily injury claims. The alleged wrongful
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conduct that proximately impacted the plaintiffs was the use of the software in the adjusting of
their claims, not the business decision to purchase the software. That the determination by
Grange to implement the use of the software predated its use, does not place the alleged wrongful
conduct beyond the scope of the Policy.
And Chubb’s reliance on Arkwright and cases involving breach of contract policy
coverage disputes is misplaced. Arkwright involved an “all-risk” property policy insuring against
all risks of physical loss or damage to the insured’s real and personal property. The Policy at
issue here covers risk associated with certain conduct, such as “claims handling and adjusting.”
Therefore, Arkwright does not apply. Furthermore, the case at bar is not one involving the issue
of a “moral hazard” created when an insurer breaches a contract then seeks coverage to
effectively support the breaching of the contract. Here, Grange made a business decision to use
the software in its claims handling and adjusting, and the application of the software to the
insureds’ claim process formed the basis of the lawsuits against Grange. This is the type of
conduct that is expressly covered under the Policy.
Applying the plain and ordinary meaning of Insuring Clause 1, and the applicable
definitions of pertinent terms, the Hensley and Gooding Actions constituted claims made against
Grange “arising out of” a “wrongful act” committed by Grange “while performing insurance
services.” Therefore, there is coverage under Insuring Clause 1, provided that Grange incurred a
“loss” as a result of the lawsuits against it, an issue which will now be resolved by the Court.
B.

Coverage for “Loss” under Insuring Clause 1 of the Policy

The Policy generally defines “loss” to mean the amount which Grange becomes legally
obligated to pay as a result of a claim against Grange for “Wrongful Acts for which coverage
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applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs.”
(Doc. 2-1, p. 18). And the parties do not dispute that Grange became legally obligated to pay
certain amounts based on its settlement in the Gooding Action, and in defending itself in the
lawsuits. However, Chubb argues that the settlement payments and defense costs did not
constitute a “loss” under the Policy, as the definition of “loss” excludes these payments and costs
under the facts of this case. As noted by Chubb, “loss” does not include “matters or sanctions
which may be deemed uninsurable under the law pursuant to which this Policy shall be
interpreted[.]” Id. at 19. In this regard, Chubb asserts that the money that Grange saved from
using the software constituted “ill-gotten gains.” Based on this assertion, Chubb reasons that
Grange has not suffered a “loss” under the Policy because the disgorgement of the ill-gotten gains
is not insurable under the law.
In support of its position that the claim against Grange was uninsurable as a matter of law,
Chubb primarily cites Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir.
2001). The court in Level 3 Communications essentially determined that an uninsurable loss
includes repayment for an insured’s retention of “ill-gotten” gains. See id. It opined that “a ‘loss’
within the meaning of an insurance contract does not include the restoration of an ill-gotten gain. .
. An insured incurs no loss within the meaning of the insurance contract by being compelled to
return property that it had stolen, even if a more polite word than ‘stolen’ is used to characterize
the claim for the property’s return.” Id. at 911.
Chubb’s reliance on Level 3 Communications and other similar cases is misplaced. Level
3 Communications applied a public policy exclusion for restitutionary relief from the definition of
loss in an insurance contract. This exclusion only applies in limited circumstances, i.e. in
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circumstances involving the insured being “required to restore to the plaintiff that which was
wrongfully acquired.” See Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106,
1115 (9th Cir. 2006) (quotation omitted). “The [insured] is asked to return something [it]
wrongfully received; [it] is not asked to compensate the plaintiff for injury suffered as a result of
his conduct.” Id. Thus, “[t]he fundamental distinction is not whether the insured received ‘some
benefit’ from a wrongful act, but whether the claim seeks to recover only the money or property
that the insured wrongfully acquired.” Id.
Here, although they requested restitutionary relief, the plaintiffs in the Hensley and
Gooding Actions were in substance seeking damages for the alleged harm caused to them due to
the allegedly wrongful conduct of Grange. Indeed, Grange allegedly received “some benefit”
from using the software, in the form of retained money, but it did not “wrongfully acquire” this
money – it simply retained it. Stated differently, the substance of the plaintiffs’ claim in the
Hensley and Gooding Actions was for damages, not restitution. Therefore, the provision
excluding matters or sanctions “uninsurable under the law” from the definition of “loss” does not
apply in this case.
C.

Application of “Benefits Due Exclusion” Provision of the Policy

Chubb argues that the “benefits due exclusion” precludes coverage in this case. Grange
conversely argues that the claims against it were not for benefits due. This issue presents a close
call. The Policy provides that there is no coverage for claims against Grange “for any amounts
which constitute benefits, coverage or amounts due or allegedly due” from Grange “as . . . an
insurer . . . under any policy . . . of insurance[.]” Thus, the amounts sought must be “due or
allegedly due” for this exclusion to apply. And Black’s Law Dictionary (9th Ed. 2009) defines
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“due” in part as “owing or payable; constituting a debt.” Black’s provides an example of this
word’s usage: “the tax refund is due from the IRS.” Black’s further defines a “debt” in part as a
“[l]iability on a claim; a specific sum of money due by agreement or otherwise[.]”
In this matter, Grange was acting as an insurer when it allegedly committed the wrongful
act relating to its use of the software during the claims process. The Hensley and Gooding
plaintiffs alleged that Grange underpaid claims but did not allege amounts due. The alleged
underpayment related to general damages for bodily injury caused by uninsured or underinsured
motorists. Thus, these claimants had coverage for these damages, but the amount of these
damages was not certain. Grange asserts that it used the software so it would not overpay claims,
and the plaintiffs alleged that Grange improperly used the software to underpay the claims.
Chubb seems to reason that because the plaintiffs in the Hensley and Gooding Actions alleged that
they received less than they should have received, as a result of Grange using the software, they
were seeking amounts due under their policies with Grange. In support, Chubb relies heavily on
Georgia Farm Bureau Mut. Ins. Co. v. Great Am. & Surplus Excess Ins. Co., Case No.
5:03-CV-226, 2005 WL 1459649 (M.D. Ga. 2005), affirmed by Georgia Farm Bureau Mut. Ins.
Co. v. Great Am. Excess & Surplus Ins. Co., 152 F. App’x 883 (11th Cir. 2005). The Georgia
Farm Bureau case involved an insurance coverage dispute relating to an insured’s settlement with
third-party plaintiffs who claimed that the insured had wrongfully denied coverage for the
diminished value of damaged vehicles after repair. In Georgia Farm Bureau, the court
determined that a benefits due exclusion, which was similar to the one found in the Policy,
precluded coverage because this provision excluded coverage for the amount of benefits that
would have been due under the policy.
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The Court finds that Georgia Farm Bureau is distinguishable. The essence of the
wrongful conduct alleged in the Hensley and Gooding Actions was that Grange improperly used
computer software in the handling of the plaintiffs’ claims. The plaintiffs were seeking damages in
an undetermined amount for what they viewed as underpayment on claims due to allegedly
improper action by Grange. And the settlement reached in the Gooding Action only included
class members who had previously settled their general damage bodily injury claims with Grange.
In this regard, there was no allegation in the Hensley or Gooding Actions that any amounts were
due under the insureds’ general damage bodily injury claim settlements with Grange. The
wrongful conduct of Grange that was alleged was not that it improperly denied coverage, it was
that Grange improperly used computer software in the processing of claims, which allegedly
ultimately resulted in the plaintiffs receiving less for general damages in bodily injury claims.
Thus, the facts of this case distinguish it from Georgia Farm Bureau.
Chubb essentially argues that, by using the software, Grange “saved” millions of dollars as
it relates to the payment of general damages for bodily injury claims. Chubb reasons that these
“savings” resulted from the underpayment of benefits, and that the Stipulation of Settlement
reflects this view. The Stipulation of Settlement indicates that Grange and the settlement class,
based on the defenses presented and the inherent risk to all from litigation, agreed to use “13% as
a negotiated method to estimate Grange’s average savings from use of [the software] on bodily
injury claims during the class period.” Although this calculation on its face applies an estimation
of Grange’s “savings” from the use of the software, it is clear that it was used as a negotiated
method to help reach a settlement between Grange and the settlement class. In effect, the
“savings” were used to estimate the settlement classes’ damages. Again, the Court notes that the
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settlement class members had already settled their general damages bodily injury claims with
Grange, and therefore no amounts were “due” or “allegedly due.” In substance, the “negotiated
method” provided a mechanism to calculate the “supplemental cash payments for general
damages” to the settlement class resulting from Grange’s allegedly improper use of the software.
In the final analysis, Chubb has not demonstrated that the plaintiffs in the Hensley and
Gooding Actions were seeking “any amounts which constitute benefits, coverage or amounts due
or allegedly due” from Grange as their insurer. That is, Chubb has not shown that it and Grange
agreed to exclude such a claim from coverage under the Policy.
Therefore, the Court determines that Grange is entitled to coverage under the Policy for
its losses in connection with the Hensley and Gooding lawsuits. These losses are covered under
Insuring Clause 1, and no exception under the Policy applies. Thus, Grange is entitled to its
requested summary judgment as to Counts I, II, and III of Chubb’s Complaint, and Count II of its
Counterclaim. Furthermore, because Grange is entitled to coverage under the Policy in relation to
the Hensley and Gooding lawsuits, Chubb is not entitled to any reimbursement of fees and costs it
advanced to Grange. Consequently, Grange is also entitled to partial summary judgment as to
Count IV of Chubb’s Complaint. Even in view of these determinations, there is still an
unresolved dispute between the parties as to whether Grange is entitled to approximately
$200,000 more from Chubb for fees and expenses. This dispute relates to Counts I and IV of
Grange’s Counterclaim. Grange does not seek summary judgment as to the defense costs issue,
and it has indicated that it would consent to trying this issue to a Magistrate Judge of this Court.
D.

Bad Faith Counterclaim

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By Count III of its Counterclaim, Grange alleges a bad faith claim against Chubb. Chubb
moves for summary judgment as to this claim. Chubb reasons that if this Court determines that
there is no coverage under the Policy, then Grange’s bad faith counterclaim should be dismissed
as a matter of law. However, because the Court has determined that there is coverage under the
Policy, this argument obviously fails. Grange does not move for summary judgment as to this
counterclaim. Nonetheless, the Court finds that additional briefing on this issue is appropriate.
In Ohio, an insurer has a duty to act in good faith toward its insured in carrying out its
responsibilities under the policy of insurance. Hoskins v. Aetna Life Ins. Co., 452 N.E.2d 1315,
paragraph one of the syllabus (Ohio 1983). Those responsibilities include the handling and
payment of an insured’s claim. Id. As to whether an insurance company denied insurance
coverage in bad faith, the crucial inquiry is whether “the decision to deny benefits was arbitrary or
capricious, and there existed a reasonable justification for the denial,” not whether the insurance
company’s decision to deny benefits was correct. Thomas v. Allstate Ins. Co., 974 F.2d 706, 711
(6th Cir. 1992) (citing Ohio law).
The case at bar presents genuinely debatable issues regarding insurance coverage. Thus,
Chubb’s position that there is no coverage is not unreasonable. And Chubb provided nearly $1.9
million to Grange for defense costs (albeit with a reservation of rights) during the underlying
litigation, demonstrating its good faith. Furthermore, despite having the opportunity in response
to Chubb’s Motion for Summary Judgment to specifically identify what it views as evidence of
Chubb’s bad faith conduct, Grange, in addition to citing the denial of its claim, simply alleges that
Chubb engaged in “foot-dragging” on the claim. The parties do not analyze whether the bad faith
counterclaim can still be resolved by motions practice if the Court rules that there is coverage
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under the policy. While the nature of the insurance coverage dispute demonstrates an absence of
bad faith by Chubb in denying coverage, Grange does not direct the Court to evidence
demonstrating that Chubb otherwise acted in bad faith. However, out of an abundance of caution,
and because the parties’ briefing on this issue centers on whether there may be bad faith in the
absence of coverage, the Court requests additional briefing on the bad faith counterclaim.
Therefore, the Court defers its ruling on Chubb’s Motion for Summary Judgment as it relates to
Grange’s bad faith counterclaim, and instructs the parties to provide supplemental briefing on this
issue. Moreover, in order to potentially expedite the final resolution of this case, the Court also
requests briefing on the issue of whether Grange is entitled to an additional reimbursement of
approximately $200,000 for defense costs. The parties’ supplemental briefs shall be filed no later
than December 16, 2011, with responses and replies to be filed pursuant to S.D. Ohio Civ. R. 7.2.
VII.

CONCLUSION
For the foregoing reasons, the Court DENIES in part Chubb’s Motion for Summary

Judgment (Doc. 68), GRANTS Grange’s Motion for Partial Summary Judgment (Doc. 69), and
DEFERS ruling on Chubb’s Motion for Summary Judgment as it relates to Grange’s bad faith
counterclaim. Therefore, Grange’s bad faith counterclaim, and the issue of whether Grange is
entitled to approximately $200,000 more from Chubb for defense costs it incurred in the
underlying lawsuits, remain pending. To potentially expedite the final resolution of this case, the
parties shall provide supplemental briefing on these issues.
The Clerk shall remove Documents 68 and 69 from the Court’s pending motions list.
IT IS SO ORDERED.

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s/ George C. Smith
GEORGE C. SMITH, JUDGE
UNITED STATES DISTRICT COURT

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