A federal appeals court has overturned a lower court ruling in an insurer dispute and held that a Selective Insurance Group Inc. unit is obligated to pay $3.25 million of excess coverage in a settlement in connection with the wrongful arrest and conviction of an Ohio man for rape and murder.

Clarence Elkins was arrested in Barberton, Ohio, in June 1998 for the rape and murder of Judith Johnson, 58, in her home, based on an incorrect identification by Ms. Johnson’s 6-year-old granddaughter, who was also raped and beaten unconscious, according to Thursday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Selective Insurance Co. v. RLI Insurance Co.

The police failed to follow up on evidence that may have exculpated Mr. Elkins, including an alibi for the time the crime occurred, according to the ruling

Six months later, in January 1999, another man, Earl Mann, who was arrested for two robberies, asked why he was not being charged in the murder. A police officer wrote a memorandum with this information, but it was never given to Mr. Elkins’ attorneys, and in June 1999 he was convicted of murder, according to the ruling

After Mr. Elkins’ conviction, “the evidence against him began to erode,” said the ruling. Mr. Elkins, who was in the same prison as Mr. Mann, managed to smuggle out one of Mr. Mann’s cigarette butts, and the DNA on it matched DNA found on Ms. Johnson’s body. Based on this DNA evidence, Mr. Elkin was exonerated and released in 2005.

He and his family then filed suit against the city and several police officers for malicious prosecution and deprivation-of-due-process claims, which eventually resulted in a $5.25 million settlement.

“The pivotal event” in terms of insurance coverage in the case occurred on June 29, 1998, when Barberton switched insurers. It changed its primary insurer from National Casualty Co., a unit of Columbus, Ohio-based Nationwide Mutual Insurance Co., to a unit of Chicago-based CNA Financial Corp.; and it switched its excess insurer from Peoria, Illinois-based RLI to Selective, a unit of Branchville, New Jersey-based Selective Insurance Co. of America.

National Casualty and CNA each paid their $1 million policy limit, and Selective paid $3.25 million in excess coverage. It then filed suit in U.S. District Court in Youngstown, Ohio, against RLI, seeking a declaratory judgment and monetary relief for the $3.25 million.

The District Court ruled in RLI’s favor, relying on other court decisions on insurance liability for malicious prosecutions claims that hold coverage is triggered when the underlying criminal charges are filed.

A three-judge appeals court panel overturned that ruling, pointing to the Mann memorandum, which was written after RLI’s occurrence-based policy had expired.

“RLI is not liable for the excess liability claim because no tort occurred prior to the expiration date of RLI’s policy,” said the ruling.

“Because there was probable cause to prosecute and detain Elkins until the Mann memorandum came into existence — which occurred after RLI’s coverage had expired — actions before the Mann memorandum could not have caused a covered loss under the policy,” said the panel’s ruling, in remanding the case for further proceedings.