A federal court of appeals has reversed a lower court ruling and held an insurer is not obligated to pay a policyholder more than $2.8 million in extracontractual damages in a long-running coverage dispute involving writing markers.

Monday’s ruling by the 7th U.S. Circuit Court of Appeals in Chicago in Creation Supply Inc. v. Selective Insurance Co. of the Southeast reflects a “decade-long, three-lawsuit fight” between Selective Insurance, a unit of Branchville, New Jersey-based Selective Insurance Group Inc., and Minooka, Illinois-based Creation Supply Inc., the ruling said. 

The issue in the case here was “the narrow question” of whether the CSI was properly awarded extracontractual damages under Illinois law, the ruling said. 

CSI, which imports and sells writing markers, was sued by a competitor in Oregon federal court in 2012 for allegedly selling copycat products. CSI turned to its insurer, Selective, for a defense, but Selective refused “for what the district court here believed were dubious reasons,” the ruling said.

Selective then sued CSI in Illinois state court for a declaration it did not owe CSI a duty to defend. While the Illinois action was pending, CSI settled the Oregon action in 2013 for no money, and an injunction requiring it to stop selling the allegedly counterfeit markets, the ruling said.

The state court granted summary judgment in CSI’s favor after concluding Selective owed the company a defense in the Oregon action, and it was later affirmed by a state appellate court, the ruling said.

While the Illinois state action was still ongoing, CSI filed suit in this case in U.S. District Court in Chicago under Section 155 of the Illinois insurance code, which permits an insured to seek extracontractual damages from an insurer in any case in which one of three issues remains undecided: the insurer’s liability under the policy; the amount of the loss payable under the policy; or whether there was an unreasonable delay in settling a claim.

The district court held that Sentry’s refusal to defend CSI or to supply insurance coverage was “vexatious and unreasonable” and warranted $2.8 million in Section 155 damages.

The ruling was overturned by a unanimous three-judge appeals court panel. None of the threshold issues that must remain undecided for a Section 155 claim remain, it said.

“Selective allegedly failed to timely pay on a judgment it did not allegedly fail to timely settle a claim,” it said, for instance, in reversing the lower court’s ruling and remanding the case.

Attorneys in the case did not provide a comment on the ruling.

Last week, a federal appeals court reversed a lower court and held that a subcontractor’s policy required a Selective unit to defend or indemnify the contractor.