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A federal appeals court largely affirmed a lower court ruling in favor of Allied World Assurance Co. Holdings Ltd. Wednesday in litigation with a claims management unit of Brown & Brown Inc. in a case involving QBE Insurance Group.
Allied World unit Allied World Surplus Lines Insurance Co., which was then known as Darwin Select Insurance Co., issued a claims-made professional liability policy to Brown & Brown unit American Claims Management Inc., based in Carlsbad, California, in October 2010, according to the complaint in American Claims Management, Inc. v. Allied World Surplus Lines Insurance Co. (F/K/A Darwin Select Insurance Co.), which was filed in U.S. District Court in San Diego in 2018.
ACM functioned as a third-party administrator for QBE, handling automotive policies, among other lines. A QBE policyholder was sued after an automobile accident injured members of a family, and ACM handled the claim.
The policyholder was imprisoned for his role in causing the accident, and in June 2015 the family won a $22 million jury verdict in that case. QBE eventually settled with the family for $15 million, then filed an arbitration demand against ACM in connection with its handling of the case, seeking reimbursement for the amount it had paid.
In July 2017, the arbitration panel awarded QBE its entire request for damages — a total of $18.5 million. In January 2018, Allied World partially funded the arbitration judgment, but about $4.9 million of it remained unfunded, and $1.1 million in fees and expenses remained unreimbursed, according to the complaint.
The district court ruled in Allied World’s favor and was largely affirmed by a three-judge appeals court panel. The district court correctly concluded that the policy’s claims services exclusion precluded coverage, the appeals court ruling said.
This exclusion provided that coverage was not available on issues involving lack of good faith or fair dealing if there was an “admission, final adjudication or a finding” of an allegation of bad faith against ACM, it states.
The ruling said a discovery order issued by a state court in the case “constitutes a ‘finding’ of an allegation of bad faith against ACM,” and that Allied World is entitled to reimbursement of the $4.4 million it paid ACM under a reservation of rights in connection with the arbitration judgment.
The appeals court also said Allied World did not breach its duty to defend ACM and that the lower court “correctly concluded that Allied World had satisfied its duty to hire competent counsel.”
The panel did reverse the district court’s holding that the Dishonest Act Exclusion barred coverage, stating there was no admission ACM had engaged “in any dishonest or fraudulent action or omission.”
Because of this, Allied is not entitled to reimbursement of $605,569 in defense expenses, the decision said.
Attorneys in the case had no comment or did not respond to a request for comment.