In Kollman v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 1:04-cv-3106-PA, Judge Owen Panner of the United States District Court for the District of Oregon recently ruled as a matter of law that even though National Union incorrectly denied coverage to its insureds, National Union did not act in bad faith in refusing to defend the underlying case. Therefore, the Court found that National Union was not liable for a $40 million judgment against the insureds.

The coverage litigation stemmed from a lawsuit filed in 2002 by Daryl Kollman against National Union’s insureds. The insureds tendered Kollman’s claims under an Executive and Organization Liability Policy. National Union denied coverage, relying primarily upon the “insured-versus-insured” exclusion, which excluded coverage for claims brought by an insured against another insured. Kollman was a former director of the insured’s subsidiary, and National Union stated that coverage for his claim was excluded. National Union declined to participate in the defense of the insureds and did not attempt to settle the matter within the $5 million policy limits.

The state court trial resulted in a $40 million judgment against the insureds. The insureds sued National Union, alleging they were entitled to coverage and that National Union acted in bad faith by unreasonably denying coverage and by failing to settle with Kollman for policy limits when it purportedly had the opportunity to do so. The insureds sought to hold National liable for the $40 million judgment, plus attorney fees and costs.

On summary judgment, the Court concluded that National Union had incorrectly denied coverage based on the policy’s insured-versus-insured exclusion, and it therefore had a duty to defend. However, the Court granted National Union’s Motion for Summary Judgment on the bad faith claims. Relying upon Georgetown Realty v. Home Ins. Co., 313 Or. 97, 831 P.2d 7 (1992), the Court ruled that Oregon law did not permit a bad faith failure-to-settle claim against an insurer that did not assume the duty to defend in the first instance. The Court also ruled that even though National Union was incorrect in its coverage determination with respect to the insured-versus-insured exclusion, its coverage decision was reasonable. The Court therefore dismissed all bad faith claims.