Last week, United States District Court Judge George C. Smith granted summary judgment in favor of Grange Mutual Casualty Company (“Grange”), following a nearly six year dispute with Chubb Custom Insurance Company (“Chubb”) as to coverage under an Insurance Company Professional Liability Policy. 2011 U.S. Dist. LEXIS 111583.

In 2005, Grange, along with hundreds of other insurance companies, was named as a defendant in a class action lawsuit filed in Texarkana, Arkansas. Hensley et al. v. Computer Sciences Corp., et al. The plaintiffs in the Hensley action asserted a number of legal claims challenging Grange’s use of Colossus, a computer software program used by Grange as a tool to help adjust bodily injury claims. Grange notified Chubb of the Hensley action in a timely manner. When it ultimately settled the underlying lawsuit, Grange looked to Chubb for coverage under the Policy, which provided coverage for losses arising from:

any  Wrongful Act committed by the Insureds . . . while performing Insurance Services including the alleged failure to perform Insurance Services . . . .

Wrongful Act” was defined under the policy to include any “error, misstatement, misleading statement, act, or omission, neglect or breach of duty committed, attempted, or allegedly committed . . . [in the performance of] Insurance Services.” Included in the definition of “Insurance Services” were “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; . . . .”

Thus, the claim submitted by Grange for losses it sustained in defending and settling the Hensley action, which pertained to allegations of errors made by Grange in the performance of claims handling and adjusting, fell squarely within the Policy definition of an insurable loss. Nonetheless, Chubb failed to recognize the claim as an insurable loss. Nearly three years after the Hensley action was commenced and Grange first submitted the claim, and without Chubb ever having taken a coverage position on the claim, Chubb initiated the lawsuit seeking declaratory relief in its favor.

The primary thrust of Chubb’s complaint was that Grange made a business decision to purchase and implement Colossus as part of an overall expense reduction plan implemented by the company. Even though there was no dispute that the Hensley plaintiffs’ claims arose from Grange’s use of Colossus in adjusting their claims, Chubb took the position that the Loss was attributable instead to a business decision made outside the claims handling process. Thus, Chubb argued that the loss was not covered under the applicable insuring clause of the Policy.

In finding in favor of Grange, Judge Smith expressly rejected Chubb’s contention that the business decision to implement Colossus, which predated Grange’s actual use of the tool, could nullify coverage for claims arising from Grange’s subsequent use of the tool during its claims handling process. Chubb asserted other Policy exclusions in support of its position, which were similarly rejected by the Court.

For insurance companies with similar Professional Liability Policies, this decision reinforces the importance of focusing upon the actual act or omission from which a loss has arisen when considering whether the insurer has properly denied a claim arising from such loss.