Earlier this month, the Sixth Circuit affirmed a district court decision granting summary judgment to a professional liability insurer where it provided a defense in a state court action but denied coverage in a subsequent related arbitration. Ganim v. Columbia Cas. Co., No. 08-3945 (6th Cir., July 23, 2009).
In the pair of proceedings underlying the insurance coverage dispute, a registered representative at a financial services firm was sued in Ohio state court by a client in connection with certain investments that the registered representative allegedly induced his client to make. The registered representative tendered the defense to his employer’s professional liability insurer, which provided a defense under a reservation of rights. After the state court action was dismissed, the client commenced an arbitration against the registered representative. This time, however, the insurer denied defense and indemnity to the registered representative. The registered representative brought an action against the insurer for breach of contract and bad faith, which was dismissed on summary judgment in the district court.
On appeal, the Sixth Circuit upheld the summary judgment. The plaintiff argued that the defendant insurer had breached its good faith obligation by refusing to defend him on the arbitration claim after providing a defense in the “substantially similar” state court action. However, the court found that the arbitration claim was not identical to the state court complaint and did not potentially fall within the scope of coverage. Specifically, the arbitration demand was solely related to investments in the registered representative’s own enterprise that were not approved by his employer, and coverage under the policy was limited to claims made against the plaintiff in connection with securities approved by his employer. In contrast, the state court action had been broader and had, as drafted, potentially fallen within the scope of coverage. Therefore, although the two proceedings against the plaintiff had been based on similar conduct, the Sixth Circuit affirmed the lower court’s decision that the insurer was not obligated to provide a defense in the arbitration despite its having provided one in the state court action.