An Illinois federal court recently held that an insured's bad faith claim fell within the scope of an arbitration provision contained in a D&O Policy and therefore granted the insurer's motion to compel arbitration. BCS Insurance Company v. Independence Blue Cross et al ., 08-C-6342 (N.D. Ill. Jan. 15, 2009).

The insured tendered several third party suits alleging improper negotiation and performance of contracts to its D&O insurer, who denied coverage. The insured demanded arbitration of its coverage claim pursuant to a provision in the D&O Policy, which provided that "[a]ny controversy arising out of or related to this Policy or the breach thereof shall be settled by binding arbitration . . . . " Separately, the insured stated its intent to file suit for bad faith denial of coverage. The insurer then filed a petition to compel arbitration of the bad faith claim together with the coverage claim.

The court granted the petition, finding that the D&O policy's language requiring arbitration of "any controversy arising out of or relating to this Policy" included the bad faith claim because the provision "contemplates any question that may arise" under the policy. In so holding, the court rejected the insured's argument that, under the Pennsylvania bad faith statute, bad faith claims do not arise out of the policy and therefore are not subject to the arbitration provision. Instead, the court found that the breadth of the arbitration provision and the fact that the bad faith claim would not have arisen "but for" the existence of the insurance contract weighed heavily in favor of the arbitrability of the bad faith claim.

For a copy of the decision, please click here.