Schmidt v. The Travelers Indem. Co. of Am., No. 1:13-CV-932, 2015 WL 4538118 (S.D. Ohio July 27, 2015).

A law firm that lost more than $141,000 in an online scam lost its coverage dispute with its insurer but still tried to pursue a bad faith claim.  The court held that where an insurer was legally entitled to deny coverage, that denial could not have been in bad faith.

The U.S. District Court for the Southern District of Ohio held that where it had previously ruled an insurance policy provided no coverage, and the insurer had denied coverage on that basis, the insurer was entitled to summary judgment on the insured’s bad faith claim.

The case involved a law firm that fell victim to an online scam.  In February 2012, Michael Schmidt of Cohen, Todd, Kite & Stanford LLC (“CTKS”) received an email from a person named Erik Carpenter, who supposedly lived in Japan and was seeking representation on a collection matter.  Schmidt and CTKS accepted the representation in exchange for a 25 percent contingent fee and drafted a demand letter to the supposed debtor, North American Iron and Steel Company (“North American”).  Later that month, a person responded by email purportedly on behalf of North American and offered to meet Schmidt’s demands and pay the money to Carpenter. 

An arrangement was agreed to whereby North American would pay CTKS the settlement amount in two cashier’s checks, CTKS would deduct its fees, and then CTKS would wire the remaining amount to Carpenter.  However, after CTKS received the first check for $189,000, deposited the funds in its trust account, and wired $141,750 to Carpenter, it discovered that the check from North American was a fraud.  CTKS never received any payment, and thus lost $141,750 in the scheme.

At the time, CTKS had a Business Personal Policy with The Travelers Indemnity Company of America (“Travelers”).  After CTKS timely submitted a claim, Travelers denied coverage in April 2012, citing several provisions and exclusions in the policy.  CTKS then brought a claim for breach of contract, declaratory judgment, and bad faith refusal of coverage.

The parties cross-moved for summary judgment on the breach of contract and declaratory judgment claims.  In March 2015, the court granted summary judgment for Travelers on those counts, concluding that the policy did not provide coverage for the losses associated with the fraudulent scheme and that it would have been barred by an exclusion in any event.

CTKS then sought a final order on those claims so that it could appeal the court’s coverage determination.  In response, Travelers moved for summary judgment on the bad faith claim.

The court noted that, under Ohio law, where an insurer was legally justified in denying a claim, it cannot be bad faith to have done so.  In other words, as long as the denial of coverage was legally correct, “it cannot be found that the insurer's denial of benefits was arbitrary or capricious, or that a reasonable justification for the denial did not exist.”  Because the court had already found that CTKS was not legally entitled to coverage under the terms of the policy, it thus ruled that Travelers could not have acted in bad faith in denying the claim and granted summary judgment for Travelers.

CTKS also sought additional discovery under Rule 56(d) concerning the adequacy of Travelers’ investigation.  However, the court stated that such a claim was baseless where the insurer denied coverage based on the policy and any additional investigation would not have affected its conclusion.