Insurance companies frequently raise the so-called “dishonesty” exclusion that is typically found in most professional liability and directors and officers insurance policies. Last week, the U.S. Court of Appeals for the Sixth Circuit took a substantial step toward curtailing that practice. In a coverage dispute with eight-figure implications, the appellate court found in favor of the policyholder and ruled that publishing false statements does not equate to dishonesty and thus is not sufficient to support application of a dishonesty exclusion.
Evanston Insurance Company v. Certified Steel Stud Association Inc. arose from a dispute between a steel producer (ClarkDietrich) and a trade association comprised of three competitors (CSSA). ClarkDietrich originally sued CSSA in Ohio state court alleging that CSSA published false statements regarding the quality of its materials. CSSA tendered the claim to its E&O insurer, Evanston, who agreed to fund CSSA’s legal defense. During the trial, ClarkDietrich repeatedly attempted to settle its claims against CSSA within the policy limits. At one point, it even offered to dismiss all of its claims against CSSA without any payment. Evanston was informed of each offer but never directed CSSA’s defense counsel to accept any of these offers. The jury returned a verdict against CSSA on all counts for $43 million.
Evanston then filed suit seeking a judgment in the Southern District of Ohio declaring that it had no obligation to indemnify CSSA for the damages it owed ClarkDietrich. ClarkDietrich filed a counterclaim as a judgment creditor, and Evanston moved for summary judgment on the basis that CSSA’s publications represented dishonest conduct that was excluded under the policy. The district court agreed with Evanston and granted the motion, concluding that the “dishonest acts” exclusion barred coverage. The court reasoned that, because CSSA committed unlawful acts in furtherance of a conspiracy, the publications necessarily were intentionally false. The Sixth Circuit found this conclusion to be a bridge too far under the policy language and reversed.
Contrary to the district court, the appellate court determined that none of the jury’s conclusions necessarily required a finding of dishonesty. Specifically, dishonesty is not required for a violation of the Ohio Deceptive Trade Practices Act; nor is it required for the commission of defamation or commercial disparagement. Similarly, in finding that CSSA committed civil conspiracy, the jury did not necessarily decide that CSSA published intentionally false statements. In short, none of the conduct at issue involved an element of dishonesty and the district court improperly imputed dishonesty from what is perceived as intentional conduct to conclude that the policy excluded coverage. As the Sixth Circuit explained:
The district court imputed the element of “intent” from the civil conspiracy claim onto the other unlawful acts. Because CSSA acted intentionally, the court reasoned, CSSA published statements that were intentionally false and therefore dishonest.
This analysis is flawed. As CSSA explains on appeal, because the jury instructions allowed the jury to find against CSSA on the civil conspiracy claim upon a finding that CSSA intentionally published false statements, the jury did not necessarily determine that CSSA published intentionally false statements. In other words, the jury could have found that CSSA intentionally published false statements rather than that CSSA published intentionally false statements.
A finding that CSSA intentionally published statements that happened to be false is not equivalent to a finding that CSSA acted dishonestly. Accordingly, the jury did not necessarily find that CSSA acted dishonestly.
Evanston’s attempt to apply the “dishonest acts” exclusion is illustrative of the industry’s simple use of this seemingly broad policy exclusion. However, as the Sixth Circuit clarified, more must be at issue than whether volitional conduct underlies the allegedly injury. The Sixth Circuit’s decision is consistent with the majority of jurisdictions that require both an intent to act and an intent to cause specific harm in order to find an act does not constitute an accident. The same logic and reasoning applies here, with the mere intent to publish statements that prove later to be false lacking the requisite culpable intent to be “dishonest.” More practically, the decision reaffirms the need for courts to closely consider whether an insurer’s legal position aligns with the alleged facts and the plain language of a policy exclusion. The decision also serves as a reminder to policyholders that they should be careful of adjusters and insurers that seek to judge intent based on objective criteria.