A Bad Faith Cautionary Tale: Ninth Circuit Affirms $8.7 Million Award for Bad Faith Coverage Denial

In Millennium Laboratories, Inc. v. Darwin Select Insurance Co., No. 15-55227, 2017 U.S. App. LEXIS 1533 (9th Cir. Jan. 27, 2017), the Ninth Circuit held that Darwin Select Insurance Company breached its duty to defend its insured, Millennium Laboratories, Inc., against two third-party lawsuits (Ameritox and Calloway). The court further held that Darwin’s failure to defend Millennium was in bad faith.

As background, Millennium filed a complaint seeking coverage regarding two underlying lawsuits alleging Millennium told its customers that its competitors’ businesses were illegal (among other things). Millennium instituted a declaratory judgment action seeking coverage in relation to the lawsuits. A California federal district court entered partial summary judgment in Millennium’s favor stating that Darwin had the duty to defend since the policy covered disparagement claims. In addition, the federal district court denied Darwin’s motion for judgment as a matter of law regarding whether Darwin acted in good or bad faith. Ultimately, the jury found Darwin acted in bad faith and was ordered to pay $8.7 million to Millennium.

On appeal, Darwin contended it had no duty to defend since Millennium had reported other claims in the Ameritox and Calloway cases to its previous insurer; thus the policy’s prior noticed claims exclusion applied. In addition, Darwin contended the district court erred in finding it had engaged in bad faith.

The Ninth Circuit upheld the bulk of district court’s ruling. First, the court held that Darwin had a duty to defend Millennium because the claims potentially fell within the policy’s coverage for personal and advertising injury. Specifically, the court reasoned that Darwin learned of Millennium’s general counsel making insulting statements about its competitors during a presentation to sales employees, and thus, should have known Millennium faced potential disparagement claims. Moreover, the court refused to apply the prior noticed claims exclusion because these claims arose during Darwin’s policy period.

Second, the Ninth Circuit held that the evidence supported a finding that Darwin had acted in bad faith. It reasoned that Darwin never anticipated defending Millennium for the underlying lawsuits since it assigned Millennium’s claims to a claims representative with little experience, conducted no real investigation (despite the suggestion by the claims representative to investigate further), and instead hired outside counsel in anticipation of coverage litigation

The court did extend Darwin an olive branch, allowing it to terminate its duty to defend Millennium in Ameritox after a jury verdict was rendered and Millennium appealed and moved for a new trial. At that point, it was apparent the Ameritox case no longer involved a potentially covered disparagement claim.

This case illuminates the increasingly harsh consequences being exacted upon insurers that are found to have erred in refusing to defend their insureds. The contagion continues to spread.

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