Court Finds That E&O Policy Dishonesty Exclusion Negates Coverage Where Underlying Tortious Claims Were Also Found to be the Subject of a Civil Conspiracy

By Clifford Masch

In Evanston Insurance Company v. Certified Steel Stud Association, U.S.D.C. Southern District of Ohio Western Division, Case No. 1:16-cv-276, the Certified Steel Stud Association (“CSSA”), a trade association, was accused of participating in a civil conspiracy along with several of its corporate members to commit the tortious acts of violating the Ohio Deceptive Trade Practices Act/Unfair Competition, defamation, and product disparagement. The jury determined that the CSSA not only committed all of these tortious acts, but that each of the wrongful acts were the subject of a civil conspiracy. The jury awarded damages totaling $49,500,000. In so finding, the jury made a number of findings by way of interrogatories, including the determination that a CSSA publication contained misleading statements of fact, the publication was false, the CSSA published the false information with actual malice, and that the CSSA disparaged Clark Dietrich, an industry manufacturer with either knowledge of falsity or with reckless disregard of the truth or falsity of the publication. Moreover, in determining that the CSSA participated in a civil conspiracy to commit the underlying torts, the jury necessarily determined that the CSSA acted with the mindset of committing the wrongful acts intentionally, without a reasonable or lawful excuse that caused injury.

Against the background of these factual jury findings, the Evanston Court considered whether an E&O policy exclusion for “dishonest” acts would negate coverage to the CSSA for each of the independent tortious acts that were the subject to the civil conspiracy. The dishonesty exclusion negated coverage for any claim “based upon or arising out of any dishonest, deliberately fraudulent, act, error, omission, personal injury, or publisher’s liability committed by or at the direct of the insured.” As the policy did not define the term “dishonest,” the court adopted the usual and ordinary meaning of the term, finding that it was characterized by a lack of truth, dishonesty, or untrustworthiness synonymous with unfair and deceptive. In applying this meaning, the court concluded that all of the counts found by the jury, including the underlying torts that were the subject of the civil conspiracy, were excluded from coverage. The court noted that while some of the underlying torts could be proved without the element of intent, the jury nevertheless concluded that all the torts were committed with the mindset of intent as each tort was part of the civil conspiracy. The court rejected the policyholder’s argument that the court should analyze coverage for each count separately, finding that this position ignored the fact that Ohio law does not recognize civil conspiracy as an independent cause of action. In sum, because each underlying tort was found to be part of the civil conspiracy, the court was required to input the intent necessary to find a civil conspiracy to each tort subject to the civil conspiracy.  

This case is noteworthy as it explores the ramifications that can arise when a plaintiff pleads and proves that an underlying tortious act is part and parcel of a civil conspiracy. Although the court noted that the finding of a civil conspiracy may not render all conduct related to civil conspiracies as dishonest or deliberately fraudulent, the jury’s finding in this case supports the exclusion. The Court’s decision highlights the fact that while an underlying tort can be proved with a mindset of mere negligence, if that tort is established to be part of a civil conspiracy, the level of intent necessary to establish a civil conspiracy is imputed to the underlying tort.

If anyone has any questions with regard to how this holding may impact any policies which contain either a dishonesty or an intentional act exclusion, please feel free to contact any member of our Insurance Coverage / Bad Faith Practice Group.