A federal appeals court on Wednesday upheld a lower court decision, ruling that an insurer is not required to pay for a settlement where a lawsuit was never filed.
Grand Rapids, Michigan-based Trident Fasteners Inc., an automotive supplier that makes custom screws, bolts and other fasteners for use as component parts, received complaints about defective fasteners, according to the ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Trident Fasteners Inc. v. Selective Insurance Co. in South Carolina.
The company had commercial liability and umbrella coverage with Carmel, Indiana-based Selective Insurance, under which Selective agreed to pay sums it was legally obligated to pay as damages, but said the insured could not voluntarily make a payment without the insurer̵7;s consent.
In October 2018, TFI contacted Selective for coverage related to an alleged product defect after a customer complained of receiving defective items more quickly.
After months of not hearing from the insurer about whether it would provide coverage, it reached out again in February 2019, and Selective responded by assigning a new adjuster to the claim.
After hearing nothing else, the company reached out again and Selective responded with a request for additional information before agreeing to TFI entering into settlement negotiations, the ruling said.
In May 2019, Selective denied consent to TFI sending a settlement letter and instructed it not to participate in any settlement negotiations, but TFI settled the dispute instead.
Selective then denied coverage, stating that TFI had violated its policy when it voluntarily paid the settlement.
TFI filed suit against the insurer in US District Court in Lansing, Michigan, alleging that Selective had materially breached the policy by acting in bad faith and seeking more than $1.3 million in damages.
The district court ruled in favor of the insurer and was affirmed by the 6th Circuit panel.
Michigan courts “require the filing of a lawsuit against the insured or an agency demand letter to the insured that is the functional equivalent of a complaint” for coverage, but no third-party complaint was filed in this case, the decision said.
“Because Selective’s duty of good faith under Michigan law would not arise until after the filing of a lawsuit against TFI, and given that no such lawsuit was ever filed, the insurance claims are excluded under the policy,” the decision states, affirming to notify.
Attorneys in the case did not respond to requests for comment.