Insured Cannot Bring Bad Faith Allegation When Coverage ‘Fairly Debatable’

The United States District Court for Minnesota, applying Minnesota law, has affirmed a magistrate judge’s decision denying an insured’s motion to amend its complaint to add a claim for bad faith. Fishbowl Solutions v. Hanover Ins. Co., 2022 WL 1462697 (D. Minn. May 9, 2022).

Applying de novo review, the court agreed that the coverage question was ‘fairly debatable’ and held that the insured failed to demonstrate the insurer knew it lacked a reasonable basis to deny the insured’s claim, an essential element of a bad faith claim under Minnesota law.

The insured accounting firm purchased a Technology Professional Liability Policy for the period from July 17, 2019 to July 17, 2020. In November 2019, a fraudster obtained access to a Fishbowl accountant’s email and created a code that intercepted emails sent by customers to the accountant.

The fraudster then replied to the emails, directing customers to pay outstanding invoice amounts to the fraudster’s bank account.

The carrier denied coverage, giving rise to coverage litigation regarding whether the conduct at issue resulted in ‘an actual impairment or denial of service of ‘business operations.’’