No Action Clause Does Not Bar Insured's Duty to Defend/Bad Faith Claims Against Insurer

The United States District Court for the Western District of Oklahoma has held that, under Oklahoma law, a policy’s “no action” clause does not apply to an insured’s breach of contract claims against its insurer premised on a breach of the duty to defend the underlying claim.  Wilbanks Securities Inc. v. Scottsdale Ins. Co., 2016 U.S. Dist. LEXIS 144761 (W.D. Okla. Oct. 19, 2016).  In so holding, the court explained that the “no action” clause “is a provision that applies to the claims of third parties” and specifically those claims “seeking recovery of settlements or judgments and not declaratory judgments regarding the duty to defend.”

The insured, a financial services firm, sought coverage from its insurer under its financial services professional liability policy after the Financial Industry Regulatory Authority (FINRA) and former clients instituted arbitration proceedings against it and certain of its officers.  The insurer concluded it had no duty to defend or indemnify the insured.  The insured responded by filing a declaratory judgment action against the insurer, seeking a declaration that the insurer had a duty to defend the ongoing arbitration, as well as asserting claims for breach of contract and bad faith.

The insurer moved to dismiss, arguing that the declaratory relief sought and claim for breach of contract failed because the insured could not satisfy the condition precedent of the policy contained in the “no action” clause.  The “no action” clause provided, in relevant part, that “[n]o suit or other action may be brought against [the insurer] unless . . . . the obligation of the insured to pay ‘damages’ has been finally determined either by judgment against the insured after actual trial or arbitration or by written agreement signed by the insured, claimant and [the insurer].”

The court rejected this argument and denied the insurer’s motion to dismiss.  According to the court, the cases relied on by the insurer where Oklahoma courts had concluded that the insured could not recover under the policy due to the “no action” clause were inapposite as they did not involve the duty to defend and instead involved direct actions by third parties or situations where the insurer was never asked to provide a defense.  Instead, the court relied on the United States Court of Appeals for the Tenth Circuit’s decision in Paul Holt Drilling, Inc. v. Liberty Mutual Ins. Co., 664 F.2d 252 (10 Cir. 1981), which determined that Oklahoma courts would hold that the “no action” clause is intended to apply only to claims made by third parties and held that an insured’s breach of contract claim premised on breach of the duty to defend accrues at the time the defense is denied by the insurer.

Applying the Paul Holt decision, the court concluded that the cause of action regarding the insurer’s duty to defend accrued at the time the insurer refused to provide its insured with a defense to the arbitration and that the “no action” clause did not constitute a condition precedent to the insured’s claim.  According to the court, “to give effect to the no action clause would eliminate in its entirety any obligation by [the insurer] to fulfill its duty to defend until such time as the insured has failed to prevail in the underlying action.”