The Ohio Supreme Court recently held that an insurer’s alleged bad faith is not enough to pierce the corporate veil and hold liable the insurance holding company. Dombroski v. Wellpoint, Inc., Case No. 2007-2162 (Ohio Sept. 30, 2008). Specifically, the Court held that “insurer bad faith is a straightforward tort, a basic example of unjust conduct; it does not represent the type of exceptional wrong that piercing is designed to remedy.” (Emphasis added).
In so holding, the Court modified the second prong of the three-prong test for piercing the corporate veil that was outlined in Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 617 N.E.2d 1075 (Ohio 1993). Under that second prong, a corporate veil may be pierced when control of the corporation “was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.” Id. at 1086. The Court’s modified version of the second prong of the Belvedere test states that to pierce a corporate veil, the “plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or asimilarly unlawful act.” Dombroski, Case No. 2007-2162, at *17 (emphasis added). The other two prongs of the Belvedere test, which address shareholder control and injury to the plaintiff, were not the focus of the Court’s analysis.
The case involved the denial of coverage to an insured whose physician prescribed cochlear implants. The insured had a health insurance policy from Community Insurance Company (“Community”). Anthem UM Services, Inc. (“Anthem”) and Anthem Insurance Companies, Inc. (“Anthem Insurance”) participated in the administration of the policy. The defendant Wellpoint, Inc. (“Wellpoint”), a publicly traded company, controlled 100 percent of the stock of all three companies. Community denied coverage on the grounds that the use of such implants to improve hearing was investigational.
The insured filed an action against Community, Anthem, Anthem Insurance and Wellpoint claiming breach of contract, promissory estoppel and insurer bad faith. Specifically, the insured alleged that the defendants acted in bad faith in processing and denying the insured’s request for the implant and that such acts caused the insured emotional distress and physical and pecuniary losses. Additionally, in a bid to enhance her leverage, the insured alleged that the corporate veils should be pierced to render Wellpoint liable for her claims.
Both Wellpoint and Anthem Insurance moved to dismiss, alleging a lack of privity of contract and an insufficient basis to pierce the corporate veil. The trial court dismissed the insured’s claims against WellPoint and Anthem Insurance, because the insured did not allege sufficient facts showing privity of contract or to pierce the corporate veil. Specifically, the trial court stated the insured did not demonstrate “the type of illegal or unjust result intended by Belvedere.” Id. at *7. The Seventh District Court of Appeals reversed the trial court’s decision, holding that the insured had pleaded sufficient facts to advance its veil-piercing claim. In so holding, the Court of Appeals interpreted the second prong of the Belvedere test broadly so as to permit piercing the corporate veil for not only fraud or illegal acts, but also for unjust and inequitable acts. However, the Court of Appeals determined that its decision conflicted with the Sixth District Court of Appeals and certified the case as a conflict to the Ohio Supreme Court.
The Ohio Supreme Court noted that, on the one hand, some courts have broadly construed the second prong of theBelvedere test so as to permit piercing for unjust or inequitable conduct. See Wiencek v. Atcole Co., 109 Ohio App. 3d 240 (Ohio Ct. App. 1996); Taylor Steel, Inc. v. Keeton, 417 F.3d 598 (6th Cir. 2005). On the other hand, the Sixth District Court of Appeals had limited the second prong of the Belvedere test where the defendant uses its control of the corporate form to commit fraud or an illegal act. See Collum v. Perlman, Case No. L-98-1291 (Ohio Ct. App. Apr. 30, 1999). Thus, the Court stated that expanding the second prong of the Belvedere test to include liability for unjust and inequitable conduct would permit a court to pierce the veil of virtually every close corporation. However, the Court also rejected a literal interpretation of the Belvedere test because such an interpretation would allow a shareholder to seriously abuse the corporate form and evade person liability.
Consequentially, the Court modified the Belvedere test so as to require a plaintiff to “demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.” Dombroski, Case No. 2007-2162, at *17 (emphasis added). The Court held that even under its new modified version of the Belvedere test, the insured’s claims failed because “insurer bad faith is a straightforward tort, a basic example of unjust conduct; it does not represent the type of exceptional wrong that piercing is designed to remedy.” Id. at *18 (emphasis added).
The dissent disagreed, stating that insurer bad faith is an exceptional wrong and that insurer bad faith breaches a legal duty. The dissent stated such a breach “constitutes an illegal or similarly unlawful act.” Id. at *24 (Pfeifer, J., dissenting). The dissent also stated that there was no notable distinction between the broadly interpreted version of Belvedere and the new modified version.
Therefore, under this modified version of the piercing the corporate veil test, an Ohio court likely will hold that an insurer’s bad faith in denying a policyholder’s claim is insufficient to pierce the corporate veil and hold the shareholders liable.
Jason Cummings is an Associate in the Insurance and Reinsurance Practice. He received a B.A. in Political Science from Wake Forest University, and a J.D., cum laude, from Mercer University School of Law. While at Mercer University Law School, Mr. Cummings was awarded a faculty merit scholarship for academic achievement.