Washington Court Finds No “Occurrence” in Debt Collection Scheme, But Bad Faith May Preserve Coverage
A Washington federal court ruled Scottsdale Insurance Co’s commercial general liability and errors and omissions coverage did not apply to counterclaims alleging Corporate Recovering Inc. (“CRI”) engaged in an unlawful debt scheme. But the court declined to declare Scottsdale free of its defense and indemnity obligations because a factual dispute remained over whether Scottsdale acted in bad faith. Scottsdale Ins. Co. v. Corp. Recoveries Inc., No. 25-cv-00728-JHC, 2026 U.S. Dist. LEXIS 203825 (W.D. Wash. Sept. 9, 2026).
The counterclaims alleged CRI violated federal and Washington debt collection and consumer protection laws by acting as legal representative for a debtor’s former romantic partner, using family court proceedings to pressure him, and taking actions intended to harass and embarrass him over debt allegedly not owed.
U.S. District Judge John H. Chun found no covered “occurrence” because the alleged injuries resulted from intentional conduct furthering CRI’s alleged collection scheme. The court likewise found no covered “error or omission” because the counterclaims did not allege negligence. CRI’s effort to characterize some allegations as negligent did not alter the intentional nature of the conduct producing the alleged injuries. Law360 (Sept. 11, 2026).
Nevertheless, the court found a triable issue regarding coverage by estoppel. CRI asserted Scottsdale’s appointed counsel had undisclosed conflicts, declined requested research and discovery, delayed a subpoena, and that Scottsdale failed to fully reimburse pre-appointment defense costs. Under Washington law, bad-faith handling of a defense under a reservation of rights can estop an insurer from denying coverage.
The ruling demonstrates that an insurer may establish no contractual coverage yet still face potential coverage consequences based on how it conducts the insured’s defense.