Houston Casualty has beaten back a $332,981 coverage fight, with a federal judge ruling defense costs in a separate arbitration fall outside the policy.
The decision, handed down May 7, 2026 by Judge Robert S. Lasnik in the Western District of Washington, dismissed every claim filed by Lesmir Corporation and its manager Stanley Rosen, including bad faith and statutory counts, and entered judgment for the insurer.
Lesmir, a commercial real estate company, held two general partners liability policies from Houston Casualty. Both were claims-made-and-reported, and crucially, neither gave the carrier a duty to defend. Houston Casualty's job was narrower: reimburse covered defense costs for a "Claim" first made and reported during the policy period.
The chain of events ran like this. In January 2023, three investors in Lesmir-affiliated companies sent a demand letter accusing Rosen of "a pattern of misconduct" in running the companies. The letter said his actions breached the operating agreements and violated his fiduciary duties. Houston Casualty eventually agreed the fiduciary duty piece was covered and paid about $8,000 in defense costs tied to that window.
Then came the arbitration. In August 2023, the same investors filed a demand laying out four causes of action - all of them contract claims. The fiduciary duty theory was dropped.
Houston Casualty accepted the arbitration was a Claim under the policy and related it back to the 2019 Policy. But it denied coverage under the Contract Exclusion, which barred payment for any Claim "for the liability of any Insured(s) arising under any express contract or agreement, regardless of whether such liability is direct or assumed, unless such liability would have existed without such contract or agreement."
Lesmir and Rosen sued, arguing the $332,981 they spent defending the arbitration should be covered because the contract claims "mirrored," shared a "common nexus of fact" with, and used the same legal defenses as the covered fiduciary duty allegations from the January 2023 demand. They leaned on Washington's "reasonably related" doctrine – a rule that has, in some cases, forced insurers to pay defense costs on uncovered claims when those costs cannot practicably be separated from covered ones.
Lasnik was not persuaded. He wrote that the doctrine is narrow. It applies when covered and uncovered claims are defended together in a single proceeding with no clean way to split the bill. He cited Nordstrom v. Chubb, where there was "no reasonable means of prorating the costs" between the two.
This case, he said, was different. The arbitration was a separate proceeding, filed nearly seven months after the January 2023 demand, pleading only contract claims. The disputed defense costs were all incurred after the arbitration was filed. The work, the judge wrote, was "temporally and functionally distinct and readily segregable."
Factual overlap with an earlier covered demand was not enough. Coverage, Lasnik explained, turns on "the allegations actually asserted in the operative complaint (or claim)" - not on claims the investors could have brought but didn't.
The fallback arguments also failed. Lesmir and Rosen said Houston Casualty shoud be barred from treating the contract and fiduciary claims as separate, because it had used the policy's interrelated wrongful acts provisions to bundle the August 2020 letter, the January 2023 demand, and the arbitration into a single claim. Lasnik said those provisions serve a "specific and limited function" – fixing the policy period and preventing duplicate retentions – and do not expand coverage.
With the coverage claim out, the extracontractual claims went with it. Because the denial was "reasonable as a matter of law," the court dismissed the Insurance Fair Conduct Act, bad faith, and Consumer Protection Act counts.
Houston Casualty's motion for summary judgment was granted. The plaintiffs' cross-motion was denied. The case was dismissed with prejudice.
