Marginian’s Shield Extends to Group Captives: No Ohio Bad‑Faith Claim When Insurer Settles Within Policy Limits Despite Captive Reimbursement

Introduction

In Chemical Solvents, Inc. v. Greenwich Insurance Co. (6th Cir. Oct. 9, 2025) (No. 25-3366) (not recommended for publication), the Sixth Circuit addressed whether an Ohio-law bad-faith claim can proceed where insurers settle a third-party bodily-injury action within policy limits, but the settlement’s structure triggers significant reimbursement by the insured through a group captive insurance arrangement. The court affirmed summary judgment for insurers Greenwich Insurance Company and Illinois National Insurance Company and upheld the district court’s denial of Federal Rule of Civil Procedure 56(d) discovery.

The dispute arose from a 2014 bodily-injury suit against Chemical Solvents, Inc. (CSI). Although CSI believed the case was defensible, the insurers settled under policy provisions permitting settlement up to limits. CSI claimed the settlement was “underhanded” because it leveraged CSI’s participation in a group captive, Alembic, Inc., and an Illinois National–Alembic reinsurance relationship, resulting in depletion of CSI’s Alembic redemption account and substantial reimbursement obligations.

After earlier appeals resolved CSI’s declaratory-judgment and breach-of-contract claims against it, the present appeal focused on two questions:

Whether Marginian v. Allstate Insurance Co., 481 N.E.2d 600 (Ohio 1985)—which bars bad-faith claims when the insurer settles within policy limits—permits an insured to proceed with a bad-faith claim where captive reimbursement followed from the settlement structure; and
Whether the district court abused its discretion in denying Rule 56(d) discovery on the bad-faith claim.

Summary of the Opinion

The Sixth Circuit affirmed, holding:

Ohio’s Marginian rule forecloses a bad-faith claim when the insurer settles a claim within policy limits. That bar applies even in nontraditional insurance contexts—here, a group captive structure—where the insured may face reimbursement obligations triggered by the settlement. The insured’s “further liability” argument misread Marginian; “further liability” means an excess judgment, not collateral reimbursement through captives or reinsurance.
There is no separate, free-standing cause of action for breach of the implied duty of good faith and fair dealing distinct from the underlying contract claim under Ohio law (Lucarell v. Nationwide). The court rejected the attempt to repackage bad-faith handling as an “independent” implied duty claim.
The district court properly denied Rule 56(d) discovery because no amount of discovery could change the legally dispositive fact that the insurers settled within policy limits, which defeats the bad-faith claim as a matter of law.

Detailed Analysis

Precedents and Authorities Cited

Marginian v. Allstate Ins. Co., 481 N.E.2d 600 (Ohio 1985): The keystone precedent. Marginian holds that an insured cannot maintain a bad-faith claim where the insurer settles a claim within policy limits. The Sixth Circuit treated Marginian as a broad, bright-line bar to third-party bad-faith claims premised on settlement conduct when the ultimate resolution is within limits. The court emphasized that “further liability” in Marginian refers to a judgment exceeding policy limits, not to collateral financial consequences (like reimbursement obligations) arising from separate risk-financing arrangements.
Ironshore Indemnity, Inc. v. Evenflo Co., No. 24-3792, 2025 WL 1356414 (6th Cir. Apr. 25, 2025): The court analogized to Ironshore, where it rejected carving out an exception to Marginian for “fronting” policies (arrangements requiring reimbursement of defense and settlement costs). The Sixth Circuit acknowledged nontraditional arrangements may present different risk profiles but found no authority exempting them from Marginian’s “capacious” rule. Chemical Solvents extends that reasoning to group captive structures.
Hart v. Republic Mut. Ins. Co., 87 N.E.2d 347 (Ohio 1949), and Slater v. Motorists Mut. Ins. Co., 187 N.E.2d 45 (Ohio 1962): Classic Ohio cases establishing the contours of an insurer’s good-faith duty in settlement—most notably, exposure to liability when the insurer unreasonably fails to settle within limits and allows an excess judgment. The Sixth Circuit used these cases to clarify that Marginian’s “further liability” means “excess judgment,” not the type of reimbursement seen here.
Scott Fetzer Co. v. American Home Assurance Co., 229 N.E.3d 70 (Ohio 2023): Reaffirmed that Ohio insurance contracts carry an implied duty of good faith in claims handling. The court cited Scott Fetzer to acknowledge the duty’s existence, then explained why Marginian nonetheless forecloses this particular bad-faith claim.
Lucarell v. Nationwide Mut. Ins. Co., 97 N.E.3d 458 (Ohio 2018): Ohio does not recognize an independent cause of action for breach of the implied duty of good faith and fair dealing separate from the contract claim. The Sixth Circuit invoked Lucarell to reject CSI’s attempt to decouple alleged bad-faith handling from the policy framework in which Marginian governs.
American Cas. Co. v. Atlantic Painting & Contracting, Inc., No. 58928, 1990 WL 100398 (Ohio Ct. App. July 19, 1990): Ohio intermediate appellate authority reading Marginian to bar bad-faith suits where the settlement is within policy limits. The Sixth Circuit cited this line of authority to show consistent application in Ohio courts.
Erie and choice-of-law principles: The court noted it must apply Ohio substantive law in this diversity case (Kepley v. Lanz, 715 F.3d 969 (6th Cir. 2013); Baker Hughes Inc. v. S&S Chemical, LLC, 836 F.3d 554 (6th Cir. 2016)) and follow the Ohio Supreme Court where its decision directly controls (Diamond Transportation Logistics, Inc. v. Kroger Co., 101 F.4th 458 (6th Cir. 2024)).
Standards of review: De novo for summary judgment (Levine v. DeJoy, 64 F.4th 789 (6th Cir. 2023)), abuse of discretion for Rule 56(d) discovery denials (Doe v. City of Memphis, 928 F.3d 481 (6th Cir. 2019)).
Rule 56(d) framework: While courts assess multiple factors (Plott v. General Motors Corp., 71 F.3d 1190 (6th Cir. 1995)), discovery can be denied where it would not affect the outcome (Thornton v. Graphic Communications Conference of the IBT Supplemental Retirement & Disability Fund, 566 F.3d 597 (6th Cir. 2009); First Floor Living LLC v. City of Cleveland, 83 F.4th 445 (6th Cir. 2023)).
Background on group captives: The court referenced industry literature explaining group captives as member-owned risk pools. That primer framed the mechanics by which Alembic held CSI’s redemption account and reimbursed Illinois National, creating CSI’s negative balance.
Prior appeals in this litigation: Chem. Solvents, Inc. v. Greenwich Ins. Co., 2023 WL 179772 (6th Cir. Jan. 13, 2023) (“Chem. Solvents I”) (affirming summary judgment on breach-of-contract and declaratory-judgment claims); Chem. Solvents, Inc. v. Greenwich Ins. Co., 2025 WL 40943 (6th Cir. Jan. 7, 2025) (“Chem. Solvents II”).

Legal Reasoning

The court’s analysis proceeds in two straightforward moves.

Marginian controls, and its bar is broad. The Sixth Circuit recognized Ohio’s tort of insurer bad faith in claims handling (Scott Fetzer), but held that the Ohio Supreme Court’s Marginian rule creates a categorical bar to third-party bad-faith claims where the insurer settles within policy limits. CSI’s attempt to distinguish Marginian—by arguing that “further liability” was incurred because the settlement depleted its Alembic redemption account—failed. The panel explained that in Marginian “further liability” means an excess judgment (the core harm in failure-to-settle cases), not collateral reimbursement obligations that happen to be part of the insured’s broader risk-financing structure. The court’s reliance on Ironshore underscores that nontraditional insurance arrangements (fronting policies there, group captives here) do not, absent Ohio authority, escape Marginian’s reach.
No discovery needed where the law forecloses the claim. The court affirmed denial of Rule 56(d) discovery because the dispositive legal premise—the insurers settled within policy limits—extinguishes the bad-faith claim. No quantum of fact discovery into alleged “underhanded” tactics could change that outcome, making additional discovery futile under Thornton and First Floor Living.

The court also addressed two auxiliary arguments:

Independent implied-duty claim. CSI urged that the duty of good faith and fair dealing operates independently of contract duties. The court rejected the proposition, citing Lucarell: Ohio does not recognize a stand-alone contract claim for breach of the implied covenant apart from the underlying contract claim. To the extent CSI sought a separate contractual implied-duty claim, it was foreclosed; to the extent it sought a tort bad-faith claim, Marginian barred it because the settlement was within limits.
Public policy. The panel declined to entertain policy-based exceptions in light of Erie constraints: when a state supreme court has spoken directly (here, Marginian), federal courts applying state law must follow it (Diamond Transportation). Policy arguments are for the Ohio Supreme Court or the legislature, not a federal intermediate court applying state law.

Impact and Implications

Although designated “not recommended for publication,” the decision is an important signal in several respects.

Group captives and fronting policies now aligned under Marginian. After Ironshore (fronting) and now Chemical Solvents (group captive), the Sixth Circuit has twice declined to carve out exceptions to Marginian for nontraditional risk-financing structures. Absent contrary guidance from the Ohio Supreme Court, insureds cannot plead around Marginian by characterizing reimbursement or collateral consequences as “further liability.”
Constraints on bad-faith discovery strategies. Plaintiffs often seek insurer claim files and internal communications to prove bad faith. Where the dispositive legal rule forecloses the claim (as when settlement is within limits), courts may deny Rule 56(d) discovery outright. Expect more early motions limiting discovery in Ohio-law bad-faith suits premised on within-limits settlements.
Incentives in captive/fronting ecosystems. The ruling may embolden insurers to settle within limits even if the insured will bear reimbursement obligations via captive or fronting arrangements. Policyholders participating in captives should anticipate that such settlements will be insulated from Ohio bad-faith claims, and should manage that risk ex ante through contractual drafting (e.g., settlement-consent provisions in fronting agreements, explicit conflict-of-interest protocols, alignment-of-interest clauses between insurer, captive, and insured).
Limited avenues for extra-contractual relief. Ohio continues to recognize the tort of insurer bad faith (e.g., denial of coverage without reasonable justification). But in third-party settlement contexts, Marginian sharply narrows extra-contractual exposure where settlements are within limits. Policyholders alleging structural conflicts, reinsurance-driven incentives, or captive-related self-dealing may need to explore alternative theories (subject to Ohio law), such as specific contractual protections, regulatory complaints, or, where applicable, fiduciary-duty or interference claims against non-insurer entities—recognizing that such claims have their own hurdles and may not be viable on these facts.
Potential for state-law evolution. The panel expressly noted the absence of Ohio authority exempting nontraditional products from Marginian. Should the Ohio Supreme Court revisit Marginian in the context of captives/fronting, the landscape could shift. For now, in federal diversity cases governed by Ohio law, Marginian’s bright line governs.
Procedural note. The district court’s bifurcation—resolving contract and declaratory issues first, then addressing bad faith—proved efficient. Once coverage and contract claims fell away and the settlement-within-limits fact was undisputed, the bad-faith claim was legally untenable, streamlining the case to judgment without discovery.

Complex Concepts Simplified

Policy limits: The maximum amount an insurer is obligated to pay under an insurance policy for a covered claim. Settling “within limits” means the insurer’s payment does not exceed that cap.
Third-party bad faith (failure to settle): A tort claim alleging an insurer unreasonably failed to settle within policy limits, exposing the insured to an excess judgment. In Ohio, classic liability arises when the insurer’s refusal to settle causes a verdict above limits (Hart; Slater).
Marginian rule (Ohio): If an insurer settles a claim within policy limits, the insured cannot pursue a bad-faith claim over the settlement conduct. “Further liability” in this context means an excess judgment, not other financial consequences.
Group captive insurance: A member-owned insurer created by multiple companies to pool and finance risk. Members pay premiums; portions may be held in “redemption accounts.” Settlements paid by a fronting carrier or reinsurer can be reimbursed from captive funds, potentially creating obligations for members to replenish accounts.
Fronting policy: A policy where the insurer issues coverage in its name but is fully or largely reimbursed by the insured (often through deductibles, collateral, or indemnity), effectively “fronting” regulatory or financial capability.
Reinsurance: Insurance for insurers. Here, Illinois National had a reinsurance relationship with Alembic, such that settlement payments could be invoiced to the captive, which then drew down CSI’s redemption account.
Implied duty of good faith and fair dealing: A duty inherent in Ohio insurance contracts requiring the insurer to act fairly in handling claims. Ohio recognizes the tort of insurer bad faith but does not recognize a separate contract cause of action for breach of the implied covenant apart from a contract claim (Lucarell).
Rule 56(d) discovery: A mechanism allowing a nonmovant to seek discovery before a court rules on summary judgment if the nonmovant cannot present essential facts. Courts may deny such requests when discovery would not change the dispositive legal outcome.

Conclusion

Chemical Solvents confirms that under Ohio law, an insurer’s settlement of a third-party claim within policy limits creates a near-absolute shield against bad-faith claims challenging the settlement’s propriety—even where the settlement triggers substantial reimbursement through a group captive or similar nontraditional structure. By reading “further liability” in Marginian to mean “excess judgment,” the Sixth Circuit rejected attempts to recharacterize captive-driven reimbursements as a path around the rule. The court also reinforced that Ohio does not recognize a standalone implied-duty claim apart from contract and that Rule 56(d) discovery may be denied when the claim fails as a matter of law.

The decision, although unpublished, is a significant waypoint for insurers and insureds in Ohio confronting the intersection of claims-handling duties and alternative risk-financing. Until the Ohio Supreme Court says otherwise, Marginian’s bright line governs: settling within limits forecloses bad-faith claims over settlement conduct, regardless of captive or fronting reimbursement consequences.