The Case
John Stafford and U.S. Diamond & Gold, doing business as Stafford's Jewelers (together, “Stafford”), shipped a 5.56-carat pink diamond to Julius Klein Diamonds (“JKD”). Stafford packaged the diamond and arranged for The Brinks Company to provide secured transportation from Dayton, Ohio, to New York City. JKD received the package the same day Stafford shipped it. JKD claimed that upon opening the package, however, the diamond was missing.

Stafford sued JKD for damages related to the loss of the diamond. JKD counterclaimed, alleging that Stafford had made false representations concerning the shipment (in particular, JKD contended that Stafford never had shipped the pink diamond at all).

The case went to trial, and a jury found in Stafford's favor, awarding over $1.7 million in damages. Stafford estimated the cost of successfully defending against JKD's counterclaim amounted to more than $1 million.

Stafford contended that its insurance policy required that its insurer, Jewelers Mutual Insurance Company, defend against JKD's counterclaim, but Jewelers Mutual disclaimed coverage. Stafford filed suit, alleging that Jewelers Mutual had breached the parties' insurance agreement and had acted in bad faith when it refused to defend against JKD's counterclaim.

Jewelers Mutual moved for judgment on the pleadings, the motion was granted, and Stafford's complaint was dismissed. Stafford appealed.

The Policy
The policy provided:

COVERAGE P—PERSONAL INJURY LIABILITY/ADVERTISING INJURY LIABILITY

“We” pay all sums which an “insured” becomes legally obligated to pay as “damages” due to “personal injury” or “advertising injury” to which this insurance applies.

1. “We” cover: