Case Briefs

GA High Court Upholds Insurer Right to Consent to Settlement

The Supreme Court of Georgia, applying state law, has ruled in a unanimous decision that a policyholder's complaint against its insurer seeking coverage for amounts paid to settle an underlying lawsuit and alleging bad faith was properly dismissed on the grounds that the policyholder settled the underlying lawsuit without its insurer's consent. Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Co., No. S15Q0418 (Ga. Apr. 20, 2015). In so holding, the court rejected the policyholder's argument that the insurer's consent was not required because the insurer allegedly withheld such consent unreasonably and in bad faith. The court also rejected the policyholder's argument that court approval of the underlying settlement transformed the settlement into a “legal obligation to pay.”

The policyholder, a real estate investment trust, exhausted the limits of a primary policy by payment of defense costs and incurred another $4 million under its excess policy while defending an underlying securities action. The policyholder prevailed on summary judgment in the underlying action, but the securities claimants then appealed, and the policyholder sought consent from the excess insurer to settle the case for the $6 million limits remaining under its policy. The insurer refused to contribute more than $1 million toward settlement. Without obtaining the insurer's consent, the policyholder entered into a $4.9 million settlement agreement, which later was approved by the district court. The policyholder then sued its insurer for breach of contract and bad faith, seeking coverage for the full settlement amount plus statutory interest. The policyholder claimed, among other things, that the insurer's consent to the settlement was not required because the insurer withheld its consent unreasonably and in bad faith. Rejecting that argument, the district court granted the insurer's motion to dismiss, and the policyholder appealed.

On appeal, the United States Court of Appeals for the Eleventh Circuit certified the questions presented to the Georgia Supreme Court. The latter enforced the consent-to-settle clause, citing Trinity Outdoor, LLC v. Central Mutual Insurance Co., 679 S.E.2d 10 (Ga. 2009), which also involved a policyholder's unilateral settlement without its insurer's consent.

In reaching its conclusion, the court rejected the policyholder's argument that the “consent to settle” provision did not apply because the insurer “unreasonably withheld” its consent to the settlement, in violation of a policy provision stating that the insurer's consent “shall not be unreasonably withheld.” Rejecting the assertion that that phrase distinguished the case of Trinity Outdoor, the court simply ruled that the policyholder “could not settle the underlying lawsuit without the insurer's consent and then sue the insurer for refusing to settle in bad faith.” The court also rejected the argument that the insurer waived the consent requirement by denying coverage for the settlement, emphasizing that the insurer did not “wholly abandon” its insured and instead funded the policyholder's defense in the underlying action.

In addition, the court rejected the policyholder's argument that the district court's approval of the settlement agreement created a “legal obligation to pay.” Instead, the court stated that the policyholder “could not settle the underlying lawsuit without [the insurer's] consent ' in breach of its insurance contract ' and then, after breaching the contract, claim that the district court's approval of the settlement imposed upon [the insurer] a distinct legal obligation to pay the settlement.”

The Georgia Supreme Court also concluded that policyholder's complaint was properly dismissed, summarizing its holdings by stating:

[T]he plain language of the insurance policy does not allow the insured to settle a claim without the insurer's written consent. It also provides that the insurer shall only be liable for a loss which the insured is “legally obligated to pay.” Finally, the policy contains a “no action” clause which stipulates that the insurer may not be sued unless, as a condition precedent, the insured complies with all of the terms of the policy and the amount of the insured's obligation to pay is determined by a judgment against the insured after a trial or a written agreement between the claimant, the insured, and the insurer. In light of these unambiguous policy provisions, we hold that [the policyholder] is precluded from pursuing this action against [the insurer] because [the insurer] did not consent to the settlement and [the policyholder] failed to fulfill the contractually agreed upon condition precedent.

Trinity, supra; see Reed v. Auto-Owners Ins. Co., 284 Ga. 286 (667 SE2d 90) (2008).

Essentially, the Georgia Supreme Court found that the consent to settlement and no action clauses together require the policyholder to either: 1) allow the insurer to determine whether a settlement is reasonable; or 2) wait to bring a suit against the insurer for allegedly unreasonably withholding consent to a settlement until after there is objective proof that refusing the settlement may have been unreasonable and that the policyholder allegedly was thereby harmed, evidenced by a judicial finding regarding the insured's liability and damages exceeding the agreed amount of the potential settlement.

Laura Foggan, a member of this newsletter's Board of Editors, is a partner in the Insurance Practice and Chair of the Insurance Appellate Group of Wiley Rein LLP, Washington, DC. Edward R. Brown and Jessica Cunningham Lim are associates at the firm.

GA High Court Upholds Insurer Right to Consent to Settlement

The Supreme Court of Georgia, applying state law, has ruled in a unanimous decision that a policyholder's complaint against its insurer seeking coverage for amounts paid to settle an underlying lawsuit and alleging bad faith was properly dismissed on the grounds that the policyholder settled the underlying lawsuit without its insurer's consent. Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Co., No. S15Q0418 (Ga. Apr. 20, 2015). In so holding, the court rejected the policyholder's argument that the insurer's consent was not required because the insurer allegedly withheld such consent unreasonably and in bad faith. The court also rejected the policyholder's argument that court approval of the underlying settlement transformed the settlement into a “legal obligation to pay.”

The policyholder, a real estate investment trust, exhausted the limits of a primary policy by payment of defense costs and incurred another $4 million under its excess policy while defending an underlying securities action. The policyholder prevailed on summary judgment in the underlying action, but the securities claimants then appealed, and the policyholder sought consent from the excess insurer to settle the case for the $6 million limits remaining under its policy. The insurer refused to contribute more than $1 million toward settlement. Without obtaining the insurer's consent, the policyholder entered into a $4.9 million settlement agreement, which later was approved by the district court. The policyholder then sued its insurer for breach of contract and bad faith, seeking coverage for the full settlement amount plus statutory interest. The policyholder claimed, among other things, that the insurer's consent to the settlement was not required because the insurer withheld its consent unreasonably and in bad faith. Rejecting that argument, the district court granted the insurer's motion to dismiss, and the policyholder appealed.

On appeal, the United States Court of Appeals for the Eleventh Circuit certified the questions presented to the Georgia Supreme Court. The latter enforced the consent-to-settle clause, citing Trinity Outdoor, LLC v. Central Mutual Insurance Co. , 679 S.E.2d 10 (Ga. 2009), which also involved a policyholder's unilateral settlement without its insurer's consent.

In reaching its conclusion, the court rejected the policyholder's argument that the “consent to settle” provision did not apply because the insurer “unreasonably withheld” its consent to the settlement, in violation of a policy provision stating that the insurer's consent “shall not be unreasonably withheld.” Rejecting the assertion that that phrase distinguished the case of Trinity Outdoor, the court simply ruled that the policyholder “could not settle the underlying lawsuit without the insurer's consent and then sue the insurer for refusing to settle in bad faith.” The court also rejected the argument that the insurer waived the consent requirement by denying coverage for the settlement, emphasizing that the insurer did not “wholly abandon” its insured and instead funded the policyholder's defense in the underlying action.

In addition, the court rejected the policyholder's argument that the district court's approval of the settlement agreement created a “legal obligation to pay.” Instead, the court stated that the policyholder “could not settle the underlying lawsuit without [the insurer's] consent ' in breach of its insurance contract ' and then, after breaching the contract, claim that the district court's approval of the settlement imposed upon [the insurer] a distinct legal obligation to pay the settlement.”

The Georgia Supreme Court also concluded that policyholder's complaint was properly dismissed, summarizing its holdings by stating:

[T]he plain language of the insurance policy does not allow the insured to settle a claim without the insurer's written consent. It also provides that the insurer shall only be liable for a loss which the insured is “legally obligated to pay.” Finally, the policy contains a “no action” clause which stipulates that the insurer may not be sued unless, as a condition precedent, the insured complies with all of the terms of the policy and the amount of the insured's obligation to pay is determined by a judgment against the insured after a trial or a written agreement between the claimant, the insured, and the insurer. In light of these unambiguous policy provisions, we hold that [the policyholder] is precluded from pursuing this action against [the insurer] because [the insurer] did not consent to the settlement and [the policyholder] failed to fulfill the contractually agreed upon condition precedent.

Trinity, supra ; see Reed v. Auto-Owners Ins. Co. , 284 Ga. 286 (667 SE2d 90) (2008).

Essentially, the Georgia Supreme Court found that the consent to settlement and no action clauses together require the policyholder to either: 1) allow the insurer to determine whether a settlement is reasonable; or 2) wait to bring a suit against the insurer for allegedly unreasonably withholding consent to a settlement until after there is objective proof that refusing the settlement may have been unreasonable and that the policyholder allegedly was thereby harmed, evidenced by a judicial finding regarding the insured's liability and damages exceeding the agreed amount of the potential settlement.

Laura Foggan, a member of this newsletter's Board of Editors, is a partner in the Insurance Practice and Chair of the Insurance Appellate Group of Wiley Rein LLP, Washington, DC. Edward R. Brown and Jessica Cunningham Lim are associates at the firm.