As we previously reported here, the U.S. Court of Appeals for the Eleventh Circuit asked the Georgia Supreme Court to weigh in on the coverage dispute in Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Co. concerning consent-to-settle and no-action provisions in an excess insurance policy. The state high court’s answer was a disappointing one for policyholders. According to the court, if a policyholder settles a claim brought against it without first obtaining the insurer’s consent, the policyholder may effectively forfeit coverage for the settlement and is barred from later suing its insurer, even if the policyholder believes the insurer unreasonably withheld consent. Companies holding policies governed by Georgia law should proceed carefully when settling claims against them where those policies include consent-to-settle and no-action provisions. Going forward, companies might be wise to avoid such policies altogether.

The insurance case arose after Piedmont Office Realty Trust wanted to settle a federal securities class action brought against it, and its insurer, XL Specialty Insurance Company, refused to consent to the settlement. Piedmont settled anyway and then sued XL after the insurer said it would not reimburse Piedmont for the settlement payment. The trial court dismissed the lawsuit, concluding that Piedmont had not obtained XL’s consent to the settlement, as required under the policy’s consent-to-settle provision, and the policy forbade Piedmont from suing XL unless it had first complied with all of the policy’s terms.

Georgia’s high court agreed. The no-action clause not only required Piedmont to comply with the consent-to-settle provision before suing XL, the court held, it also barred suit for recovery of any amount Piedmont was obliged to pay to someone who had sued it unless that obligation arose out of an adverse judgment against Piedmont or under a written agreement between Piedmont, the claimant, and XL. The Georgia Supreme Court also observed that XL was only liable under the policy for a loss Piedmont was “legally obligated to pay” and suggested that settlement amounts paid without the insurer’s consent were voluntary and did not constitute a legal obligation.

In reaching its decision, the Georgia court relied on an opinion it had issued a few years earlier, Trinity Outdoor, LLC v. Central Mut. Ins. Co., in which it concluded that a policyholder’s suit against its insurance carrier was barred by provisions similar to those in the XL policy. Piedmont tried to distinguish the Trinity case, arguing that the XL policy, unlike the policy at issue in Trinity, expressly provided that XL could not unreasonably withhold its consent to a proposed settlement. The Georgia Supreme Court was unpersuaded. According to the court, such a provision may not have been expressly included in the policy, but it was nevertheless implied in it because Georgia law prohibits an insurer from unreasonably refusing to settle a covered claim.

The Eleventh Circuit has since affirmed the dismissal of Piedmont’s suit against XL.

In light of this decision, companies looking to buy or renew policies should consider avoiding ones with consent-to-settle and no-action clauses. Under Georgia law, those provisions may force the policyholder into a no-win situation: either forfeit coverage by settling without the insurer’s consent in order to put an end to a vexatious and potentially economically damaging lawsuit, or try to preserve coverage at the cost of prolonging all of the expense, reputational harm and business disruption that litigation imposes, not to mention the risk of an adverse judgment that could dwarf the settlement amount that the carrier rejected.

Sure, a policyholder that loses in the underlying litigation may sue its carrier for unreasonably withholding consent, but only if the policyholder is willing to spend even more time and money and endure further disruption to its business. That’s cold comfort.