When a liability insurer defends its insured under a reservation, recent decisions limit the insurer’s right to enforce a policy’s consent-to-settle clause. But can the reservation affect the rights of an excess carrier? And does it matter if the carrier declines to participate in an upcoming mediation? Last month, in The Doe Run Resources Corp. v. The Fidelity & Cas. Co. of N.Y., G050689 (Cal. Ct. App. Feb. 1, 2016), a California appellate court (applying Missouri law) found that the contract still had teeth. After the policyholder provided the excess insurer with nothing more than a vague report about an upcoming mediation, it could not force the insurer to cover the ensuing settlement.

Litigation Takes Time

In 1976, St. Joe Minerals Corporation obtained an excess liability policy from The Fidelity & Casualty Company of New York. F&C’s policy provided coverage in excess of the coverage under a primary policy issued by Zurich Insurance Company. St. Joe operated lead and cadmium smelting facilities in Herculaneum, Missouri. (This place, not this one.) Doe Run Resources Corp. is a successor to St. Joe’s business.

In 2001, residents of Herculaneum filed a class action against Doe Run on behalf of 400 citizens, alleging environmental damages arising from St. Joe’s operations in the 1970s. Doe Run gave notice of the suit to both Zurich and F&C. Zurich defended Doe Run under a reservation of rights. F&C, as an excess carrier, did not participate in the defense. A trial in the class action was set for October 2011.

The parties in the class action scheduled a mediation for September 6, 2011. Five days before it started, on September 1, 2011, Doe Run’s coverage counsel wrote a seven-paragraph “update” to F&C’s coverage counsel on the status of the case. Among other things, the letter stated:

“At this time it is impossible to determine whether the parties will be able to achieve settlement [at the upcoming mediation]. It is also unknown whether Doe Run’s part of any such settlement would penetrate the excess layers of coverage … . In the even that a settlement is achieved and … Doe Run’s portion of the settlement exhausts applicable coverage under the primary policies, Doe Run will look to [F&C’s excess policy] for coverage … .

The Art of the Deal

Following a mediation that stretched past midnight, Doe Run and the plaintiffs eventually reached a $55 million settlement, which was memorialized on a handwritten piece of paper. The writing gave each party the right to rescind the agreement within three days. It also made the settlement subject to the approval of Doe Run’s CEO and the class representatives. It contained no provisions for input from either Zurich or F&C.

Doe Run did not tell F&C about the settlement until a month later—and, even then, it did so only in response to an inquiry from the insurer about the status of the litigation. The notice consisted of an email, dated October 5, 2011, which stated:

“I expect you will be hearing from us soon (including some of the requested information). In the meantime… wanted to make sure you knew that the case has been settled, so the trial next week is off-calendar.

The insured did not disclose the amount of the settlement, nor did it mention that it was negotiating with Zurich over how much (if anything) the primary insurer would cover.

Thereafter, F&C did not hear from Doe Run “soon.” Six months later, Doe Run simply added claims against F&C to a pending coverage suit against Zurich.

What Does a Consent Clause Do?

Doe Run’s suit sought indemnification under a policy that promised to indemnify the company for an “ultimate net loss” it would become “legally obligated to pay.” The policy defined the term “ultimate net loss” as

“the sum actually paid or payable … for which the insured is liable either by adjudication or compromise with the written consent of [F&C] …

The trial court granted summary judgment in favor of F&C, on the ground that Doe Run had failed to obtain F&C’s consent to the settlement of the class action. Doe Run appealed.

The Court of Appeal began its analysis by noting that the consent requirement in Doe Run’s policy was part of the definition of a term in the policy’s insuring clause, rather than part of an exclusion.

“That point makes a difference in litigation. It is the insured who has the initial burden of showing whether a claim is within the insuring clause. Then it is the insurer who must bear the burden of showing that an exclusion applies … .

Because Missouri law governed Doe Run’s claim, the court next considered two cases decided under that law:Johnston v. Sweany, 68 S.W.3d 398 (Mo. 2002), and Interstate Cleaning Corp. v. Commercial Underwriters Ins. Co., 325 F.3d 1024 (8th Cir. 2003). Both cases enforced consent-to-settle provisions. Moreover, neither case required the insurer to present evidence that the settlement was excessive, or that the insurer could have negotiated a better deal. Thus, the Court of Appeal concluded that “the loss of the opportunity to control costs [w]as the essence of the prejudice” which excuses an insurer from indemnifying a settlement to which it has not agreed.

The Three Arguments

Doe Run argued that these general principles should not apply under the circumstances of its case.

Doe Run’s first argument (which the Court of Appeal called the “argument from sequence”) arose out of the fact that the company’s primary insurer, Zurich, had defended the underlying action subject to a reservation of rights—but, unlike the argument in other cases, it did not assert that the reservation somehow narrowed the insured’s obligations to its insurer. Instead, Doe Run pointed out that Zurich had not agreed to make the payment that exhausted its policy until after the settlement had become final. In other words, F&C’s obligation, as excess carrier, did not attach until afterit had become impossible for Doe Run to seek prior consent to the settlement.

The Court of Appeal was not impressed by that fact, ruling that the “prerequisite of exhaustion of primary coverage” could not “nullify[] other prerequisites for, or conditions precedent to, coverage in the policy.”

The court called Doe Run’s second argument an “argument from retroactive non-prejudice.” This argument contended that summary judgment was premature, because F&C could present evidence to establish prejudice at trial. This argument was negated by the court’s conclusion that the “loss of opportunity” to participate in the settlement constituted “prejudice,” in and of itself. The court also rejected it on practical grounds:

“[T]rying to reconstruct the conditions that existed in a Missouri courthouse or office building at midnight, September 7, 2011, -particularly the willingness of the [plaintiffs from Herculaneum] to settle for an amount below $55 million – will be impossible.

Finally, Doe Run offered what the court called the “argument from proactivity,” and which the court summarized in this way:

“Look, nothing actually prevented F&C from attending the … mediation, and the company had access to all the public pleadings, so if F&C didn’t consent to the settlement, it was, in effect, its own fault; it should have sent a representative who could have objected if the settlement was too high.

The court rejected this argument, but it did so “primarily because of the way the September 1 letter was written.” The court ruled, in other words, that Doe Run’s letter had not adequately disclosed the possibility that the upcoming mediation might result in a settlement that would penetrate F&C’s layer of coverage. The court’s reasoning therefore leaves open the possibility that Doe Run might have been justified in settling without consent—if it had provided more information about the mediation, or if it could show that the settlement arose out of some sudden, unexpected development.

Cold Comfort

The opinion in Doe Run strongly endorses the rationale underlying consent-to-settle requirements, but it is also clear that the court was influenced by what it perceived to be the high-handedness of the insured. (Recounting the underlying facts, the court stated sarcastically that Doe Run’s notice about the outcome of the mediation mentioned, “almost as an afterthought … the little detail that the case had settled.”) The decision therefore leaves open the question of how the court would treat more sympathetic insureds. How would this court have ruled, for example, if Doe Run had told F&C, prior to the mediation, that plaintiffs were demanding an amount that exceeded the company’s primary coverage? And how much leeway will the court give excess insurers to reject settlements they consider unreasonable?

Because these questions remain open, it still behooves insurers to treat every settlement opportunity as a red flag, and to demand, in writing, thorough disclosure from the insured.