In a recent decision, the Eleventh Circuit sought and then applied the Georgia Supreme Court’s answers to two certified questions about policyholder settlements made without the insurer’s consent. Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., No. 14-11987, 2015 WL 3853022, at *1 (11th Cir. June 23, 2015).
In Piedmont Office, the insurer (XL) had issued an excess CGL policy to Piedmont that contained a standard voluntary payment clause and a clause that required XL’s consent to settlement unless that consent was “unreasonably withheld.” Piedmont was later sued in a class action lawsuit claiming $150 million in damages, and entered into settlement negotiations while the lawsuit was up on appeal. Piedmont asked XL to make its $6 million limit available for settlement, but XL stated that it would only pay $1 million. Nonetheless, Piedmont agreed to settle the case for $4.9 million without any further notice to XL, and that settlement was approved and authorized in a court order.
XL refused to pay the settlement, citing the consent to settle and voluntary payment clauses in the policy. In the ensuing coverage action, Piedmont argued that neither clause applied:
- Piedmont argued that its payment of the settlement was not voluntary because the court had entered an order authorizing the settlement agreement, making Piedmont “legally obligated to pay” it.
- Piedmont argued that XL’s consent to make its limits available was “unreasonably withheld.”
Noting uncertainty in the law, the Eleventh Circuit certified two questions to the Georgia Supreme Court:
- Is payment of a settlement voluntary when a court issues an order that authorizes and directs the implementation of that settlement agreement, or is the insured “legally obligated to pay” such a settlement?
- When an insurance contract contains a “consent-to-settle” clause that provides expressly that the insurer's consent “shall not be unreasonably withheld,” can a court determine, as a matter of law, that an insured who seeks (but fails) to obtain the insurer's consent before settling is flatly barred—whether consent was withheld reasonably or not—from bringing suit for breach of contract or for bad-faith failure to settle? Or must the issue of whether the insurer unreasonably withheld its consent be resolved first?
The Supreme Court of Georgia responded to the first question by stating that an insured cannot create a “legal obligation to pay” simply by gaining court approval of a settlement negotiated without the insurer’s consent. The Court recognized differing opinions from courts in Oregon and Utah, but instead followed a ruling of a federal court in Florida, Zurich Am. Ins. Co. v. Frankel Enterprises, 509 F.Supp.2d 1303 (S.D. Fla. 2007) (insurer cannot be bound by unauthorized settlement when it has not refused to defend).
Regarding the second question, the Court clarified that a consent-to-settle clause that forbids an insurer from “unreasonably” withholding consent does not allow the policyholder to unilaterally determine whether consent was withheld unreasonably and proceed with settlement. Rather, the policyholder is bound by the insurer’s decision and must file a subsequent bad-faith action to seek any damages caused by unreasonable refusal.