Why it matters

A Michigan federal court held that an excess liability insurer was liable for a $7.6 million settlement, finding the insured did not have to obtain the insurer’s consent to settle where the settlement was entered into before the underlying insurance was exhausted. The insurer argued that a provision in its excess policy required that it be consulted on all settlements, but the insured contended that the provision applied only to settlements within the excess policy layer. Finding the excess policy was ambiguous as to whether the insured was required to obtain the excess insurer’s consent to settle, the court resolved the ambiguity in favor of the insured, ruling that the insurer’s consent would have been a meaningless gesture given that the settlement amount was nowhere near the attachment point for its policy.

Detailed Discussion

A manufacturer and marketer of medical supplies, Stryker Corporation purchased from Pfizer the assets of another company that made artificial knee joints. More than a decade later, Stryker began facing product liability lawsuits over the knee joints.

For insurance coverage, Stryker had a $15 million commercial liability policy issued by XL Insurance Company that included a $2 million self-insured retention. Excess insurer TIG Insurance Company’s attachment point was $17 million.

Stryker sued XL when the insurer refused to defend or indemnify the company for the product liability lawsuits. The insured funded its own defense and eventually settled the cases for more than $7.6 million. A court subsequently determined that XL was liable.

In the interim, Pfizer was facing similar litigation over the knee joints. Pfizer filed suit against Stryker for indemnification and a federal court in New York ruled that Stryker was liable to Pfizer for all losses relating to sales after Stryker’s purchase date. Stryker filed suit against XL and TIG for coverage in the Pfizer action, noting that the damages might exceed $18 million.

After a conference with all parties, XL paid Pfizer more than $17 million to settle Stryker’s liability, exhausting its policy limits. All that remained at issue was the original $7.6 million settlement.

TIG argued that it was not required to cover $7.6 million paid in settlements because Stryker failed to obtain TIG’s consent before entering into them.

TIG had argued that a provision in its excess insurance policy with Stryker required that it be consulted on all settlements, but Stryker argued that provision applied only to settlements within its policy layer.

The court found that the policy was ambiguous as to whether TIG’s policy would require Stryker to seek its consent to settlements that were below its policy layer. Noting that Michigan law routinely construes ambiguous language in an insurance policy against the insurer, the court found that Stryker should not be required to obtain TIG’s consent for the direct settlements because it settled the claims within the XL layer of insurance. Moreover, obtaining TIG’s consent would have been meaningless, the court concluded, because XL had already denied coverage at that time.

Further, the court reasoned that the purpose of the consent requirement – i.e., to give the insurer the opportunity to contest liability and to participate in settlement negotiations – would not have been met by requiring Stryker to seek TIG’s consent because TIG had no interest in involving itself in settlements that were within XL’s layer.

To read the opinion in Stryker Corporation v. XL Insurance Company, click here.