Why it matters

A Georgia federal court recently delivered an important but painful reminder that coverage may be compromised where the insured fails to obtain its insurer’s consent prior to settlement of an underlying claim. Applying a strict reading of the policy at issue, the court denied coverage to an insured for a $4.9 million settlement where the policy at issue contained a provision requiring the insurer’s written consent before the insured assumed liability or agreed to a settlement. Although the policyholder discussed a possible settlement with the insurer in which the insurer would contribute $1 million toward settlement, the court refused to order payment because the insurer did not provide its consent for the larger $4.9 million settlement. In the alternative, the court held, the insured’s unilateral decision to settle the case constituted a “voluntary act” rather than a legal obligation that could trigger coverage.

Detailed Discussion

The underlying litigation was a securities fraud complaint filed by the Washtenaw County Employees’ Retirement System against the Piedmont Office Realty Trust and the company’s officers and directors. A federal court judge granted summary judgment to Washtenaw. When Piedmont filed its notice of appeal, the parties agreed to mediate the dispute. By this point, primary insurance had already been wiped out and excess insurer XL Specialty Ins. Co. had already paid $4 million in defense costs.

At the mediation, Washtenaw demanded more than $158 million in damages. Piedmont sought approval from XL to settle the case, which said it would contribute no more than $1 million towards any settlement, even though $6 million of the XL policy’s $10 million in limits remained intact.

Piedmont agreed to a $4.9 million settlement and the federal court overseeing the case entered a final order approving the agreement. Piedmont sought the $4.9 million from XL, which paid only the $1 million it had indicated it would pay. Piedmont then filed suit to recover the remaining $3.9 million.

U.S. District Court Judge William S. Duffey, Jr., sided with XL, ruling that the conditions of the policy were not met.

“Here, plaintiff unilaterally, and in its own discretion based on its perception of risk and its economic interests, decided to voluntarily settle the securities action,” the court said. “Plaintiff here reached a voluntary, unilateral, and discretionary agreement with Washtenaw to pay $4.9 million and did so without the defendant’s consent.”

Under Georgia law, an agreement to settle a claim is a “voluntary payment [that] does not constitute a legal obligation,” the court wrote. “In the case here, plaintiff’s insurance contract with the defendant provides for the payment of claims and defense costs only if the plaintiff is ‘legally obligated’ to pay a securities claim. The defendant is not obligated to pay any claims or costs arising out of a securities claim if the plaintiff did not have a legal obligation to pay the settlement amount, and the defendant did not consent to pay the settlement amount. The plaintiff’s complaint is required to be dismissed on this basis alone.”

Judge Duffey was unmoved by Piedmont’s argument that it became “legally obligated” to pay the settlement once the district court approved the deal.

“That ‘voluntary act’ was completed before the district court approved the settlement agreement,” the court said, granting XL’s motion to dismiss the complaint. “The district court’s approval of the settlement does not convert an uncovered amount into a covered amount under the insurance agreement.”

To read the decision in Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., click here.