In Perini/Tompkins Joint Venture v. ACE American Insurance Company, -- F.3d --, 2013 WL 6570947 (4th Cir. 2013), the United States Court of Appeals for the Fourth Circuit, applying Maryland and Tennessee law, affirmed the district court’s grant of summary judgment for general liability insurer when the insured settled the underlying claim without consulting or obtaining the approval of the insurer.

The case arose out of a dispute regarding the construction of the Gaylord National Resort and Conference Center at the National Harbor just south of Washington, DC in Oxon Hill, Maryland. The appellant, Perini/Tompkins Joint Venture (PTJV) was hired to build the $900 million hotel and conference center by Gaylord National LLC (Gaylord) in 2005. As part of the construction agreement, Gaylord obtained primary and excess liability insurance coverage for PTJV from the appellee, ACE American Insurance Co. (ACE).

Both policies issued by ACE contained the following clauses:

Voluntary payment clause: No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense other than for first aid, without our consent.

No-action clause: No person or organization has a right under this Coverage Part: . . . to sue us on this Coverage Part unless all of its terms have been fully complied with.

Id. at *5 (citations omitted).

During construction of the facility’s 18-story glass atrium, a structural component failed (the collapse), causing significant damage and contributing to a delay in completion. After the project was finished in 2008, PTJV and Gaylord sued one another for various damages and unpaid bills. PTJV and Gaylord settled their respective suits on November 26, 2008, for a $42.3 million payment from Gaylord to PTJV and a $26.16 million credit from PTJV to Gaylord. PTJV did not seek or obtain ACE’s consent prior to settlement.

Several months after PTJV and Gaylord settled their respective claims, on May 6, 2009, PTJV notified ACE of ACE’s potential liability for costs associated with the collapse and repair of the atrium. ACE declined to provide coverage for the damage from the collapse or for PTJV’s settlement with Gaylord, and PTJV filed suit. On October 23, 2012, the district court granted ACE’s motion for summary judgment, and PTJV appealed.

In analyzing the case, the court agreed with ACE’s characterization, and held that it ultimately turned on the question of “whether the insured . . . can unilaterally settle a construction defect case . . . , present the settlement to its liability insurer as a fait accompli, and obtain indemnification” despite failing to seek the insurer’s approval, as required by the terms of the relevant policies. Id. (citation omitted) (textual omissions in original). As such, the court held that the case boiled down to “simple contract interpretation[,]” and ruled for ACE according to the plain language of the policy. Id. at *4.

In choosing to apply the plain language of the policy, the court rejected PTJV’s argument that Maryland state law1 required an insurer to suffer “actual prejudice” before denying coverage in a case where the insured failed to give the insurer requisite notice of a claim. See id. at *5 (citing Maryland Code § 19-110). Relying on Phillips Way, Inc. v. American Equity Ins. Co., 795 A.2d 216 (Md. Ct. Spec. App. 2002), the court here held that the no-action and voluntary payments provisions of the policies at issue constituted “conditions precedent to PTJV’s ability to obtain coverage.” Perini, 2013 WL 6570947, at *6. The court reasoned that, “because PTJV did not meet the condition precedent in the no-action clause (that is, it did not obtain consent before settlement), it cannot now sue ACE.” Id. at *7. The court held that Maryland Code § 19-110 did not apply to contractual requirements that an insured obtain its insurer’s consent before settling a covered claim. Id. Moreover, the court held that even if breaching the voluntary payments provision fell under the rubric of a “cooperation clause” for purposes of Maryland Code § 19-110, ACE had been prejudiced as a matter of law by the insured’s presentation of an already-consummated settlement agreement to ACE. Id. at *7-8. Any decision to the contrary, the court held, would assign the insurer “the impossible burden . . . of showing collusion or demonstrating, after the fact, the true worth of a settled claim.” Id. (citation omitted).

Perini stands for the proposition that an insured settles an underlying claim without its liability insurer’s consent at its own peril. This is particularly true where, as in Perini, the insurer is not even presented with a claim until the underlying liability has been settled. Insureds should be wary of the possibility that they can vitiate their insurance coverage by not respecting the insurer’s rights as set forth in the relevant insurance policies.