U.S. District Court for the Southern District of New York  

In Federal Ins. Co. v. SafeNet, Inc., ___ F.Supp.2d ___, 2011 WL 4005353 (S.D.N.Y. Sept. 9, 2011), the U.S. District Court for the Southern District of New York held that SafeNet, Inc. could not recover losses stemming from a $25 million settlement of a class action lawsuit because it did not comply with the consent-to-settle provisions of the directors and officers excess liability policies at issue.

SafeNet was named as a defendant in various private lawsuits and criminal and civil enforcement actions alleging that SafeNet had made false and misleading public statements concerning its accounting and business policies and practices. SafeNet had advised its excess D&O insurer, Federal Insurance Company, of the pendency of the actions, but did not advise Federal that it was negotiating the settlement of a class action and did not obtain Federal's consent to settle for $25 million.  Federal filed an action against SafeNet and two of its officers, seeking declarations concerning its obligations under its excess policies, including a declaration that there was no coverage for SafeNet's settlement because SafeNet did not notify Federal of the negotiations or obtain Federal's consent to settle.

The parties filed cross-motions for summary judgment, and they agreed in their motion papers that SafeNet did not confer with or advise Federal before settling the class action lawsuit.  The issue, therefore, was whether Federal had denied or repudiated coverage under its excess D&O policies such that SafeNet was relieved from seeking Federal's consent before settling.  In granting summary judgment for Federal, the district court observed that Federal had not issued a blanket denial of coverage.  Rather, Federal had repeatedly informed SafeNet that Federal was investigating its obligations under the policies, that it believed that a partial rescission was appropriate, that coverage would remain for certain insureds who lacked knowledge of the inaccurate information contained in SafeNet's insurance application, and that Federal would seek judicial input concerning its obligations under the policies.  The court concluded that, in light of the facts, SafeNet was not excused from complying with the consent-to-settle provisions in the excess policies, and that the failure to comply barred Safeco from recovering the settlement amount under the policies.