Why it matters: The Georgia Supreme Court dealt a blow to a policyholder hit with a securities class action, holding that because the company settled the litigation without the insurer’s consent, the insurer was not obligated to contribute to the settlement fund. After years of litigation, Piedmont Office Realty Trust agreed to settle a securities class action against it. Piedmont—which had already exhausted a $10 million primary policy as well as $4 million of excess coverage—requested consent from the excess carrier to settle the case for the remaining $6 million in coverage. The excess insurer promised to pay only $1 million. Piedmont then settled the case for $4.9 million and sought reimbursement from the excess carrier, who refused. A federal district court dismissed Piedmont’s bad faith failure to settle suit, and the Eleventh Circuit Court of Appeals asked the Georgia Supreme Court for help. Answering the federal appellate panel’s questions, the court found that reimbursement was unavailable because Piedmont ran afoul of the policy’s consent to settle provision, as the policyholder “failed to fulfill the contractually agreed upon condition precedent.” While the decision noted a split among jurisdictions on the issue, policyholders should take note that some courts will strictly enforce a consent to settle clause, with the possible result of losing a settlement contribution from an insurer.

Detailed discussion: Piedmont Office Realty Trust was named as a defendant in a federal securities class action lawsuit seeking damages in excess of $150 million. As the litigation went on, the parties traded motions until the district court granted summary judgment for Piedmont. But the plaintiffs appealed the ruling, and Piedmont agreed to discuss a deal.

At this point Piedmont had already exhausted a $10 million primary policy as well as $4 million of an excess policy issued by XL Specialty Insurance Company. The policyholder requested XL’s consent to settle the suit for the remaining $6 million under the excess policy. The insurer agreed to contribute just $1 million towards the settlement, and nothing more.

Piedmont then settled the dispute for $4.9 million and asked XL to pay up. The insurer refused based on a “consent to settle” clause in the policy, which stated: “No claims expenses shall be incurred or settlements made, contractual obligations assumed or liability admitted with respect to any claim without the insurer’s written consent, that shall not be unreasonably withheld. The insurer shall not be liable for any claims expenses, settlement, assumed obligation or admission to which it has not consented.”

The policy also contained a “no action” clause which prohibited an insured from taking any action against the insurer “unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, and the amount of the insureds’ obligation to pay shall have been finally determined either by judgment against the insureds after actual trial, or by written agreement of the insureds, the claimant, and the insurer.”

Piedmont filed suit against XL alleging breach of contract and bad faith failure to settle. A federal district court granted the insurer’s motion to dismiss the complaint and Piedmont appealed to the Eleventh Circuit Court of Appeals.

The federal appellate panel sought guidance from the Georgia Supreme Court, certifying three questions: “Under the facts of this case, and in the light of the Final Judgment and Order—in the Underlying Suit—approving of and authorizing and directing the implementation of the terms of the settlement agreement, is Piedmont ‘legally obligated to pay’ the $4.9 million settlement amount, for purposes of qualifying for insurance coverage under the Excess Policy?”

Secondly, the court asked whether “In a case like this one, 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 withheld unreasonably its consent be resolved first?”

Finally, the appellate panel wondered whether Piedmont’s complaint was properly dismissed.

The complaint was properly dismissed and Piedmont’s request for coverage was unavailing, the Georgia Supreme Court determined, relying on state precedent (Trinity Outdoor, LLC v. Central Mut. Ins. Co., 285 Ga. 583 (2009)) that refused to permit an insured to sue in the face of a consent to settle clause where it neglected to obtain consent prior to settlement.

“In this case, as in Trinity, the plain language of the insurance policy does not allow the insured to settle a claim without the insurer’s written consent,” the court said. “It also provides that the insurer shall only be liable for a loss which the insured is ‘legally obligated to pay.’ Finally, the policy contains a ‘no action’ clause which stipulates that the insurer may not be sued unless, as a condition precedent, the insured complies with all of the terms of the policy and the amount of the insured’s obligation to pay is determined by a judgment against the insured after a trial or a written agreement between the claimant, the insured, and the insurer. In light of these unambiguous policy provisions, we hold that Piedmont is precluded from pursuing this action against XL because XL did not consent to the settlement and Piedmont failed to fulfill the contractually agreed upon condition precedent.”

Piedmont argued that the policy also expressly provided that XL could not withhold its consent to settle unreasonably, but the court said the provision was essentially superfluous because Georgia law prohibits insurers from unreasonably refusing to settle a covered claim.

Although Piedmont tried to distinguish the prior case law because the policy in that case did not contain a consent to settle provision, the court said the clause was implied based on Georgia law. “And, in spite of this implied provision, we determined that the insured in Trinity could not settle the underlying lawsuit without the insurer’s consent and then sue the insurer for refusing to settle in bad faith,” the court wrote.

The district court’s approval of the settlement in the underlying litigation had no bearing on the coverage question, the court added. The consent to settle clause “precluded Piedmont from entering into a settlement agreement without XL’s prior consent,” the court reiterated. “Piedmont could not settle the underlying lawsuit without XL’s consent—in breach of its insurance contract—and then, after breaching the contract, claim that the district court’s approval of the settlement imposed upon XL a distinct legal obligation to pay the settlement on Piedmont’s behalf.”

Courts are split on the question of whether an insured who settles a lawsuit in violation of a “no action” clause can still bring a bad faith claim against the insurer, the court noted, acknowledging cases from Oregon and Utah where the suits were allowed, but citing a similar conclusion from Florida.

“In sum, absent XL’s consent to the settlement, under the terms of the policy, Piedmont could not sue XL for bad faith refusal to settle the underlying lawsuit in the absence of a judgment against Piedmont after an actual trial,” the court wrote.

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