11th Circuit Certifies Questions Regarding Insured’s Breach of Consent to Settle Clause

by Traub Lieberman Straus & Shrewsberry LLP
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In its recent decision in Piedmont Office Realty Trust v. XL Specialty Ins. Co., 2014 U.S. App. LEXIS 20141 (11th Cir. Oct. 21, 2014), the United States Court of Appeals for the Eleventh Circuit, applying Georgia law, elected to certify to the Supreme Court of Georgia the question of whether an insured’s payment obligations under a judicially approved settlement agreement qualify as amounts that the insured is “legally obligated to pay,” and if so, whether the insured’s failure to have obtained the insurer’s consent to settle resulted in a forfeiture of coverage.

XL insured Piedmont under an excess layer directors and officers policy. Piedmont was a defendant in an underlying federal securities class action lawsuit. It succeeded on motion for summary judgment in the underlying matter, but when plaintiffs undertook an appeal, Piedmont agreed to mediate the matter. By the time of the mediation, the primary policy to which the XL policy was excess had already exhausted, and $4 million of the $10 million limit of XL’s policy had already been eroded. Piedmont sought XL’s consent to settle at the mediation for an amount up to the remaining policy limits, but XL only agreed to contribute up to $1 million. Piedmont subsequently settled the matter at mediation for $4.9 million without further notice to XL and without XL’s consent. Piedmont then brought a declaratory judgment action against XL for the full amount of the settlement.

The United States District Court for the Northern District of Georgia dismissed Piedmont’s suit, largely based on the decision by the Supreme Court of Georgia in Trinity Outdoor, LLC v. Cent. Mut. Ins. Co., 679 S.E.2d 10 (Ga. 2009).   There the Court, in considering a policy with a similar consent-to-settle clause as contained in the XL policy, as well as a “no action” clause precluding the insured from bringing suit against the insurer absent compliance with all conditions precedent to coverage under the policy, held that an insured could not maintain a suit for breach of contract and bad faith failure to settle against its insurer. The Trinity Outdoor court also concluded that an insured’s payment obligation pursuant to a voluntary settlement could not be considered an amount the insured was “legally obligated to pay.” The lower court concluded that the facts before it were substantially the same as in Trinity Outdoor, and thus granted XL’s motion to dismiss.

On appeal, however, the Eleventh Circuit questioned whether certain subtle distinctions between the facts before it and those involved in Trinity Outdoor required a different outcome. First, the court noted that unlike the facts in Trinity Outdoor, Piedmont’s settlement of the underlying class action was later approved by a court, thus calling into question whether Piedmont was, in fact, legally obligated to pay such amounts. The court could find no controlling Georgia case law on this issue either at the Georgia Supreme Court or the appellate court level. Second, the court noted that unlike the consent provision in Trinity Outdoor, the consent to settle clause in the XL policy stated that XL’s prior consent was required, but that it would not be unreasonably withheld. This raised a question for the court as to whether the district court should have first inquired into whether XL unreasonably withheld its consent before considering whether Piedmont breached the settlement clause. Again, the court could find no controlling Georgia case law on the issue. As such, the court certified the following questions to the Supreme Court of Georgia:

(1) 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?

(2) 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?

(3) In this case, under Georgia law, was Piedmont’s complaint dismissed properly?

- See more at: http://www.traublieberman.com/insurance-law/2014/1023/5471/#sthash.kpFqNBAj.dpuf

In its recent decision in Piedmont Office Realty Trust v. XL Specialty Ins. Co., 2014 U.S. App. LEXIS 20141 (11th Cir. Oct. 21, 2014), the United States Court of Appeals for the Eleventh Circuit, applying Georgia law, elected to certify to the Supreme Court of Georgia the question of whether an insured’s payment obligations under a judicially approved settlement agreement qualify as amounts that the insured is “legally obligated to pay,” and if so, whether the insured’s failure to have obtained the insurer’s consent to settle resulted in a forfeiture of coverage.

XL insured Piedmont under an excess layer directors and officers policy. Piedmont was a defendant in an underlying federal securities class action lawsuit. It succeeded on motion for summary judgment in the underlying matter, but when plaintiffs undertook an appeal, Piedmont agreed to mediate the matter. By the time of the mediation, the primary policy to which the XL policy was excess had already exhausted, and $4 million of the $10 million limit of XL’s policy had already been eroded. Piedmont sought XL’s consent to settle at the mediation for an amount up to the remaining policy limits, but XL only agreed to contribute up to $1 million. Piedmont subsequently settled the matter at mediation for $4.9 million without further notice to XL and without XL’s consent. Piedmont then brought a declaratory judgment action against XL for the full amount of the settlement.

The United States District Court for the Northern District of Georgia dismissed Piedmont’s suit, largely based on the decision by the Supreme Court of Georgia in Trinity Outdoor, LLC v. Cent. Mut. Ins. Co., 679 S.E.2d 10 (Ga. 2009).   There the Court, in considering a policy with a similar consent-to-settle clause as contained in the XL policy, as well as a “no action” clause precluding the insured from bringing suit against the insurer absent compliance with all conditions precedent to coverage under the policy, held that an insured could not maintain a suit for breach of contract and bad faith failure to settle against its insurer. The Trinity Outdoor court also concluded that an insured’s payment obligation pursuant to a voluntary settlement could not be considered an amount the insured was “legally obligated to pay.” The lower court concluded that the facts before it were substantially the same as in Trinity Outdoor, and thus granted XL’s motion to dismiss.

On appeal, however, the Eleventh Circuit questioned whether certain subtle distinctions between the facts before it and those involved in Trinity Outdoor required a different outcome. First, the court noted that unlike the facts in Trinity Outdoor, Piedmont’s settlement of the underlying class action was later approved by a court, thus calling into question whether Piedmont was, in fact, legally obligated to pay such amounts. The court could find no controlling Georgia case law on this issue either at the Georgia Supreme Court or the appellate court level. Second, the court noted that unlike the consent provision in Trinity Outdoor, the consent to settle clause in the XL policy stated that XL’s prior consent was required, but that it would not be unreasonably withheld. This raised a question for the court as to whether the district court should have first inquired into whether XL unreasonably withheld its consent before considering whether Piedmont breached the settlement clause. Again, the court could find no controlling Georgia case law on the issue. As such, the court certified the following questions to the Supreme Court of Georgia:

(1) 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?

(2) 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?

(3) In this case, under Georgia law, was Piedmont’s complaint dismissed properly?

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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