Failure to Comply With a Consent to Settle Provision in Excess Insurance Policy Precludes an Insured’s Bad Faith Lawsuit

By Lindsey Dean, Esq. of Tressler LLP


Because an insured failed to obtain its excess insurer’s consent prior to entering into a settlement, the insured violated the "consent-to-settle" clause in the policy and was precluded from maintaining a bad faith and breach of contract action against the insurer. Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., No. S15Q0418, 2015 Ga. LEXIS 247 (Apr. 20, 2015).


Piedmont Office Realty Trust (Piedmont), a real estate investment trust (REIT), and its directors and officers were sued in a class action claiming more than $150 million in damages for alleged violations of federal securities laws and breach of fiduciary duty.


Piedmont was insured under a primary and excess policy. The primary policy provided $10 million in coverage. The excess policy, purchased from XL Specialty Insurance Company (XL), was a claims-made policy that provided $10 million in coverage in excess of the primary policy’s limits for "loss," which the trust becomes "legally obligated to pay as a result of a securities claim." The excess policy contained a "consent-to-settle clause" which provided that "[n]o 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, which 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 excess policy’s "no action" clause further provided that "[n]o action shall be taken 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."


After years of protracted litigation that exhausted the primary policy’s limits and eroded the excess limits by $4 million, the REIT and class action plaintiffs agreed to mediate plaintiffs’ claims. Piedmont sought XL’s consent to settle the claims for the remaining $6 million under the excess policy. XL only agreed to contribute $1 million towards the settlement. Without any further notice to the excess insurer, Piedmont agreed to settle the underlying class action lawsuit for $4.9 million. Piedmont then demanded that XL provide coverage for the full settlement amount, which the excess insurer refused to pay.


Piedmont subsequently filed suit against XL for breach of contract and bad faith failure to settle. The District Court granted XL’s motion to dismiss Piedmont’s lawsuit and the REIT appealed. On appeal, the U.S. Court of Appeals for the Eleventh Circuit certified questions concerning the interpretation of the excess policy’s language, with a specific focus on the "consent-to-settle" clause, to the Georgia Supreme Court.


The Georgia Supreme Court held that Piedmont was precluded from pursuing its action against XL because XL did not consent to the settlement. Relying on a 2009 Georgia Supreme Court case, the Court found the excess policy provisions to be unambiguous. The plain language of the "consent-to-settle" clause did not allow Piedmont to settle a claim without XL’s written consent. The Court further found that obtaining such written consent was a condition precedent to Piedmont’s right to sue XL, as the policy unambiguously provided that the insurer could not be sued unless, as a condition precedent, the REIT complied with all of the terms of the policy and the amount of the REIT’s obligation to pay was determined by a judgment or a written agreement between the claimant, the insured and the insurer. Because Piedmont failed to comply with the terms of the policy by entering into a settlement agreement without XL’s consent, and the REIT’s obligation was determined by neither a judgment or a written agreement involving the excess insurer, the Court found that Piedmont failed to fulfill the contractually agreed upon condition precedent.


The Court rejected Piedmont’s contention that it was not precluded from pursuing the bad faith action because the policy expressly provided that the excess insurer would not withhold its consent unreasonably. The Court stated that regardless of whether a policy contains an express or implied provision that the insurer may not unreasonably withhold consent to settlement, an insured could still not settle without the insurer’s consent and then sue the insurer for refusing to settle in bad faith.


The Court also rejected Piedmont’s argument that XL was required to pay because the District Court approved the settlement. It reasoned that the "consent-to-settle" clause precluded Piedmont from entering into a settlement without the excess insurer’s prior consent. Piedmont could not breach its insurance contract and then claim that the District Court’s approval of the settlement imposed "a distinct legal obligation" to pay the settlement amount. The Court finally refused to apply estoppel, finding that XL did not "wholly abandon" the REIT, as it provided it with coverage and a defense throughout the underlying proceedings.

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