A Georgia Supreme Court ruling that an insurer is not liable for
refusing to indemnify a policyholder that settled a case without the
insurer’s permission is out of step with the vast majority of comparable
cases around the country.
But policyholder attorneys warn that other insurers involved in
coverage disputes are likely to cite the Atlanta-based court’s unanimous
ruling in Piedmont Office Realty Trust Inc. v. XL Specialty Insurance
Co.
Johns Creek, Georgia-based Piedmont Office Realty Trust purchased two
liability insurance policies, a $10 million primary policy from Liberty
Surplus Insurance Co., a unit of Liberty Mutual Insurance Group, and a
$10 million excess policy from Stamford, Connecticut-based XL Specialty,
according to last week’s ruling.
XL’s excess policy provided that the insurer would pay only for a
loss that Piedmont became legally obligated to pay as a result of a
securities claim. It also contained a “consent to settle” clause, which
said no settlements would be made without the insurer’s written consent,
according to the ruling. In addition, the policy included a “no action”
clause, which stated that no action would be taken against the insurer
if there had been full compliance with the policy’s terms.
Plaintiffs brought a securities class action against Piedmont seeking
more than $150 million in damages. Both sides eventually agreed to
mediate the claim, according to the ruling.
By that time, Piedmont had exhausted its primary policy limit as well
as another $4 million of its excess policy “simply by defending
itself,” according to the ruling.
Anticipating a settlement, Piedmont sought XL’s consent to resolve
the claim for the remaining $6 million under the excess policy, but XL
agreed to contribute only $1 million more to the settlement.
Without further notice to XL or obtaining its consent, Piedmont then
agreed to settle the underlying lawsuit for $4.9 million. Piedmont then
demanded XL provide coverage for the full settlement amount, which XL
refused.
Piedmont then sued XL alleging breach of contract and bad faith. An
Atlanta federal judge dismissed the suit. Piedmont appealed and the 11th
U.S. Circuit Court of Appeals in 2014 asked the George Supreme Court to
consider the case.
In its unanimous ruling last week, the Georgia high court agreed the case against XL should be dismissed.
“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. It follows that the district court didn’t err in
dismissing Piedmont’s complaint,” the state Supreme Court ruled.
Attorneys in the case declined to comment or could not be reached for comment.
Black-letter rule
The ruling “creates a black-letter rule that the insurance company
can withhold consent to a settlement and force the policyholder to go to
trial, and (the ruling) doesn’t seem to be supported by the policy
language here,” Charles P. Edwards, a partner at law firm Barnes &
Thornburg L.L.P. in Indianapolis, said in commenting on the case.
Observers say the decision is contrary to rulings by most other courts.
Most other courts in the country have held “that the failure of a
policyholder to seek consent before settling will only result in no
coverage if the insurance company can show that it was prejudiced by the
policyholders’ settling without consent,” said K. James Sullivan, a
partner and policyholder attorney at Calfee, Halter &Griswold L.L.P.
in Cleveland.
This decision is “something of an outlier,” said policyholder
attorney Linda J. Kornfeld, a partner at Kasowitz Benson Torres &
Friedman L.L.P. in Los Angeles.
However, “the fact that this court ruled so strongly in favor of the
insurer should not be ignored. Insurers who don’t participate in a
settlement because they argue the policyholder prevented them from doing
so will rely on the case, and the theory set forth in this case, to
deny coverage, and there’s no guarantee that the insurer won’t prevail,”
Ms. Kornfeld said.