An interesting question recently came before the Georgia Supreme Court. In Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., 771 S.E.2d 864 (Ga. 2015), the insured Piedmont Office Realty Trust, Inc. (Piedmont) had purchased and maintained two insurance policies—a primary policy issued by Liberty Surplus Insurance Company and an excess policy issued by XL Specialty Insurance Company (XL). Under the primary policy, Piedmont had $10M of coverage. The excess policy provided an additional $10M of coverage in excess of the primary policy’s coverage limits. The XL policy stated that it would only pay for a “loss” which Piedmont became “legally obligated to pay as the result of a securities claim.” The XL policy contained a standard “consent to settle” clause.
Piedmont was named as a defendant in a federal securities class action lawsuit where the plaintiffs sought damages in excess of $150M. Early in the litigation, Piedmont moved for summary judgment which was denied. Years of discovery and litigation followed after which Piedmont renewed its motion for summary judgment. The District Court granted the renewed motion and dismissed the class action lawsuit. During the pendency of the appeal of that dismissal, the plaintiffs and Piedmont agreed to mediate the plaintiffs’ claim. At the time of the mediation, Piedmont had already exhausted its coverage limit under the primary policy and had eroded the excess policy by $4M through its defense. Anticipating a settlement with plaintiffs would be accomplished at the mediation, Piedmont sought XL’s consent to settle the claim for the remaining $6M under the XL excess policy. XL agreed only to contribute $1M towards the settlement, but no more.
At the mediation, Piedmont agreed to settle the underlying lawsuit with plaintiffs for $4.9M without providing further notice to XL regarding the settlement and without obtaining XL’s consent. The settlement was approved by the District Court after which Piedmont demanded XL provide coverage for the full amount of the settlement. XL refused and Piedmont sued XL for breach of contract and bad faith.
Piedmont argued that because the XL policy expressly provided that XL would not withhold its consent to settle unreasonably, that Piedmont was allowed to enter into the case settlement.
The Georgia Supreme Court held that the plain language of the XL policy did not allow the insured to settle a claim without the insurer’s written consent. Additionally, the policy’s “no action” clause which stipulates that the insurer may not be sued unless, as a condition precedent, the insured complied with all of the terms of the policy and amount of the insured’s obligation to pay under the policy applied to bar Piedmont’s bad faith lawsuit.
The Piedmont Office Realty Trust case illustrates an interesting argument to overcome a consent to settlement clause where the policy also provides that the insurer will not unreasonably withhold consent to settle. The argument is that when the insurer refuses to reasonably consent to a settlement the insurer first breaches the contract and therefore excuses the requirement that the insured seek consent of the insurer in proceeding with the settlement. The Georgia Supreme Court was summarily dismissive of this argument. It does raise the paradoxical question of how the consent to settlement clause of the policy can co-exist with another clause saying that the insurer shall not reasonably withhold the consent to settlement. This issue is going to remain problematic until insurance policies containing both clauses reconcile them with additional policy language.
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