Most cases in the United States settle. Insurers are well-aware of this fact. Thus, insurance companies employ consent-to-settle provisions in insurance policies to limit and control their liability in the likely event of a settlement involving policyholders. Essentially, consent-to-settle provisions require the insurer to approve a proposed settlement of the policyholder with a third party in underlying litigation in order for there to be coverage under the insurance policy. These provisions give insurers a great deal of power. One way policyholders can curb this power is to ensure that the policy’s consent-to-settle provision includes the qualification that the insurer cannot unreasonably withhold its consent to a reasonable settlement.
Just such a clause was at issue in Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Company. In the case, the policyholder, Piedmont Office Realty Trust, Inc., requested that XL, its excess insurer, consent to a settlement with federal securities class-action plaintiffs. Piedmont sought XL’s consent to settle the class action for up to the remaining limits of the XL policy, $6 million. XL declined, agreeing to pay no more than $1 million.
Piedmont then settled the class action for $4.9 million and requested coverage from XL, which refused to provide coverage on the basis that Piedmont breached the consent-to-settle provision. The policy provision 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, which shall not be unreasonably withheld.”
After XL denied coverage, Piedmont sued for breach of contract and bad faith failure to settle a claim. The trial court granted XL’s motion to dismiss on the grounds that Piedmont had not obtained XL’s consent to settle and suit against XL was barred under the policy’s “No Action” clause which prohibited suit against XL unless and until there was full compliance with all of the terms of the XL policy. Piedmont appealed the decision to the Eleventh Circuit.
In examining whether Piedmont’s failure to obtain XL’s consent before entering into the underlying settlement precluded coverage, the Eleventh Circuit observed that there was Georgia precedent finding that a policyholder’s lack of consent barred it from claiming breach of contract or bad faith failure to settle under a consent-to-settle provision, but no precedent construing a consent-to-settle provision containing a qualifying clause requiring the insurer not to unreasonably withhold consent. Such a clause “might be determinative,” the Eleventh Circuit reasoned, and so it certified the question to the Georgia Supreme Court due to the lack of relevant precedent on the issue.
The Georgia Supreme Court has not yet ruled on this issue. We’ll be following developments. In the meantime, Piedmont highlights the importance, when procuring or renewing insurance, to ensure that consent-to-settle provisions include the qualification that an insurer cannot unreasonably withhold consent. Those few words may yet alter the outcome of coverage in Piedmont and many others instances.