Another Policyholder Falls Victim To The 'Consent-To-Settle' Trap

Liability insurance policies are full of traps for policyholders. One of the most troubling is the standard consent-to-settle provision. To set the trap, an insurer first defends under a reservation of rights, asserting numerous so-called coverage defenses. It does not matter if any of these defenses are valid. As long as they are raised, that is good enough. Then, when it comes time to settle, the insurer offers pennies on the dollar for the proposed settlement, relying on the so-called defenses asserted earlier, hoping that the policyholder will settle the matter without the insurers' written agreement to do so. Because the trap is often so expertly set, it is not uncommon for policyholders take the bait. See, e.g. Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., 2015 WL 1773620 (Ga. April 20, 2015) ("Piedmont")

The Piedmont Trap

In Piedmont, the policy stated that: "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." Piedmont, the policyholder, was sued in a federal securities class action suit in which the plaintiffs sought more than $150 million. Piedmont eventually won summary judgment in the trial court, and the plaintiffs appealed.

While the appeal was pending, Piedmont agreed to mediation with the plaintiffs. Piedmont sought the consent of its excess insurer, XL, to settle the claim for the remaining $6 million in limits. XL, however, only agreed to contribute $1 million toward the settlement. Given XL's position, Piedmont acted in its own best interest and settled the underlying securities suit for $4.9 million.

The trap was set, and the bait was taken.

When the policyholder demanded that XL pay the remaining $3.9 million that it owed, XL refused. Piedmont then filed a coverage suit against XL, seeking the remaining $3.9 million. XL contended that the "consent to settle" clause barred recovery, and the Georgia Supreme Court agreed: "In this case . . . the plain language of the insurance policy does not allow the insured to settle a claim without the insurer's written consent. . . . In light of these unambiguous policy provisions, we hold that Piedmont is precluded from pursuing this action against XL because XL did not consent to the settlement and Piedmont failed to fulfill the contractually agreed upon condition precedent." 2015 WL 1773620 at *3.

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