Coverage for Voluntarily-Reached Settlements Addressed by Courts in 2016

It’s a common situation.  A policyholder is sued and put its insurer on notice.  The litigation proceeds and the opportunity to settle arises.  The policyholder settles and turns to its insurer for coverage of the settlement amount.

Case law over the years has addressed policy language that concerns whether a policyholder is covered for voluntarily incurred amounts, including settlement amounts.  Some policies also require a policyholder to secure the consent and sometimes the written consent of the insurer before reaching a settlement.  Such wording can be in a policy’s insuring agreement, an assistance and cooperation clause, an exclusion or elsewhere in a policy.  In addition, courts often consider whether an insurer is obliged to show it is prejudiced by voluntary payments and if so, what constitutes sufficient prejudice.

These issues remained topical in 2016.  The following are descriptions of just some of the recent decisions on these issues, which show that the outcomes can be affected by the facts, the policy language, and the jurisdiction at issue in a dispute.

A federal appellate court applying Michigan law upheld the plain language of a consent provision.  In Stryker Corp., et al. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, et al., 842 F.3d 422 (6th Cir., Nov. 18, 2016)(Michigan law), a medical technologies firm sued its insurers for coverage relating to certain product liability claims.  While the coverage action was pending, “Stryker unilaterally settled all of its individual product-liability claims for $7.6 million ….”  The insured sought this amount from TIG Insurance Company, its excess insurer, since the limits underlying the excess policy were exhausted by payment of a higher value judgment against Stryker for other claims.  Both the settlement and the judgment had been reached while the underlying insurer still had available limits.  That insurer opted to pay the judgment value and exhausted its limits.  TIG denied coverage for the settlement amount because the insured failed to get TIG’s written consent to the settlement.  The trial court found for Stryker, holding that the consent provision was ambiguous.  The appellate court disagreed and held that the plain language of the policy was clear.  According to the court, the insured “was required to obtain consent for any settlements that were ultimately presented to TIG for payment,” making irrelevant that the settlement was reached at a time that the underlying policy limits were still available.

A New York trial court relieved a policyholder from having to get their insurers’ consent to settle because the insurers had denied coverage.  In J.P. Morgan Securities Inc., et al. v. Vigilant Ins. Co.,et al., 39 N.Y.S.3d 864 (Supr. Ct. N.Y., Jul. 7, 2016), an investment company policyholder (the former Bear Stearns) contended that its insurers were obligated to cover its securities-related settlement.  Having previously denied coverage on various grounds for the claim, the insurers specifically denied coverage for the settlement, saying, in part, that the policyholder had failed to secure their consent to settle.  While recognizing that the consent-to-settlement provision in the subject policies is a condition precedent to coverage, the court determined that the insurers’ prior denial of coverage “excused” Bear Sterns from having to comply with the consent provision.  

Two decisions analyzed whether an insurer must demonstrate it has been prejudiced by a policyholder’s failure to obtain the insurer’s consent to a settlement.  A divided Supreme Court of Colorado held that no showing of prejudice was required.  In Travelers Prop. Cas. Co. of America v. Stresscom Corp., 370 P.3d 140 (Colo. Sup. Ct. 2016), a subcontracting concrete company, Stresscom, sought coverage from an insurer for amounts associated with a construction accident.   Stresscom settled with the injured person.  Travelers moved for summary judgment because that the settlement was a voluntary, and thus uncovered, payment.  The trial court denied the motion, holding that Travelers could deny coverage for Stresscom’s failure to comply with the consent provision only if Travelers suffered prejudice.  The court likened a no-voluntary-payments provision to a notice provision in imposing a prejudice requirement on insurers.  The intermediate appellate court agreed.  However, the state supreme court, in a 4-3 decision, reversed, finding that the lower courts had improperly applied prior notice-related case law to the no-voluntary-payments provision in this case.  The latter provision is, the court noted, “a fundamental term defining the limits or extent of coverage.”  As such, according to the court, the public policy justifying a prejudice requirement in the notice context does not apply to a no-voluntary-payments provision.

A California appellate court determined under Missouri law that the fact that a policyholder failed to follow a consent provision constituted proof of prejudice to an insurer.  In The Doe Run Resources Corp. v. The Fed. & Cas. Co. of NY, 2016 WL 379839 (Cal. App. 4th., Feb. 1, 2016)(non-publishable)(Missouri law), the court found no coverage for a company’s environmental cleanup settlement because the insured failed to get the consent of the excess insurer from which reimbursement was sought.  The subject insurance policy’s insuring clause  required written consent from the insurer for any amounts paid by the policyholder.  According to the court, the fact that the insured excluded the insurer entirely from the process of settling is “sufficient prejudice by itself.”  

Finally, in what may be a case to watch in 2017 on the issue of prejudice, the federal 9th Circuit Court of Appeals recently certified two questions to the California Supreme Court, one of which reads:  “If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies?”  It is not known whether the California Supreme Court will accept this question for review.  Order Certifying Questions to the California Supreme Court, Pitzer College v. Indian Harbor Ins. Co., No. 14-56017 (9th Cir., Jan. 13, 2017).