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Insurer not liable for settlement made without its permission

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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.