In what is being described as an unusual ruling, a U.S. District Court has upheld an American International Group Inc. unit’s refusal to fund a $13.1 million settlement agreement under its directors and officers liability policy in a case involving a for-profit educational firm.

Phoenix-based Apollo Education Group Inc. was sued in 2006 in a putative shareholder class action by Ridgefield, New Jersey-based Teamsters Local 617 Pension & Welfare Funds, according to court papers in Apollo Education Group Inc. v. National Union Fire Insurance Group of Pittsburgh, Pa.

The union alleged Apollo and individual defendants had engaged in a scheme to commit securities fraud by backdating Apollo’s stock option grants to certain of its personnel, contrary to the firm’s public statements that its stock price options’ price was set at the fair market value of the stock on the day the options were granted.

The U.S. District Court in Phoenix ruled in Apollo’s and the other defendants’ favor. But while that decision was being appealed, the parties reached a $13.1 million settlement agreement in April 2014 following mediation, according to court papers.

National Union, a unit of New York-based AIG, however, refused to consent to or fund the settlement under its claims-made D&O policy, which had a $15 million limit and a $3 million self-insured retention.

Apollo paid the settlement with its own funds, then filed suit against National Union in U.S. District Court in Phoenix, charging breach of contract and bad faith.

The District Court — under a different judge than the one that had handled the original case — ruled AIG was not obligated to fund the settlement.

“In the context of a prospective settlement, an insurance company is obligated ‘to give equal consideration to both the interests of itself and of its insured,’” said the Oct. 26, ruling, in quoting an earlier ruling.

AIG “concluded that settlement was premature — and likely unnecessary — because of the probability that (Apollo) would prevail on appeal,” said the ruling.

“Moreover, (AIG) concluded that even in the unlikely event that (Apollo) did not prevail on appeal, there were a variety of other hurdles that Teamsters would have to overcome in order to recover a ‘substantial judgment’ against” the firm, the ruling said.

“By conducting this extensive analysis weighing the Teamsters settlement, taken in conjunction with the express terms of (Apollo’s) policy, it is clear that (AIG) fulfilled its obligation to Plaintiff by considering the terms of the Teamsters’ settlement,” said the court, in dismissing the breach of contract claim.

On the bad faith claim, Apollo “has failed to set forth facts from which a reasonable juror could find that (AIG) acted unreasonably” when it refused to consent to the settlement, said the court, in granting AIG’s motion for summary judgment in the case.

Apollo’s attorney had no comment as to whether the company planned to appeal the ruling.

The ruling in the case is unusual, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio. “Judges have a bias in favor of things that help get cases resolved,” and the issue is “even trickier” when it comes to funding settlements, he said.

What makes this case different, he said, was AIG’s extensive analysis. “The carrier was able to show what the process was, what it took into account and to be able to portray itself as reasonable,” he said.

“They got a judge that heard them out and was willing to look comprehensively at what they had done. That may not always be viable,” he said, adding this is why it “may always be dicey for insurers to withhold consent” to a settlement.