US appeals court punts AIG D&O settlement dispute to Arizona

In the latest development in a long-running case, a federal appeals court is asking the Arizona Supreme Court what standard should be used to evaluate American International Group Inc.’s refusal to fund the $13.1 million settlement of a directors and officers liability policy.

The Arizona Supreme Court is being asked whether the “objective reasonableness” of an AIG unit’s decision to withhold consent for the settlement should be assessed from the insurer or insured’s perspective, according to Thursday’s filing by the 9th U.S. Circuit Court of Appeals in San Francisco in Apollo Education Group Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa.

The case involves a putative shareholder class action filed against Phoenix-based Apollo Education Group in 2006 by Ridgefield, New Jersey-based Teamsters Local 617 Pension Welfare Funds, in which 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.

This was allegedly contrary to the firm’s public statements that the stock 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 settlement agreement in April 2014 following mediation. AIG unit National Union, however, which had no duty to defend Apollo, refused to consent to or fund the settlement. Apollo paid the settlement with its own funds then filed suit in U.S. District Court in Phoenix, charging breach of contract and bad faith.

In October 2017, the District Court ruled AIG was not obligated to fund the settlement. In the latest development in the case, the 9th Circuit said, “This appeal presents the question of the standard imposed by Arizona law on an insurer’s obligation not to unreasonably withhold consent to a settlement, where the insurer has no duty to defend.

“Should the federal district court assess the objective reasonableness of National Union’s decision to withhold consent form the perspective of an insurer or an insured?”

While both Apollo and National Union “contend that the reasonableness standard is ‘objective,’ they dispute from whose perspective the district court should evaluate reasonableness,” the ruling said.

“Because this issue is governed by Arizona law, but is not clearly addressed by relevant Arizona authorities, we certify it to the Supreme Court of Arizona,” the 9th Circuit said.

“Though in disagreement as to how consent to settlement provisions should be evaluated, the parties are in agreement as to their essential importance to the system of liability insurance,” the three-judge appeals court panel said. “We think that the resolution of that disagreement and consideration of an open question of Arizona jurisprudence are better entrusted to the Supreme Court of Arizona than to us.”

AIG’s attorney had no comment, while Apollo’s attorney could not immediately be reached for comment.