Georgia Supreme Court Unanimously Holds That Insured Cannot Sue Insurer for Amounts Paid to Settle Claim Without Insurer’s Consent

The Supreme Court of Georgia has held unanimously that an insured’s complaint against its insurer seeking coverage for amounts paid to settle an underlying lawsuit and alleging bad faith was properly dismissed because the insured settled the underlying lawsuit without its insurer’s consent. Piedmont Office Realty Trust, Inc. v. XL Spec. Ins. Co., No. S15Q0418 (Ga. Apr. 20, 2015). Wiley Rein represented the insurer.

The insured, a real estate investment trust, exhausted the limits of a primary D&O policy and incurred another $4 million under its excess policy while defending an underlying securities action. The insured prevailed on summary judgment, but the securities claimants appealed, and the insured sought consent from the excess insurer to settle the case for the $6 million remaining under its policy. Based largely on the insured’s counsel’s analysis of the potential exposure, the excess insurer agreed to contribute $1 million toward settlement. Without obtaining the insurer’s consent, the insured entered into a $4.9 million settlement agreement, which was later approved by the district court. The insured then sued its insurer in federal district court for breach of contract and bad faith, seeking coverage for the full settlement amount plus statutory interest. The insured claimed, among other things, that the insurer’s consent to the settlement was not required because the insurer withheld its consent unreasonably and in bad faith. Rejecting that argument, the district court granted the insurer’s motion to dismiss. The insured appealed.

On questions certified by the United States Court of Appeals for the Eleventh Circuit, the Georgia Supreme Court first discussed the case of Trinity Outdoor, LLC v. Central Mutual Insurance Co., 285 Ga. 583, 279 S.E.2d 10 (Ga. 2009), which also involved an insured’s unilateral settlement without its insurer’s consent. Ultimately, with respect to the present action, the court summarized its conclusion that the insured’s complaint was properly dismissed:

[T]he plain language of the insurance policy does not allow the insured to settle a claim without the insurer’s written consent. It also provides that the insurer shall only be liable for a loss which the insured is “legally obligated to pay.”  Finally, the policy contains a “no action” clause which stipulates that the insurer may not be sued unless, as a condition precedent, the insured complies with all of the terms of the policy and the amount of the insured’s obligation to pay is determined by a judgment against the insured after a trial or a written agreement between the claimant, the insured, and the insurer. In light of these unambiguous policy provisions, we hold that [the insured] is precluded from pursuing this action against [the insurer] because [the insurer] did not consent to the settlement and [the insured] failed to fulfill the contractually agreed upon condition precedent.

The court also rejected the insured’s argument that the “consent to settle” provision did not apply because the insurer “unreasonably withheld” its consent to the settlement, in violation of a policy provision stating that the insurer’s consent “shall not be unreasonably withheld.” The court rejected the assertion that that phrase distinguished the policy here from the policy in Trinity Outdoor, concluding that the very same duty was implied in Trinity Outdoor but did not dictate a different result. The court also rejected the argument that the insurer waived the consent requirement by denying coverage for the settlement, concluding that the insurer did not “wholly abandon” its insured but rather funded the insured’s defense in the underlying action.

In addition, the court rejected the insured’s argument that the district court’s approval of the settlement agreement created a “legal obligation to pay.” The court stated that the insured “could not settle the underlying lawsuit without [the insurer’s] consent—in breach of its insurance contract—and then, after breaching the contract, claim that the district court’s approval of the settlement imposed upon [the insurer] a distinct legal obligation to pay the settlement.”