Insurer’s Refusal to Participate in Settlement Negotiations Waives Consent-to-Settle Requirement

The United States District Court for the Southern District of Alabama, applying Alabama law, has held that an insurer could not invoke a policy’s consent-to-settle requirement to avoid liability because the insurer refused to participate in settlement negotiations despite having notice of the negotiations, and thus had waived its right to challenge the settlement for lack of consent.  Granite State Ins. Co. v. New Way Out, Corp., 2021 WL 191637 (S.D. Ala. Jan. 19, 2021).

The insurer issued a policy to a residential services provider to special needs clients, under which the service provider’s subcontractors were additional insureds.  The service provider filed a lawsuit against its subcontractors in state court, and the insurer provided a defense to the subcontractors under a reservation of rights.  Although the insurer requested information regarding the lawsuit from the service provider, it did not respond.  After the service provider extended settlement offers to the subcontractors, the insurer advised the subcontractors that, based on the information available to the insurer at the time, it did not consent to the proposed settlements.  The subcontractors then unilaterally settled with the service provider without the insurer’s consent.  The insurer brought a declaratory judgment action against the service provider arguing that it was not liable for the settlement amounts because it had not consented to the settlements as required under the policy.

The parties agreed that Alabama law recognizes an exception to an insurance policy’s consent requirement under which an insurer waives this requirement when it has notice of settlement negotiations but refuses to participate in them.  That said, the insurer argued that the exception did not apply because the exception’s two requirements—that (i) the insurer has the information necessary to evaluate the claim; and (ii) the insurer refuses to participate in settlement negotiation—were not present.

The court rejected the insurer’s arguments.  First, the court opined that the insurer’s receipt of information was not an element of the exception.  Second, the court concluded that the insurer refused to participate in settlement negotiations because it failed to engage in substantive settlement discussions with the service provider, despite being informed of the provider’s settlement offers.