GaThe Georgia Supreme Court has held that where a policyholder settled an underlying claim without its D&O insurer’s consent, the policyholder cannot sue the carrier for breach of contract or for bad-faith failure to settle. The Court, applying Georgia law, entered its opinion in the case based on questions certified from the United States Court of Appeal for the Eleventh Circuit. The Georgia Court’s April 20, 2015 opinion can be found here. As discussed below, this ruling potentially creates problems for a policyholder that believes the insurer has unreasonably withheld its consent.


An April 20, 2015 post on the Executive Summary Blog about the Georgia Supreme Court’s opinion can be found here.



At the relevant time, Piedmont Office Realty Trust had a $20 million D&O insurance program, consisting of a primary D&O insurance policy with a $10 million limit of liability and an excess D&O insurance policy with a $10 million.


Piedmont was sued in a securities class action lawsuit. After protracted proceedings, the district court entered summary judgment in the defendants’ favor in the securities class action lawsuit. The plaintiffs filed a notice of appeal. While the appeal was pending, the plaintiffs and Piedmont agreed to mediate the plaintiffs’ claim.


By this time, Piedmont’s defense expenses had already exhausted the $10 million limit of the primary policy, as well as another $4 million of the excess policy. Piedmont sought its excess D&O insurer’s consent to settle the claim for the $6 million remaining under the excess policy’s limit. The excess insurer agreed to contribute $1 million toward the settlement. Without obtaining the excess insurer’s consent, Piedmont agreed to settle the underlying lawsuit with plaintiffs for $4.9 million. The district court approved the settlement. Piedmont demanded that the excess insurer provide coverage for the full settlement amount. The excess carrier refused.


Piedmont filed a lawsuit in federal district court for breach of contract and for bad faith failure to settle. The district court dismissed the coverage lawsuit and Piedmont appealed the district court’s ruling to the United States Court of Appeals for the Eleventh Circuit. The 11th Circuit certified several questions of law to the Georgia Court of Appeals.


The D&O policy at issue incorporated a “consent to settle clause,” which provides that “No Claims expenses shall be incurred or settlements made, contractual obligations assumed or liability admitted with respect to any claim without the insurer’s written consent, which shall not be unreasonably withheld. The insurer shall not be liable for any claims expenses, settlement, assumed obligation or admission to which it has not consented.”


The D&O policy also incorporated a “no action” clause, which provides that “No action shall be taken against the insurer unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of the policy, and the amounts of the insureds’ obligation to pay shall finally have been determined either by judgment against the insureds after actual trial, or by written agreement of the insureds, the claimant and the insurer.”


The April 20, 2015 Opinion         


In an April 20, 2015 opinion written by Chief Justice Hugh P. Thompson, the Georgia Supreme Court unanimously held, in reliance on its 2009 ruling in Trinity Outdoor LLC v. Central Mut. Ins. Co., that in light of the “unambiguous” policy provisions, Piedmont is precluded from pursuing this action against the excess insurer because the excess insurer did not consent to the settlement and because Piedmont “failed to fulfill the contractually agreed upon condition precedent.”


In reaching this conclusion, the Court noted that “the plain language of the insurance policy does not allow the insured to settle a claim without the insurer’s written consent,” and also provides that the insurer shall only be liable for a loss which the insured is legally obligated to pay. In addition, the policy’s no-action clause “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.”


The court also rejected a number of Piedmont’s arguments, including one based on the contention that these principles should not apply because the district court had approved the settlement. The court said that Piedmont could not settle the underlying lawsuit without the excess 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 excess insurer] a distinct legal obligation to pay the settlement on Piedmont’s behalf.”


Because the excess insurer was providing Piedmont with a defense, the Court also rejected Piedmont’s argument that Piedmont was estopped from insisting that Piedmont needed to obtain insurer’s consent to settle, because the insurer did not “wholly abandon” Piedmont.


Finally, the Court declined to follow decisions of other court which had held that an insured who settles a lawsuit in violation of a no-action clause can still bring a bad faith claim against the insurer, saying that this is “not the law of Georgia.”


The Court concluded by saying that absent the excess insurer’s consent to the settlement, “under the terms of the policy, Piedmont could not sue [the excess insurer] for bad faith refusal to settle the underlying lawsuit in the absence of a judgment against Piedmont after an actual trial.”



At the point where Piedmont asked the excess insurer for consent to settlement, this case had been going on for years, yet Piedmont was asking for the remaining $6 million of the excess insurer’s policy limit, after spending $14 million of the insurers’ money obtaining summary judgment in the case. I can imagine that this was not a proposal that thrilled the insurer, but on the other hand, the excess insurer’s proposal to contribute only $1 million may have stymied the company and its desire to resolve the case at that point. I don’t know for sure why the conversation then broke down, but I know from experience that it can be a very difficult situation when the policyholder and the carrier are at loggerheads on the question of whether or not the amount of a proposed settlement is reasonable.


I also know from long experience that many defense attorneys view the consent to settlement requirements in the typical D&O insurance policy as little more than an annoying impediment. But as I have pointed out in prior posts on this blog (for example, here), consent to settle really is required, and as this case shows, policyholders that proceed to settle an underlying claim without the insurer’s consent do so at their own peril.


To be sure, an insurer’s right to withhold consent it not unlimited. The typical D&O policy provides that the insurer’s consent to settlement may not be unreasonably withheld. There have been cases in which courts have held that a D&O insurance carrier’s consent to settlement was unreasonably withheld (refer, for example, here). However, this constraint on the carriers has practical limitations; at the moment when the underlying claims needs to be settled, there is no way of knowing if a court will later agree that the carrier’s refusal to consent was unreasonable. Indeed, while there are, as noted, cases in which courts have found a D&O insurer’s refusal to consent to settlement to be unreasonable, there are other cases in which the court’s have said that the D&O insurer’s refusal to consent to settlement was not unreasonable (refer, for example, here).


The interesting thing to me about this case is that the Georgia Supreme Court does not seem to have even reached the question of whether or not the excess carrier’s refusal to consent to the settlement was unreasonable. If I am reading the opinion correctly, I think the Court was saying it did not need to reach that question.


One of the Eleventh Circuit’s certified questions asked, in pertinent part, “can a court determine, as a matter of law, that an insured who seeks (but fails) to obtain the insurer’s consent before settling is flatly barred – whether consent was withheld reasonable or not – from bringing suit for breach of contract or for bad-faith failure to settle? Or must the issue of whether the insurer withheld unreasonably its consent be resolved first?” The Georgia Supreme Court’s opinion doesn’t directly map its responses to the Eleventh Circuit’s certified questions, but taking the Supreme Court’s opinion as a whole, it seems as if the Court determined that the insured who settles without the insurer’s consent is precluded from bringing the bad faith claim, without regard to whether or not the insurer unreasonably withheld its consent.


My concern about this reading is that the practical effect seems to be that the policy clause providing that the insurer may not unreasonably withhold its consent is effectively read out of the policy.


If the policyholder cannot sue the insurer for breach of contract where the insurer declined to consent to the settlement of the underlying claim, there is no way for the policyholder to contend that the insurer unreasonably refused to consent. Again, if I am reading the Georgia Supreme Court’s opinion correctly, where the insurer has withheld its consent to the settlement of the underlying claim the policyholder cannot assert the breach of contract or bad faith against the insurer – even if the insurer acted unreasonably in withholding its consent. If that is the holding, the typical clause specifying that the D&O insurer’s consent shall not be unreasonably withheld may provide very little protection for policyholders, at least in Georgia.


Imagine the following hypothetical. Let’s assume an insurer actually did unreasonably withhold its consent. (Understand, this is a hypothetical, I am not saying that is what happened here.) If the carrier really did unreasonably withhold its consent, then it has breached the contract. Why should the policyholder have to continue to perform under the contract if the carrier has already breached it? Why should the policyholder be barred from filing suit for the carrier’s breach? And, to take it out of the hypothetical context, how can it be concluded that the policyholder has no right to sue, if there hasn’t  been a determination of whether or not the carrier breached the contract by unreasonably withholding the consent to settle? 


I welcome readers’ comments about this opinion or my interpretation of the opinion, particularly if there are readers who think I am not reading the opinion correctly.