D&O insurance policies typically specify that the insurer’s written consent is required for a policyholder to settle a claim, such consent not to be unreasonably withheld. This consent-to-settlement clause is the not infrequent source of coverage disputes, usually involving circumstances where the policyholder has gone ahead and settled a claim without seeking the requisite consent. A less frequent but no less troublesome circumstance involves the situation where the policyholder sought consent but the insurer declined to consent. The question then becomes whether the insurer’s withholding of consent was (or was not) reasonable.


In an interesting recent ruling, an Arizona district court judge held that Apollo Education Group’s D&O insurer’s withholding of consent to the company’s $13.125 million settlement of an options backdating-related securities class action lawsuit was reasonable. There are a number of interesting aspects to this ruling, as discussed below. Judge Stephen Logan’s October 26, 2017 decision in the Apollo Education Group coverage lawsuit can be found here.



As detailed here, in November 2006, Apollo and certain of its directors and officers were sued in the District of Arizona in a securities class action lawsuit related to alleged backdated options grants made to company management.  In March 2011, the district court entered an order (here) granting the defendants’ motion to dismiss the plaintiff’s amended complaint. The plaintiff appealed. While the appeal was pending, the parties to the options backdating lawsuit reached an agreement to settle the case, based upon the company’s agreement to pay $13.125 million.


Apollo’s insurer refused to consent to the settlement. Apollo paid the settlement out of its own funds and then filed a lawsuit against its insurer alleging breach of contract and bad faith. In its coverage lawsuit, Apollo contended that the insurer’s refusal to consent to the settlement was unreasonable and therefore constituted a breach of duty under the terms of the policy. The insurer filed a motion for summary judgment.


The relevant provision of Apollo’s D&O insurance policy provides as follows:


The Insureds shall not … enter into any settlement agreement… without the prior written consent of the Insurer. Only those settlements … which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy.  The Insurer’s consent shall not be unreasonably withheld ….


The October 26, 2017 Order

In his October 26, 2017 order, Judge Logan, applying Arizona law, granted the insurer’s motion for summary judgment, ruling that the insurer had reasonably withheld consent.


In reaching this conclusion, Judge Logan reviewed the actions the insurer had undertaken in response to Apollo’s request for consent to the settlement. The insurer, Judge Logan noted, “considered the terms and undertook an assessment of a variety of factors, including several other cases that were similar in nature” to the Apollo backdating lawsuit, and also considered the parties’ pleadings, the various rulings of the district court judge in the backdating suit, as well as the decisions of the SEC and the DoJ not to bring an enforcement action against Apollo.


The insurer, Judge Logan said, “concluded that settlement was premature – and likely unnecessary – because of the probability that [Apollo] would prevail on appeal.” Judge Logan added that the insurer had concluded that even in “the unlikely event” that Apollo did not prevail on appeal, there were a “variety of other hurdles” the plaintiff in the options backdating suit would have to overcome in order to recover a “substantial judgment” against Apollo.


Judge Logan said that “by conducting this extensive analysis weighing the … settlement, taken in conjunction with the express terms of [Apollo’s] policy, it is clear that [the insurer] fulfilled its obligation to [Apollo] by considering the terms of the … settlement and the [Apollo’s] breach of contract claim must fail as a matter of law.” Because the breach of contract claim failed as a matter of law “because of the reasonableness of [the insurer’s] actions,” Apollo’s bad faith claim also fails as a matter of law.



Even though most D&O insurance policies give the insurer the right to consent to settlements, it is in fact relatively rare for an insurer to withhold its consent to settle for the simple reason that the insurer has no way of knowing at the time whether a court later will conclude that their withholding of consent was or was not reasonable. The risk for an insurer in withholding consent is that if the court concludes that the insurer unreasonably withheld consent, the insurer could become liable for extracontractual damages.


The risks for the insurer in withholding consent are compounded where, as here, the policyholder goes ahead and funds the disputed settlement out of its own funds. The policyholder’s willingness to fund the settlement out of its own resources lends some strong psychological weight to the notion that the settlement was reasonable.


To be sure, the circumstances involved here were highly unusual. The insured company had secured the dismissal of the underlying complaint in the district court, yet while the plaintiffs’ appeal of the dismissal was pending, the defendant company agreed to settle the case – a case that had been dismissed at the district court – for $13.125 million, an amount that was far from de minimis and that could hardly be characterized as a cost of defense compromise. Given the circumstances of the settlement and the large settlement amount, it is not hard to see why the carrier might have balked.


There is some context to this situation that might help explain what was going on. This case was not Apollo’s first go-round with a securities class action lawsuit. The company and some of its executives has been sued in a separate securities class action lawsuit in 2004 based on allegations that the company had used a variety of means to boost its reported enrollment figures at its for-profit education business.


In that prior case, the company made the unusual decision not to settle the case, but instead took the case to trial. This aggressive approach backfired on the company, when the January 2008 trial resulted in a verdict in favor of the plaintiffs of $277.5 million.


It looked as if the company snatched victory from the jaws of defeat when the trial judge entered a post-trial order setting aside the verdict and granting Apollo judgment as a matter of law (as discussed here).


Apollo’s triumph proved to be short-lived, as in June 2010, the Ninth Circuit reversed the trial judge’s entry of judgment as a matter of law in Apollo’s favor, and reinstated the jury verdict. The U.S. Supreme Court denied Apollo’s petition for a writ of certiorari, and the case returned to the district court for further proceeding consistent with the Ninth Circuit’s decision.


On remand to the district court, Apollo raised a number of issues in connection with the entry of judgment in the case. While these procedural issues were pending, the parties entered mediation and in December 2011 reached an agreement to settle the long-running case for $145 million (as discussed here).


In light of the way that the prior securities suit ultimately played out, as well as all of the twists and turns that took place along the way, it arguably comes as no surprise that the company was uninterested in a prolonged fight in the options backdating case. After all, Apollo had managed to secure a post-trial entry of judgment as a matter of law in the prior securities suit, only to see its apparent victory dashed at the Ninth Circuit. Apollo, more so than many other litigants, had a bitterly won appreciation for the risks involved in an appeal, even in the context of a win at the district court level.


While this historical background may help explain (or at least supply the context for) the company’s decision to try to settle the case on appeal despite having secured dismissal at the district court, the circumstances in that prior securities lawsuit have little relevance to the question of whether or not the insurer was or was not reasonable in withholding its consent to the settlement of the options backdating lawsuit.


Judge Logan’s ruling in the coverage lawsuit validates the insurer’s decision to withhold consent, but I doubt this outcome by itself is going to encourage more insurers to withhold consent in many other cases. Most insurers understand that their decision to withhold consent will be viewed narrowly by later courts. My view is that most courts are predisposed against anything that they see as impeding negotiated case resolution. The body of consent-to-settle case law includes a variety of cases where insurers have been held to have unreasonably withheld consent, even in some pretty extenuating circumstances (refer, for example, here).


There is another reason why an insurer’s withholding of consent is and should be unusual, and that is because by withholding consent, the insurer is in effect reaching an assessment of the case contrary not only to the policyholder but contrary to defense counsel. An insurer’s decision to withhold consent to settlement in the face of the defense counsel’s recommendation basically puts the insurer in the position of trying to substitute its judgment for that of the counsel that has been directly involved in litigating the case. The insurer may well disagree with the policyholder’s and defense counsel’s assessment of the case, but the mere disagreement alone is hardly going to be enough to establish that its withholding of settlement consent is reasonable. It goes without saying that it is not going to be enough for the insurer to show that its withholding of consent is reasonable merely because the insurer thinks the proposed amount of the settlement is too high.


To be sure, the point in the case when the insurer has to decide whether or not it is going to consent can be fraught. The situation can be highly contentious. Disputes may be unavoidable in certain kinds of cases, particularly where the parties and the insurer have widely different views about the merits of or value of the underlying claim. One thing policyholders can do to try to avoid or minimize these kinds of disputes is to keep the insurers (including in particular the excess insurers) informed about settlement discussions in the case. Nothing is likelier to cause problems than for an insured than to spring a fully negotiated settlement on the insurer out of the blue. Again, it is not going to be possible to avoid disputes in some cases, but the possibility of a dispute arising can be reduced by the simple but important step of keeping the insurers fully informed about settlement discussions. (It is probably worth adding that courts have held that an insurer is justified in withholding its settlement consent where the policyholder is found to have “cut out” its insurer from the settlement process.)


One final note. It is clear from Judge Logan’s opinion that a key reason that the insurer was able to persuade him that its withholding of consent was reasonable is that the insurer showed that it had undertaken a thorough consideration of the proposed settlement and of the relevant circumstances. Judge Logan characterized the insurer’s review process as having involved “extensive analysis.” It bears emphasizing that an insurer’s withholding of consent is likelier to be found reasonable where it can show that it undertook this type of extensive analysis. In the absence of this type of showing, it is going to be harder for an insurer to establish that its withholding of consent was reasonable.


Tribute: Everyone here at The D&O Diary was saddened by the news this past week of the death of music legend Fats Domino. Even if he had not produced so many classic songs, Fats Domino would be worth remembering and honoring if for no other reason than his absolutely fabulous name. Fats Domino (born Antoine Dominque Domino, a great name in its own right) had one of the world’s all-time great names. He  also make a bunch of great records. Our personal favorite is his cover of the song first made famous by the Glenn Miller Band, Blueberry Hill.  Here’s a YouTube video of Fats (or should I say, Mr. Domino) singing the classic song – sorry about the commercial at the beginning, it is short.