In an interesting development in a long-running legal battle in which for-profit education company Apollo Education Group is seeking D&O insurance coverage for its $13.125 million settlement of an options backdating-related securities class action lawsuit, the Ninth Circuit has certified to the Arizona Supreme Court the question of the standard of law to be applied to the insurance policy’s consent to settlement provisions. The Arizona Court’s response to the certified question potentially could have important implications for the meaning and application of similar provisions in other D&O insurance policies. The Ninth Circuit’s August 15, 2019 opinion certifying the question to the Arizona court can be found here.



This insurance dispute relates to the settlement of an underlying securities class action lawsuit. In November 2006, a plaintiff shareholder sued Apollo and certain of its directors and officers in a securities suit based on options backdating allegations. The defendants filed a motion to dismiss, which the district court granted. The plaintiff shareholder filed an appeal of the dismissal. While the appeal was pending, Apollo reached an agreement with the plaintiff to settle the securities suit for $13.125 million.


Apollo sought its D&O insurer’s consent to the settlement under the terms of the D&O insurance policy. The insurer denied consent. Apollo paid the settlement amount out of its own funds filed a separate action seeking a judicial declaration that the insurer had breached the insurance contract and committed bad faith. In the 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.


As detailed here, on October 26, 2017, District of Arizona Judge Stephen Logan, applying Arizona law, granted the insurer’s summary judgment motion. Judge Logan noted the steps the insurer had taken to consider the settlement and concluded that in light of the insurer’s “extensive analysis weighing the Teamsters’ settlement, taken in conjunction with the express terms of Plaintiff’s policy, it is clear that Defendant fulfilled its obligation to Plaintiff by considering the terms of the Teamsters’ settlement and that Plaintiff’s breach of contract claim must fail as a matter of law.”


Judge Logan also stated that the insurer “concluded that the settlement was premature – and likely unnecessary – because of the probability that Plaintiff would prevail on appeal.” He also noted the insurer concluded that in the unlikely event that Apollo did not prevail on appeal, there would be “a variety of other hurdles that Teamster would have to overcome in order to recover a ‘substantial judgment’ against Plaintiff.”


Apollo appealed the district court’s ruling to the Ninth Circuit.


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 August 15, 2019 Order

In a unanimous August 15, 2019 order, a three-judge panel certified to the Arizona Supreme Court the question of the legal standard to be applied to determining the appropriateness of an insurer’s withholding of consent to settle under a D&O insurance policy that does not have a duty to defend provision.


The appellate court reviewed the Arizona case law on which the district court had relied in ruling on the insurer’s summary judgment motion. The court noted that none of the Arizona cases on which the district court had relied contained a consent provision like the one in Apollo’s D&O insurance policy. Moreover, the cases on which the district court had relied involved insurance policies that imposed on the insurers a duty to defend, unlike the policy at issue here that did not have a duty to defend provision and instead provided only for the reimbursement of defense expenses.


Given the differences between Apollo’s D&O insurance policy and the policies interpreted in the prior Arizona cases, the Ninth Circuit said it did not want to guess at the legal standard that the Arizona Supreme Court might apply.


The appellate court said “Though in disagreement as to how the consent to settlement provision should be evaluated, the parties are in agreement as to their essential importance to the system of liability insurance,” and therefore “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.”


The question for the Arizona Supreme Court to decide is: “What is the standard for determining whether [the insurer] unreasonably withheld consent to Apollo’s settlement with shareholders in breach of contract under a policy where the insurer has no duty to defend?”



As a true law nerd, I have to say that there is nothing I find more interesting that a certified question of law. The court receiving the certified question is presented with a pure question of law, disembodied from the wrangles of the underlying dispute. The certified question itself is presented like a highly stylized law school exam question. In response, the court receiving the question must answer a question of law that the presenting court itself was not able to answer. This is great stuff! It doesn’t get any better than that!


Though the Arizona Supreme Court’s answer to the certified question necessarily will represent the answer to the question under the law of the state of Arizona, the Court’s answer could also provide meaning and context for other courts interpreting similar provisions under those other jurisdictions’ laws. Among other things, the significance to the Arizona Court of the fact that the policy at issue is not a duty to defend policy – a consideration that the Ninth Circuit emphasized in framing the certified question – could be a consideration that other courts’ could find instructive.


The Arizona court’s answer to the certified question could have an even broader significance beyond what impact it might have on other courts. Depending on what the Arizona court says, the court’s response to the certified question could have an impact in the workaday world of policy interpretation and enforcement. The court’s answer could, for example, have an impact on other insurers in responding to requests from their policyholders for consent to settlement.


It is important to note that the Arizona court has only been asked to identify the legal standard to be applied. The Arizona court will not take the next step and determine whether or not in light of that legal standard the insurer in this situation unreasonably withheld its consent to settlement. That question – that is, the application of the legal standard in the context of this insurance coverage dispute – is for the Ninth Circuit to take up once the Arizona court has responded to the certified question and identified the legal standard to be applied.


It will only be when the certified question has been answered and the case has been sent back to the Ninth Circuit that it will be decided whether or not it was unreasonable for the insurer to withhold consent to a $13.125 million settlement of a case that had already been dismissed and while the dismissal was on appeal.


In other words, there is a lot more left to this story before we will know the outcome. How to assess this case and the insurer’s conduct probably should await another day. However, in the interim, there is one point from the district court’s opinion that is worth emphasizing. In concluding that the insurer’s withholding of consent was not unreasonable, there was one particular detail that the district court considered significant. That is, the insurer had undergone a review process that Judge Logan said involved “extensive analysis.” It bears emphasizing that the insurer’s withholding of consent is likelier to be found reasonable where the insurer 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.


And for now, we await the Arizona Supreme Court’s answer to the certified question. What fun! (To be sure, not fun at all for the parties, who have to deal with the added expense and delay associated with the certification to the Arizona Supreme Court.)


Another Summer Sunset:

That’s me, kayaking on Lake Michigan at sunset. Cool.



Sunset, Pentwater, Michigan. August 21, 2019. 8:40 pm EDT.