A frequently recurring insurance claims handling challenge is the problem of “too many insureds, not enough insurance.” Different insureds can have competing and even incompatible interest in the limited insurance funds. As a recent insurance coverage dispute in the Southern District of New York showed, these problems are magnified when the competing insureds also have conflicting interests in the underlying claim. Judge Jennifer Rochon’s February 8, 2024, opinion rejecting one insured’s attempt to block the competing demands to the insurance proceeds of another insured can be found here. Paul Curley’s February 11, 2024 LinkedIn post about the decision can be found here.

Background

Modell’s Sporting Goods owned and operates retail sporting goods stores. Mitchell Modell was the company’s CEO. Eric Spiel was the company’s CFO. In March 2020, the company filed for Chapter 11 Bankruptcy. As part of the company’s Chapter 11 plan, a liquidating trust was created, and a liquidation trustee was appointed to receive and administer the company’s assets. In March 2022, the liquidation trustee filed a lawsuit against Modell, Spiel and others. The parties submitted the lawsuit as a claim to the company’s Management Liability Insurer. The insurer funded the individuals defense of the claim.

In September 2022, the parties to the underlying litigation attended a mediation. Modell subsequently alleged that in connection with the mediation Spiel made various admissions of liability. In February 2023, the liquidation trustee and Spiel entered into a settlement agreement, in which Spiel agreed to cause the company’s insurer to pay the liquidation trustee $2.8 million and also to cooperate with the liquidation trustee, in exchange for mutual releases.

Modell contends that Spiel breached the policy by making admissions at the mediation and by entering into the settlement without Modell’s consent. Modell filed a coverage lawsuit against the insurer and against Spiel, protesting the provision of insurance benefits to Spiel and seeking declaratory judgement of the parties’ respective rights under the policies.

The insurance policy provides, among other things, that:

Notwithstanding the Insurer’s right and duty to defend any Claim under this Coverage Section, the Insureds shall have the option to: 1. Select the defense attorney or to consent to the Insurer’s choice of defense attorney, which consent shall not be unreasonably withheld; 2. Participate in, and assist in the direction of, the defense of any Claim; and 3. Consent to settlement, which consent shall not be unreasonably withheld.

In his lawsuit, Modell sought, among other things, a judicial declaration that the insurer has no right or obligation to pay Spiel’s settlement or his further defense, because Modell, as another Insured under the Policy, did not consent to the Spiel settlement. Modell further argued that Spiel’s supposed admissions at the mediation without the insurer’s consent violated the policy’s cooperation clause. The insurer and Spiel filed a motion to dismiss Modell’s lawsuit.

The February 8, 2024, Opinion

In a February 8, 2024 opinion, Southern District of New York Judge Jennifer Rochon granted the defendants’ motion to dismiss.

Judge Rochon first rejected Modell’s argument that, under the policy’s consent to settlement clause, he had the right to consent to Spiel’s settlement. The court agreed with the defendants’ argument that the consent to settlement clause provides only that the individual insured whose claim is being settled has the option to consent to the settlement, and not every insured under the policy. Judge Rochon said that the “plain and unambiguous language of the Policy, read in context, supports Defendants’ reading.” She added that the “clean meaning of this provision is that each Insured has the right to consent to a settlement on its own behalf; it does not mean that other Insureds have the right to block settlements with respect to other Insureds.”
 

Judge Rochon went on to note that if Modell’s reading of the provision were correct, then each Insured would have the option to, for example, select the defense attorney for a criminal proceeding against another Insured or participate in and assist in the defense of a Claim that was asserted against another Insured. Indeed, Judge Rochon noted, under Modell’s reading, Modell himself ran afoul of the provision because he hired defense counsel and defended himself in the Adversary proceeding without the prior consent of Spiel. That, Judge Rochon said, “cannot possibly be the case.”

Finally, Judge Rochon also rejected Modell’s argument that Spiel’s admissions at the mediation session ran afoul of the policy’s cooperation clause. She first noted that Modell has cited no authority for the proposition that he had standing to object to Spiel’s alleged noncooperation with the insurer. Nor did Modell allege that Spiel had formally assumed a contractual obligation, admitted liability, or stipulated to judgment without the insurer’s consent. Indeed, Judge Rochon noted, Modell cited no case where comments made during a confidential mediation rise to the level of noncooperation sufficient to forfeit coverage. Judge Rochon also stated that “discussions related to a confidential mediation proceeding that, under applicable Bankruptcy rules, may not be used in any proceeding, do not rise to the level of a breach of the cooperation clause in any case.”

Discussion

The theories on which Modell sought to proceed here were always going to be difficult to sustain. Judge Rochon clearly showed why Modell’s arguments based on the consent clause and the cooperation clause couldn’t possibly be right. But while Judge Rochon had little difficulty rejecting Modell’s arguments, there are nonetheless some lessons to be drawn from this case.

The first is the fact that because multiple insured persons are insured under the management liability insurance policy, there are some inherent tensions involved. Modell and Spiel not only had interests that diverged in connection with the underlying claim, but they also had competing interests in how the insurance policy proceeds were used. The fact that various insureds can and frequently do have competing (and perhaps even incompatible) interests in finite insurance funds is not a new observation; indeed, the issue comes up frequently, as I noted more recently, for example, in connection with insurance claims relating to the FTX legal drama.

One of the lessons from the fact that multiple insureds have competing and perhaps incompatible interests in the finite insurance funds has to do with limits selection. Many insureds when buying the insurance ask themselves only what is the minimum amount of insurance the company can get away with buying, rather than asking what amount will be sufficient for the persons insured to defend themselves and to settle allegations in the event of a serious claim. The fact that in the event of a serious claim multiple insureds could be competing for the limited insurance resources underscores the fact that the purchase of only minimum amounts of insurance could be woefully inadequate in the event of a serious claim.

The usual fight that arises when “too many insureds, not enough insurance funds” problems emerge is to fight over whose defense costs or settlement amounts should be paid first. Modell tried to come up with arguments to suggest that Spiel’s settlement should not be paid at all. (Modell clearly was angered by Spiel’s supposed admissions at the mediation session; in any event, it is clear their interests in connection with the underlying claim diverged.) But while Modell’s arguments did not succeed, the dispute does show how challenging the “too many insureds, not enough insurance” kinds of problems can be.