In an earlier blog post we discussed a Georgia case where settlement occurred without consent from the insured. In that case, the court held that when a policyholder settles without consent in the face of a consent to settle clause, the policyholder will not succeed in seeking a recovery for that settlement from the insurance company. In a recent New York intermediate appellate court decision, the court reached a similar outcome by affirming dismissal of the policyholder’s complaint under CPLR 3211(a)(1).
In Ralex Services, Inc. v. Southwest Marine & General Ins. Co., No. 55917/15 (N.Y. App. Div. 2d Dep’t Nov. 8, 2017), the policyholder brought a declaratory judgment action against its insured seeing to compel the insured to provide coverage to and indemnify the policyholder in an underlying action in federal court. In August 2014, the policyholder settled the underlying action for a substantial sum. A month later, the policyholder informed the insurance company of the underlying action and requested coverage and indemnification. The insurance company disclaimed coverage and this action was commenced.
The insurance policy provided that “[n]o insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [the policyholder’s] consent.” This is a relatively typical consent to settle clause found in many insurance policies.
The insurance company moved to dismiss the complaint based, in part, on documentary evidence under New York CPLR 3211(a)(1). The motion court granted the motion based on CPLR 3211(a)(1) and the appellate court affirmed. In affirming the dismissal, the appellate court held that the consent to settle clause was not ambiguous. It also found that under New York law, “an insurer’s right to consent to any settlement [is] a condition precedent to coverage.” (citations omitted). The court agreed that the evidence submitted showed that the policyholder undertook its own defense in the underlying action, agreed to settle the underlying action, and incurred defense costs in the underlying action without first obtaining the insurance company’s consent. This, the court held, was a breach of the insurance contract and precluded coverage. The appellate court remitted the matter to the trial court for entry of judgment declaring that the insurance company was not obligated to provide coverage to or indemnify the policyholder in the underlying action.
The urge to settle a matter quickly and at a reasonable price may conflict with policy provisions requiring the policyholder to obtain the insurance company’s consent to settle. Some policyholders want to avoid delay and having to put a good settlement under the insurance company’s scrutiny. These cases point out the danger in overlooking these basic insurance clauses when rushing to settle. In this case, the policyholder was left holding the settlement bag.