June 15, 2015

Another Policyholder Falls Victim to the “Consent-To-Settle” Trap

Better to Avoid a Trap Than to Get Stuck in One

Better to Avoid a Trap Than to Get Stuck in One

Liability insurance policies are full of traps for policyholders.  One of the most troubling is the standard consent-to-settle provision. To set the trap, an insurer first defends under a reservation of rights, asserting numerous so-called coverage defenses.  It does not matter if any of these defenses are valid.  As long as they are raised, that is good enough.  Then, when it comes time to settle, the insurer offers pennies on the dollar for the proposed settlement, relying on the so-called defenses asserted earlier, hoping that the policyholder will settle the matter without the insurers’ written agreement to do so.  Because the trap is often so expertly set, it is not uncommon for policyholders take the bait.  See, e.g.  Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., 2015 WL 1773620 (Ga. April 20, 2015) (“Piedmont”).

The Piedmont Trap

In Piedmont, the policy stated 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.”  Piedmont, the policyholder, was sued in a federal securities class action suit in which the plaintiffs sought more than $150 million.  Piedmont eventually won summary judgment in the trial court, and the plaintiffs appealed.

While the appeal was pending, Piedmont agreed to mediation with the plaintiffs.  Piedmont sought the consent of its excess insurer, XL, to settle the claim for the remaining $6 million in limits.  XL, however, only agreed to contribute $1 million toward the settlement.  Given XL’s position, Piedmont acted in its own best interest and settled the underlying securities suit for $4.9 million.

The trap was set, and the bait was taken.

When the policyholder demanded that XL pay the remaining $3.9 million that it owed, XL refused.  Piedmont then filed a coverage suit against XL, seeking the remaining $3.9 million.  XL contended that the “consent to settle” clause barred recovery, and the Georgia Supreme Court agreed:  “In this case . . . the plain language of the insurance policy does not allow the insured to settle a claim without the insurer’s written consent.  . . . In light of these unambiguous policy provisions, we hold that Piedmont is precluded from pursuing this action against XL because XL did not consent to the settlement and Piedmont failed to fulfill the contractually agreed upon condition precedent.”  2015 WL 1773620 at *3.

Unfortunately, the consent to settle trap is commonly used by insurers to avoid liability, and some courts reward this kind of behavior.  Insurers resist settlement and try to put the onus on the policyholder to overcome unnecessary hurdles if it wants to both settle the case and preserve coverage.  Unfortunately, policyholders often fail to recognize the trap until it is too late.

Avoiding the Trap

The first step to avoiding the trap is to recognize the trap long before it is set.  The second step is to let the insurer know that you are aware of the trap, and to proactively offer alternatives that preserve coverage.  Then, if the policyholder wants to settle on its own, it can do so without fear of losing coverage.

In any event, even if a policyholder is lured into the trap, that does not necessarily mean that the policyholder will get caught.  There are at least two recognized exceptions to the general rule.

First, as pointed out in Piedmont, if the insurer denies coverage, it waives its right to assert the consent-to-settle clause.  Id.  at *4.  In that situation, a policyholder may not need not seek the insurer’s consent.

Second, a similar result should follow if the insurer unreasonably withholds consent after the policyholder requests consent.  See e.g. Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135 (2d Cir. 2008).  In that situation, the insurer also breaches the policy and thus waives any right to rely on the consent-to-settle clause.

The general rule on consent to settle, and its exceptions, however, are creatures of state common law. Because a policyholder’s best strategy is dependent on ever-changing case law, it is inadvisable to settle any claim without first seeking advice from competent coverage counsel.


There are solutions to the consent to settle problem, but they require careful coordination between defense counsel, coverage counsel, and the insurer.  If coverage counsel is involved early on, and communication with the insurer is expertly maneuvered towards coverage, and not away from it, the consent-to-settle issue should not prove problematic.  Otherwise. coverage may be waived.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage.  Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results.  Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please call 202-760-3160.

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