Georgia Court Rejects Bad Faith Claim Citing Insurer’s Lack of Consent to Settlement

The Georgia Supreme Court denied an insured’s bad faith claim against its insurer for its refusal to pay a settlement because the insured settled on the amount without the consent of the insurer that was required by the policy.

A $10 million excess policy issued by XL Specialty Insurance to Piedmont Realty Trust included a “consent to settle” provision requiring the insured to obtain the insurer’s consent for any settlement of a securities claim that the insured became “legally obligated” to pay. The insurer’s consent “shall not be unreasonably withheld,” according to the clause.

The policy also contained a “no action” provision barring the insured from suing the insurer unless the insured has been in “full compliance with all of the terms” of the policy. This provision also stated that the amount of the settlement shall have been determined by a judgment after an actual trial or by a written agreement of the insured, the claimant and the insurer.

Piedmont Realty Trust held two policies—a $10 million primary policy issued by Liberty Surplus Insurance Co. and the excess policy from XL Specialty Insurance Co.

Piedmont was named a defendant in a securities class action in which the plaintiffs sought more than $150 million in damages. After years of discovery, summary judgment rulings and appeals, then another appeal, the plaintiffs and Piedmont agreed to mediate. By this time Piedmont had exhausted the limits of its primary policy and also had used up $4 million of its $10 million from the XL excess policy.

Entering into mediation, Piedmont sought XL’s consent to settle the claim for the remaining $6 million on the excess policy. XL agreed to contribute $1 million but no more.

Without further notice to XL and without obtaining XL’s consent, Piedmont agreed to settle with the plaintiffs for $4.9 million. A district court approved the settlement. Piedmont demanded XL pay the full settlement but XL refused. Piedmont sued XL for breach of contract and bad faith failure to settle.

The district court dismissed Piedmont’s claim but Piedmont appealed to the 11^th Circuit Court. Piedmont, which claimed that XL’s refusal to consent was unreasonable, lost again. Its subsequent appeal went before the state’s high court.

Chief Justice Hugh Thompson wrote the opinion in the 6-0 ruling that had one justice not participating. The decision upheld the ruling by the 11^th Circuit Court.

Calling the XL policy’s consent to settle and no action policy provisions “unambiguous,” the Georgia Supreme Court found Piedmont was correctly barred from pursuing its bad faith action against XL because Piedmont had failed to obtain XL’s consent before settling on the amount. Piedmont thus failed to fulfill one of the agreed-upon terms of the policy.

Piedmont argued that the policy expressly stated that XL could not withhold its consent unreasonably. But the high court said an insurer is required to act reasonably even where there is no such express language in the policy.

The court also rejected Piedmont’s assertion that because XL denied the claim it was then estopped from insisting that Piedmont needed to obtain its consent prior to settling. The court said XL did not “wholly abandon” Piedmont and did not refuse to pay the underlying claims; on the contrary it provided Piedmont with coverage and a defense throughout the underlying proceedings.

Finally, Piedmont maintained that since the district court approved the mediated settlement amount, Piedmont was “legally obligated” to pay it and thus XL must consent. But the court noted that the consent to settle clause precluded Piedmont from entering into a settlement agreement without XL’s prior consent in the first place, and the district court’s approval could not force XL to pay an amount that only Piedmont approved.

“Piedmont could not settle the underlying lawsuit with out XL’s consent—in breach of its insurance contract—and then, after breaching the contract, claim that the district court’s approval of the settlement imposed upon XL a distinct obligation to pay the settlement on Piedmont’s behalf,” Justice Thompson wrote.

The case is Piedmont Office Realty Trust v. XL Specialty Insurance Co.