Georgia Supreme Court Bars Claim Regarding Unconsented Settlement Based on “No Action” Clause

The Georgia Supreme Court recently ruled, in a case involving certified questions from the 11th Circuit U.S. Court of Appeals, that an excess insurer was not obligated to pay a voluntary settlement that its insured entered into without consent and that the insured’s suit was barred based on a “no action” clause in the policy.

The underlying case in Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Company, No. S15Q0418, 2015 WL 17736620 (Apr. 20, 2015), regarded a securities class action in which the plaintiffs sued Piedmont Office Realty Trust, Inc. (“Piedmont”) for claims in excess of $150 million. Piedmont had purchased and maintained two liability policies, a primary policy issued by Liberty Surplus Insurance Company (“Liberty”) with coverage up to $10 million and an excess policy with XL Specialty Insurance Company (“XL”) with an additional $10 million in coverage. The XL policy provided that it would pay only if Piedmont became “legally obligated to pay as a result of a securities claim.” That “obligation” required XL’s consent to settle a claim, which could not be unreasonably withheld. The policy also contained a “no action” clause that provided that no action could be brought against XL by Piedmont unless Piedmont had complied with all the terms of the policy.

Piedmont was eventually granted summary judgment but agreed during the pendency of plaintiffs’ appeal to mediate the case. By that time, the Liberty policy had been exhausted by defense costs, as had $4 million of the XL policy. Piedmont sought XL’s consent to settle the claim for the remaining $6 million under the XL policy but it would only consent to contributing $1 million. Without any further notice to XL and without XL’s consent, Piedmont settled the case for $4.9 million, with the trial court’s approval, and then demanded the full settlement amount from XL. When XL refused to pay, Piedmont filed suit in the Northern District of Georgia claiming breach of contract and bad faith. XL moved to dismiss the complaint, the court granted the motion and on appeal, the 11th Circuit certified three questions to the Georgia Supreme Court, which can be summarized as asking 1) was Piedmont “legally obligated” to pay the settlement since it was approved by the court; 2) was Piedmont flatly barred from bringing suit by its failure to get consent or was the court required to determine whether consent was unreasonably withheld; and 3) was the case properly dismissed under Georgia law?

While noting that other jurisdictions had determined that an insured who settles in violation of a no action clause can still bring a bad faith suit, the Georgia Supreme Court held that under Georgia law, the case was properly dismissed because the plain language of the policy did not allow Piedmont to settle without XL’s consent and by doing so, Piedmont did not fulfill the policy requirements, thus barring the case based on the no action clause. It further determined that Piedmont was not legally obligated to pay, even though the trial court had approved the settlement, because the payment was considered voluntary without XL’s consent, since the plain language of the policy required it.

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