United States: California Federal Court Finds No Coverage For Settlement Reached Without Insurer’s Consent, Rejecting Insured’s Argument That It Was Excused From Obtaining Consent

A federal district court in California enforced the "voluntary payments/consent" provision of a professional liability policy, finding as a matter of law that an insurer properly denied coverage for a settlement entered into by its insured without the insurer's prior knowledge or consent.  In a March 9, 2015 decision, District Judge Beverly Reid O'Connell granted summary judgment to Houston Casualty Company in One West Bank, FSB v. Houston Casualty Co., No. CV 14-00547 BRO (JCGx) (C.D. Cal.), rejecting the insured's argument that the insurer was estopped from relying on the consent requirement of the policy due to a delay in acknowledging the claim and issuing a reservation of rights letter.

OneWest Bank was sued by Assured Guaranty Municipal Corporation, a company that had guaranteed principal and interest payments on two mortgage-backed securities transactions.  Assured Guaranty alleged that OneWest's negligence in servicing the mortgages caused it to suffer $335 million in losses.   OneWest was an insured under a bankers' professional liability insurance policy issued by Houston Casualty Company (HCC) that expressly disclaimed any duty to defend and contained a $2.5 million self-insured retention.

When OneWest first sought to tender the suit for coverage under the policy, it addressed its notice to the wrong individual at HCC and as a result, a claim was not opened.  Eight months later, while OneWest was engaged in settlement discussions with Assured Guaranty, OneWest inquired of HCC as to its coverage position.  HCC immediately opened a file, issued an acknowledgement letter, and began its investigation.  Days later, without the knowledge or consent of HCC, OneWest executed a term sheet memorializing a settlement with Assured Guaranty.  When HCC was later advised of the settlement, it denied coverage pursuant to a provision in the policy stating that OneWest "shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs, without the prior written consent of [HCC].  Only those settlements, stipulated judgments and Defense Costs which have been consented to by [HCC] shall be recoverable as Loss under the terms of this policy.  [HCC's] consent shall not be unreasonably withheld ...."

OneWest brought suit against HCC for breach of contract and bad faith as a result of its denial, asserting that HCC could not rely on the voluntary payments/consent provision because it had not yet accepted coverage or reserve rights under that provision.  It also argued that the term sheet it executed was not a binding settlement agreement and that it had sought HCC's consent before the final settlement agreement was executed.

The district court first found that the term sheet executed by OneWest contained all material terms of the settlement and was intended by the parties to be enforceable, even though it contemplated completion of a more formal settlement agreement.  The court then found that the voluntary payments/consent provision of the policy was unambiguous and enforceable, and that because OneWest failed to obtain HCC's consent prior to executing the term sheet, coverage for the settlement would not be available unless some exception to enforcement of the provision was established.

The court rejected OneWest's argument that the delay in acknowledging the claim or reserving rights excused OneWest from obtaining HCC's consent prior to settling the claim.  The court noted that the policy contained a $2.5 million self-insured retention and did not impose a duty to defend upon HCC.  Defense costs at the time of the settlement were well within the policy's retention.  Accordingly, the court found HCC to be in the position of an excess insurer whose obligations to the insured had not yet been triggered.  Thus, contrary to OneWest's assertions, HCC had not "abandoned" its insured or breached any duty to OneWest before the settlement was entered, and so OneWest was not excused from obtaining HCC's consent before agreeing to the settlement.

The court also rejected the argument that HCC was estopped from relying on the policy's consent provision because it had not called that provision to the attention of OneWest before OneWest agreed to the settlement.  While California law requires insurers to alert insureds to time limitations contained in policies, the court refused to extend this requirement to other policy provisions.  The court found that an insurer is not estopped from relying on other policy provisions – including the voluntary payments/consent provision – merely because it did not expressly alert the insured to them in a letter.

After confirming that HCC correctly determined the settlement was not covered, the court concluded that OneWest could not establish a breach of the implied covenant based on a purported failure to promptly acknowledge, process, and investigate the claim, and held that HCC was entitled to summary judgment as to the entire suit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.