Arizona Supreme Court to define consent to settlement standard

The Ninth Circuit has certified a question to Arizona’s high court that should have insurers’ attention. In Apollo Education Group, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., No. 15-cv-01948 (Dist. Ariz.), the United States Court of Appeals for the Ninth Circuit is seeking guidance from the Arizona Supreme Court on the question of the correct standard of law to be applied with respect to an insurance policy’s consent-to-settle provision.

Background

In 2005, Apollo purchased a directors and officers liability insurance policy from National Union. In June 2006, the U.S. Attorney’s Office for the Southern District of New York issued to Apollo a grand jury subpoena, and the Securities and Exchange Commission issued a letter notifying Apollo of its intent to investigate the company regarding its practice of backdating stock options for corporate executives. Neither resulted in charges or enforcement activities. Apollo simultaneously conducted its own internal investigation regarding its stock-options practice, and then disclosed that certain grants made during the relevant time period used incorrect measurement dates for accounting purposes. On this news, in October 2006, Apollo’s stock price fell 23%, and Teamsters Local 617 Pension & Welfare Funds filed a securities class action against Apollo in the U.S. District Court for the District of Arizona alleging fraudulent misrepresentations and backdating by Apollo in violation of the Securities Exchange Act of 1934.

Following rounds of pleadings, in March 2011, the district court dismissed the securities class action with prejudice and entered final judgment for Apollo. After the district court denied Teamsters’ motion to reconsider, Teamsters appealed to the Ninth Circuit. While the appeal was pending, Apollo, National Union, and Apollo’s excess carriers agreed to mediate with Teamsters. After over a year of mediation, Apollo agreed to settle with Teamsters for $13.1 million. Apollo had $13.5 million remaining in limits on the policy with National Union.

Apollo believed the settlement was “a great deal,” and that the securities class action would be an “enormously expensive case to defend” if reversed by the Ninth Circuit. Apollo feared Teamsters could recover “a substantial multiple of insurance coverage” if successful on appeal. Nevertheless, National Union declined to consent to or fund the settlement. Apollo settled with Teamsters using its own funds, then commenced a coverage action against National Union to recover the $13.1 million under the policy. Apollo alleged breach of contract and bad faith, arguing that National Union “unreasonably withheld” consent to the settlement. Pursuant to the policy, National Union had no duty to defend Apollo, and “[o]nly those settlements . . . which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy. The Insurer’s consent shall not be unreasonably withheld[.]”

In the coverage action, the district court granted summary judgment in favor of National Union. The district court noted the undisputed steps National Union took to consider the settlement and concluded that in light of National Union’s “extensive analysis weighing the Teamsters’ settlement, taken in conjunction with the express terms of [Apollos]’s policy, it is clear that [National Union] fulfilled its obligation[.]”

On appeal to the Ninth Circuit, Apollo argued that the district court, in its breach of contract analysis, should have evaluated the objective reasonableness of the settlement based on the merits of the underlying claim, not whether National Union thought it was reasonable or the steps it took to consider and evaluate the settlement. National Union countered that Arizona courts have applied the objectively reasonable settlement rule only in instances where the insurer had a duty to defend and, moreover, those cases did not involve the “unreasonably withheld” policy language at issue here.

In the end, the parties fundamentally disagree on the purpose of the consent-to-settle provision. Apollo contends that the objectively reasonable settlement rule is necessary to protect the insured because of the inherent conflict that exists when an insured is presented with a settlement opportunity at or near policy limits. National Union argues that when an insured wants to spend the insurer’s money, the issue is not whether the insured had a reasonable basis to pay a particular amount in settlement, but whether the insurer had a reasonable basis not to agree to pay that amount.

The Certified Question

Recognizing the provision’s “essential importance to the system of liability insurance,” the Ninth Circuit certified the following question to Arizona Supreme Court: “What is the standard for determining whether National Union unreasonably withheld consent to Apollo’s settlement with shareholders in breach of contract under a policy where the insurer had no duty to defend?”

Comment

The Arizona Supreme Court’s response—and the Ninth Circuit’s application of the legal standard in the context of this dispute—could impact how other insurers respond to requests from insureds for consent to settlement. Stay tuned.

Read other items in Coverage Digest - September 2019