General Liability Insurance Policies
4th Circ. Fuels Voluntary Payment Clause Enforcement Trend
John O'Connor and Jeremy B. Glen
January 8, 2014
On December 16, 2013, the United States Court of Appeals for the Fourth Circuit decided Perini/Tompkins Joint Venture v. ACE American Insurance Company, a case that provides a useful reminder of the important differences between notice provisions and voluntary payment provisions in general liability insurance policies. In Perini, the court, applying Maryland and Tennessee law, affirmed the district court’s grant of summary judgment for general liability insurer when the policyholder settled an underlying construction defect claim without consulting or obtaining the approval of its insurer.
The case arose out of a dispute regarding the construction of the Gaylord National Resort and Conference Center at the National Harbor just south of Washington, D.C., in Oxon Hill, Md. Gaylord National hired the appellant, Perini/Tompkins Joint Venture (“PTJV”), in 2005 to build the $900 million hotel and conference center. As part of the construction agreement, Gaylord obtained project specific primary and excess liability insurance coverage for PTJV from the appellee, ACE American Insurance Co. (“ACE”).
Both policies issued by ACE contained the following clauses:
Voluntary payment clause: No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation or incur any expense other than for first aid, without our consent.
No-action clause: No person or organization has a right under this coverage part ... to sue us on this coverage part unless all of its terms have been fully complied with.
During construction of the facility’s 18 story glass atrium, a structural component failed (“the collapse”), causing significant damage and contributing to a delay in completion. After the project was finished in 2008, PTJV and Gaylord sued one another for various damages and unpaid bills. PTJV and Gaylord settled their respective suits on Nov. 26, 2008, for a $42.3 million payment from Gaylord to PTJV and a $26.16 million credit from PTJV to Gaylord. PTJV did not seek or obtain ACE’s consent prior to settlement.
PTJV did, however, turn to ACE and seek insurance coverage for the settlement amount. On May 6, 2009, several months after PTJV and Gaylord settled their respective claims, PTJV notified ACE of ACE’s potential liability for costs associated with the collapse and repair of the atrium. ACE declined to provide coverage for the damage from the collapse or for PTJV’s settlement with Gaylord, and PTJV filed suit. On Oct. 23, 2012, the district court granted ACE’s motion for summary judgment, PTJV appealed.
In analyzing the case, the court of appeals agreed with ACE’s characterization, and held that the case ultimately turned on the question of “whether the insured ... can unilaterally settle a construction defect case ..., present the settlement to its liability insurer as a fait accompli, and obtain indemnification” despite failing to seek the insurer’s approval, as required by the terms of the relevant policies. As such, the court held that the case boiled down to “simple contract interpretation[,]” and ruled for ACE according to the plain language of the policy.
In choosing to apply the plain language of the policy, the court rejected PTJV’s argument that Maryland statutory law, and in particular Maryland Code § 19-110, required an insurer to suffer “actual prejudice” before denying coverage in a case where the insured failed to comply with a policy provision prohibiting settlement of covered claims without obtaining the insurer’s consent. The language of Maryland Code § 19-110, however, creates a statutory requirement of actual prejudice before an insurer can prevail based on the policyholder’s breach of notice or cooperation provisions in an insurance policy.
Relying on a prior decision by the Maryland Court of Special Appeals,[2] the court held that Maryland Code § 19-110 did not apply to contractual requirements that an insured obtain its insurer’s consent before settling a covered claim. The court concluded that the prohibition on voluntarily payments (i.e., settlement of the underlying claim) without obtaining the insurer’s written consent is an obligation that is separate and distinct from the notice and cooperation duties encompassed by Maryland Code § 19-110, and that the voluntary payments provision therefore should be applied as written.
Moreover, the court held that by virtue of the ACE policies’ no-action clauses, PTJV’s compliance with the prohibition on voluntary payments were “conditions precedent to PTJV’s ability to obtain coverage.” “[B]ecause PTJV did not meet the condition precedent in the no-action clause (that is, it did not obtain consent before settlement), it cannot now sue ACE.” Finally, the court held that even if breaching the voluntary payments provision could be construed as falling under the rubric of a “cooperation clause” for purposes of Maryland Code § 19-110, ACE had been prejudiced as a matter of law by the insured’s presentation of an already consummated settlement agreement to ACE. Any decision to the contrary, the court held, would assign the insurer “the impossible burden ... of showing collusion or demonstrating, after the fact, the true worth of a settled claim.” Having concluded that the result would be the same under Tennessee law, the court concluded that it did not need to determine which of Maryland or Tennessee law applied.
Perini is an important reminder that a policyholder proceeds at its own peril by settling underlying litigation without obtaining the written consent of insurers to which the policyholder will turn for indemnification. Some states have weakened the contractual notice and cooperation clauses in general liability policies by requiring, either statutorily or by case law, a showing of prejudice to the insurer before the insurer may rely on these clauses to disclaim coverage.
A breach of a contractual voluntary payments clause strikes at the very core of the relationship between policyholder and insurer. By including a voluntary payments clause in a liability policy, an insurer protects itself from having the policyholder decide how to use the insurer’s funds. Indeed, when a settlement will be funded in whole or in large part by insurance funds, the policyholder may have little interest in striking the best deal possible, and may settle an underlying case (with the insurer’s money) when the insurer would prefer to take the case to trial. Thus, as the court recognized in Perini, a voluntary payments clause provides for an absolute bar on coverage for cases settled without the insurer’s consent, which in turn avoids placing the insurer in the near-impossible situation of proving, after the fact, that an underlying settlement was unwise or collusive.
It is true that courts may, at times, be more sympathetic to a policyholder in cases where the insurer has wrongfully abandoned its policyholder by denying coverage or refusing to defend where the insurer is contractually obligated to provide a defense to its policyholder. However, where the insurer was not even notified of the potential settlement, or had merely reserved its rights but breached no duty to the policyholder, a policyholder stands a very good chance of forfeiting any potential coverage when it settles an underlying suit or claim without obtaining the consent of the insurers that will be asked later to cover all or part of the settlement amount. While state laws, rightly or wrongly, are in some cases forgiving to the policyholder that breaches its notice and cooperation obligations, Perini is one of many recent cases demonstrating the trend toward enforcing voluntary payments clauses as written.[3]
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.
SOURCE: www.lexology.com