Consent To Settle Provision In Insurance Policy

Most Garland insurance law lawyers can tell you how important the “consent to settle” provision is in an insurance policy. This provision is addressed in a 2006, 5th Circuit Court of Appeals opinion. It is styled, Motiva Enterprises, LLC v. St. Paul and Marine Insurance Company. Here is what it says.
Motiva settled an action brought against it for damages without notice to National Union, its insurer, and without obtaining National Union’s consent. Motiva sued National Union to recover the amount Motiva paid in settlement, contending that it had no obligation to comply with the condition in the policy to obtain its insurer’s consent to settle because National Union refused to tender an unqualified defense to Motiva. This Court agreed with the district court that National Union’s tender of a defense with a reservation of rights to later deny coverage did not excuse Motiva’s breach of the consent-to-settle clause. The Court also conclude that National Union suffered prejudice as a matter of law and had no obligation to reimburse Motiva for the settlement.
A sulfuric acid storage tank exploded at Motiva’s Delaware refinery, killing one employee and injuring several others. Motiva had approximately $250 million in liability insurance which Motiva contended covered its liability for injuries and litigation costs related to the explosion. The policy contained standard “consent-to-settle” and “cooperation” clauses. The consent-to-settle clause required National Union’s advance consent to any settlements that it would be funding, and the cooperation clause required Motiva to cooperate with National Union in the investigation, settlement, and defense of claims.
National Union tendered its offer to defend the Beaver case and the other pending lawsuits, subject to a reservation of its right to deny coverage under the terms of the policy. National Union asked Motiva to cooperate fully with its defense-a requirement of the policy-and said that it expected to participate fully in the Beaver mediation. Despite the tender, Motiva refused to furnish the Beaver documents to National Union.
National Union sent a representative to a mediation. During National Union’s presence at the mediation, the only settlement demand it received was for $40 million. Before the mediation ended however, National Union’s representative was asked to leave. The mediation continued without National Union’s presence and ultimately resulted in a voluntary settlement agreement in which Motiva agreed to pay $16,500,000 to resolve the claim.
After the mediation, Motiva asked National Union to fund the settlement, but National Union refused to do so on the grounds that its consent had not been obtained as required by the consent-to-settle clause. Motiva paid the settlement out of its own funds and after National Union again declined Motiva’s request for reimbursement, Motiva filed this suit to recover sums it paid to settle.
The parties submitted a Stipulated Chronology and Facts. National Union and Motiva filed cross-motions for summary judgment, and the district court granted partial judgment for National Union, holding that Motiva should take nothing in the lawsuit because it had breached the consent-to-settle and cooperation clauses.
The Court looked to the principal issue in this case, whether Motiva’s settlement of the claim without giving National Union an opportunity to participate in the final settlement decision and without obtaining National Union’s consent to the settlement precludes Motiva’s action against National Union under the policy for reimbursement of the sum Motiva paid in settlement.
Motiva argued that even if it breached the consent-to-settle clause, National Union cannot refuse to pay policy benefits unless it shows actual prejudice from the breach.
Assuming without deciding that an insurer must show prejudice to avoid its obligations under the policy when the insured breaches the consent-to-settle provision, based on the summary judgment evidence in this case, the Court was satisfied that National Union suffered prejudice as a matter of law. An insurer’s right to participate in the settlement process is an essential prerequisite to its obligation to pay a settlement. When, as in this case, the insurer is not consulted about the settlement, the settlement is not tendered to it and the insurer has no opportunity to participate in or consent to the ultimate settlement decision, the Court concluded that the insurer is prejudiced as a matter of law. Under these circumstances the breach of the consent-to-settle provision in the policy precludes this action.