Consent To Settle

North Richland Hills insurance attorneys should be aware of the “consent to settle” provision in most insurance policies. This is discussed in a 2006, United States 5th Circuit Court of Appeals opinion. The style of the case is, Motiva Enterprises, LLC v. St. Paul Fire and Marine Insurance Company. Here is what the case tells us.
In July 2001, a sulfuric acid storage tank exploded at Motiva’s Delaware refinery, killing one employee and injuring several others. A number of civil suits ensued, including a lawsuit by John and Pamela Beaver for injuries John sustained in the explosion (the “Beaver” suit).
Motiva had approximately $250 million in liability insurance which Motiva contended covered its liability for injuries and litigation costs related to the explosion. The coverage was divided into two “towers,” referred to as the Continental Tower and the St. Paul Tower, and consisted of seven insurance policies in all. National Union supplied $25 million of umbrella coverage, providing for both the duty to defend and the duty to indemnify once the underlying insurance was exhausted. 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.
In July 2002, Motiva notified National Union of the first two lawsuits that had been filed against it, including the Beaver suit, and requested a defense. In February 2003, National Union conditionally disclaimed coverage on the ground that the underlying insurance policies had not yet been exhausted. National Union reserved the right to supplement or amend its disclaimer in the future. When National Union did not withdraw its denial of coverage at Motiva’s request, Motiva filed suit seeking a declaratory judgment of its coverage.
In May 2003, National Union sent Motiva a “reservation of rights” letter that withdrew its disclaimer of coverage, but reserved the right to withhold or limit coverage under the terms and conditions of the policy. On July 28, 2003, Motiva informed National Union that the St. Paul policy had been exhausted and that National Union would be responsible for the defense costs related to the remaining five suits. The next day, Motiva asked National Union to send a representative with full settlement authority to a mediation in the Beaver case that was scheduled for August 8, 2003. National Union immediately requested all documents related to Beaver, but on August 1, Motiva rejected the request, claiming that National Union had “never acknowledged coverage” for the Beaver claim. Despite that refusal, Motiva still demanded that National Union attend the mediation.
On August 6, 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.
On August 8, National Union sent a representative to the 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 Beaver claim.
In December 2003, the parties submitted a Stipulated Chronology and Facts per the district court’s order. 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 turned to the principal issue in this case, whether Motiva’s settlement of the Beaver claim without giving National Union an opportunity to participate in the final settlement decision and without obtaining National Union’s consent to the settlement precluded Motiva’s action against National Union under the policy for reimbursement of the sum Motiva paid in settlement.
it is not entirely clear under Texas law whether an insurer must demonstrate prejudice before it can avoid its obligations under a policy where the insured breaches a prompt-notice provision or a consent-to-settle provision. 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.
For the reasons stated the 5th Circuit AFFIRMED the judgment of the district court.