The Claims Journal published an article January 18, 2018. It is titled, Insured Must Obtain Settlement Consent Where Policies Require It. The article discusses a case from the 9th Circuit Court and looks at California law. However, Texas law has the same laws as it relates to coverage.
The article tells us that where insurance policies require written consent from the insurer to enter into any settlement agreement, it is important to ask, for permission from the insurer before entering into a settlement agreement. Failure to do so may void coverage.
That is what occurred recently in One West Bank, FSB v. Houston Casualty Co. In the case, Houston Casualty issued a professional liability policy which had a restrictive condition requiring the insured to seek prior written consent prior to entering into any type of settlement agreement regarding a covered claim.
The insured, One West, was sued for its alleged failure as a loan servicer, to mitigate or avoid losses on mortgage loans for which the plaintiff had guaranteed the principle and interest payments. The plaintiff in One West agreed to a settlement that was memorialized in a settlement term sheet without One West seeking Houston Casualty’s written consent prior to executing the term sheet. The 9th Circuit Court held, applying California law, that One West breached the prior written consent provision of the policy and therefore Houston Casualty was relieved of its coverage obligation for the settlement.
Under California law, an insured can be excused from a written consent provision based upon economic necessity, insurer breach, or other extraordinary circumstances.
In this case the settlement term sheet provided all of the relevant terms of a settlement agreement and therefore it was determined that One West and the plaintiff intended to enter into a final and binding settlement agreement when they executed the term sheet.
The district court could find no exception to the prior written consent provision and therefore found it to be enforceable.
With respect to One West’s claim for a breach of the covenant of good faith and fair dealing, the court found that a necessary predicate to such a breach required a demonstration that the insurance company withheld benefits that were due under the policy. Absent the prior consent of the insurer for the settlement term sheet, there was no evidence that Houston Casualty withheld benefits that were due under the policy. Therefore, the insured’s claim for breach of the implied covenant of good faith and fair dealing failed as a matter of law.
Under Texas law, the insurer has to show it has been “prejudiced” by the insured’s failure to obtain consent to settle. This would be a situation where an experienced Insurance Law Lawyer needs to be consulted.