Insured Cannot Block Coverage For Settlement By Another Insured Based On Consent and Cooperation Provisions in D&O Policy

The United States District Court for the Southern District of New York, applying New York law, has held that one Insured cannot use consent and cooperation provisions in a D&O insurance policy to block coverage for another Insured’s settlement in a bankruptcy adversary proceeding. Modell v. Argonaut Ins. Co., 2024 WL 495135 (S.D.N.Y. Feb. 8, 2024). 

A sporting goods company filed for bankruptcy under Chapter 11 of the Bankruptcy Code. As part of its plan of reorganization, a litigation trustee was appointed. The litigation trustee commenced an adversary proceeding against certain former directors and officers of the company. The former directors and officers tendered the adversary proceeding to the company’s D&O carrier, which accepted coverage subject to a reservation of rights.  One of the former officers reached a settlement at mediation, which the Insurer agreed to fund. The policy provided that the Insureds had the right to: select the defense attorney or to consent to the Insurer’s choice of defense attorney, which consent shall not be unreasonably withheld; participate in, and assist in the direction of, the defense of any Claim; and consent to a settlement, which consent shall not be unreasonably withheld (the “Consent Provision”). The Policy also had a Cooperation Provision, which stated in relevant part that “[t]he Insured(s) shall not undertake to negotiate to settle, offer to settle, or settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation, admit any liability, or stipulate to any judgment with respect to any Claim without the Insurer’s prior written consent, such consent not to be unreasonably withheld.” Another former officer, who was also a defendant in the adversary proceeding, sued the Insurer and the settling former officer, alleging that the settling former officer admitted liability at mediation and settled without his consent in violation of the policy. 

The court granted a motion to dismiss filed by the Insurer and the settling former officer. First, the court held that the Consent Provision could not be read to require one Insured’s consent as to a settlement involving another Insured.  Were it otherwise, then the same principle would apply to the entire Consent Provision, and each Insured would also have the right to select defense counsel for each other Insured and would have the right to participate in each other Insured’s defense. The court reasoned that such reading of the Consent Provision would yield an absurd result.  Second, the court held that the plaintiff had no standing to assert a violation of the Cooperation Provision and that there had been no breach of that provision alleged. The court reasoned that the Cooperation Provision required the Insurer’s consent and inured to the benefit of the Insurer. The Insurer consented to the settlement with the settling former officer.  Because there was no violation of the Cooperation Provision asserted, it was irrelevant whether there was prejudice, which could only be relevant if the Insurer—and not the non-settling Insured—was prejudiced.