Where Policy Contains no Duty to Defend, Reasonableness of Insurer’s Decision to Withhold Consent to Settlement Judged from Insurer’s Perspective

In answering a certified question from the Ninth Circuit, the Arizona Supreme Court has held that, where the policy contains no duty to defend, the objective reasonableness of an insurer’s decision to withhold consent to settlement is judged from the perspective of the insurer.  Apollo Education Group, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL 710224 (Ariz. Feb. 17, 2021).

The insured, a publicly traded higher-education service provider, had coverage under a directors and officers (D&O) liability policy. A class action was filed against the company after public allegations arose that it had backdated stock options for corporate executives. The insured settled the claims while an appeal was pending before the Ninth Circuit.  Coverage litigation ensued after the carrier refused to consent to the settlement.

The company’s D&O policy did not include a duty to defend or a cooperation clause, but it did contain a consent-to-settle provision requiring the insured to not “admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs without the prior written consent of the Insurer,” with such consent “not to be unreasonably withheld.”  Rejecting the insured’s argument that the consent-to-settle provision should be construed against the insurer, the court noted that, without a duty to defend provision, the insurer has no control over the litigation or settlement.  Thus, considering both the plain language and the context of the policy, the court held that reasonableness must be considered from the perspective of the insurer.

The court further held that the insurer must fully investigate the claim for its conduct to be considered reasonable.  In conducting such investigation, the Arizona Supreme Court indicated that the insurer must consider the fair value of the claim and ensure that it protects the insured’s benefit of the bargain.  The insurer is not required, however, to consider factors relevant only to the insured.