Running counter to the national trend to require insurers to show prejudice before they can void their insurance obligations due to allegedly late notice, the U.S. Court of Appeals for the Sixth Circuit recently strictly enforced a consent to settle clause. This decision should remind policyholders that they ought to be familiar with and follow the technical terms of their policy regarding notice issues.
Background
In Stryker v. National Union, 2016 WL 6818853 (6th Cir. 2016), the court found that even though XL Insurance America, Inc., the underlying insurer, had received notice and had approved and paid for various judgements in product liability cases against Stryker Corporation, TIG Insurance Company, the excess carrier (a subsidiary of National Union Fire Insurance Company of Pittsburgh, PA), could assert its own consent clause against similar settlements not approved or reimbursed by XL. XL did receive notice of the settlements but paid the judgments instead, and these exhausted its layer. Stryker argued mainly that the clause in the TIG policy was ambiguous and should be construed against the insurer. The policyholder also raised the issue of futility of giving notice of the settlement to TIG because TIG had already refused coverage of the claim. However, the court rejected the policyholder’s argument that the insurer should be required to show prejudice when TIG refused to approve the settlement.
Indeed, based on a recent petition for rehearing, the appellate court seems to have found that, despite various letters to TIG and findings from the district court below about disputes of fact on the issue of notice of the pending settlements, there was no notice or a request for consent. This again highlights the need for very clear notice of any claim and a request for approval of all settlements. It also seems to suggest that the insured cannot even rely on notice to the underlying carrier to serve as notice to the excess carriers.
Impact on Policyholders
While this case, like many other letter-of-the-law notice cases, seems badly reasoned, it provides additional evidence that policyholders are well-advised to give notice to all carriers about any lawsuits brought against them. Policyholders also should notify their insurers about all settlements regardless of the levels of coverage the policyholder thinks the claim may reach. It may be possible to settle over an insurer’s disapproval after proper notice, particularly if the carrier chooses not to defend, but without notice and a request for approval, policyholders can have great difficulty in getting a settlement covered.
Although this all seems terribly unfair, policyholders can avoid this possible defense to coverage by simply providing notice and seeking consent. Brokers may discourage notice to excess layers when they seem unlikely to be triggered, but on balance, it is a best practice to give notice and avoid a potential forfeiture of insurance coverage from an alleged failure to provide timely notice.
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