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Vol. 11 - Issue 1

January 3, 2022


D&O Insurer Need Not Submerge Its Own Interests In Withholding Consent To A Settlement

Apollo Education Group, Inc. v. National Union Fire Ins. Co., 480 P.3d 1225 (Ariz. 2021)


At issue before the Arizona Supreme Court, in Apollo Education Group, Inc. v. National Union, is how an insurer must respond to an opportunity to settle an underlying action, under a no duty to defend policy that affords the insurer the right to consent to a settlement, provided that it is not unreasonably withheld.  

The policy at issue was directors and officers liability and did not contain a defense obligation.  Admittedly, this is quite different from a commercial general liability policy -- that almost always contains a duty to defend.  And, of course, claims and settlements are far, far and away more common under CGL policies, which gives rise to a different analysis.  Nonetheless, I chose Apollo Education Group, for inclusion here, because of the significant deference that the court gave to the insurer in its decision to withhold consent to settle.     

One of policyholders’ most common arguments, when it comes to insurers’ handling of claims, is that the insurer must not put its own interests ahead of the insured’s.  The refrain sometimes goes so far as an insurer must even submerge its own interests to that of the insured’s.  But that simply was not the result here.  Not even close.  Even with a D&O policy, since Apollo goes so strongly against this oft-asserted purported principle -- as well as the decision providing guidance by way of a lengthy list of factors whether an insurer’s decision, not to consent to a settlement, was reasonable -- I chose it for inclusion here.    

Apollo Education Group suffered a significant drop in its stock price after the SEC accused it of backdating stock options awarded to executives.  A class action was filed against Apollo.  National Union refused to consent to a settlement.  Apollo settled on its own for $13,125,000 and sought coverage from National Union under a D&O policy.

The Supreme Court of Arizona answered the following re-stated certified question from the Ninth Circuit Court of Appeals: “Should the federal district court assess the objective reasonableness of National Union’s decision to withhold consent from the perspective of an insurer or an insured?”

The relevant policy provision, concerning an insurer’s consent to settle, stated: “The Insureds shall 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. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy. The Insurer’s consent shall not be unreasonably withheld, provided that the Insurer shall be entitled to effectively associate in the defense, the prosecution and the negotiation of any settlement of any Claim that involves or appears reasonably likely to involve the Insurer.” (emphasis added).

First, the court concluded, following some analysis of the issue, but, ultimately, with not a lot of trouble, that the reasonableness of withholding consent to a settlement is to be viewed from the insurer’s perspective.      

The court next turned to the heart of its decision – the factors that determine if the insurer’s decision, to withhold consent to settle, was reasonable.  After concluding that the inquiry is an objective one – the way a reasonable insurer would be expected to act – the court held as follows:

[The court’s explanation, of what the insurer must do, to act reasonably, is lengthy.  I set it out here, in full, as it necessary to see it all to appreciate the significance of the decision]

“To act reasonably, the insurer is obligated to conduct a full investigation into the claim. The Court has described the insurer’s role as an almost adjudicatory responsibility. To carry out this responsibility, the insurer evaluates the claim, determines whether it falls within the coverage provided, assesses its monetary value, decides on its validity and passes on payment. The company may not refuse to pay the settlement simply because the settlement amount is at or near the policy limits. Rather, the insurer must fairly value the claim. The insurer may, however, discount considerations that matter only or mainly to the insured—for example, the insured’s financial status, public image, and policy limits—in entering into settlement negotiations. The insurer may also choose not to consent to the settlement if it exceeds the insurer’s reasonable determination of the value of the claim, including the merits of plaintiff’s theory of liability, defenses to the claim, and any comparative fault. In turn, the court should sustain the insurer’s determination if, under the totality of the circumstances, it protects the insured’s benefit of the bargain, so that the insurer is not refusing, without justification, to pay a valid claim.”

Of note, the court stated that considerations of coverage are in play for the insurer’s decision, as well as the insurer having the right to “discount considerations that matter only or mainly to the insured,” such as its insured’s financial status, public image and policy limits.  The insurer can also base its decision on simply a reasonable determination of the value of the claim and potential liability.  The court also noted that the insurer “need not consider any additional factors that may have induced the insured to settle.”   

Clearly, the insurer has a significant place at the settlement table and it certainly need not abandon or dramatically minimize its own interests, as many policyholders would maintain. 

The dissent had much to say about the deference given to an insurer faced with a demand to consent to a settlement: “[B]ecause there is no standard set forth in the policy itself, based on the implied covenant of good faith and fair dealing, National was required to give equal consideration to the interests of Apollo in deciding whether to consent to the settlement agreement.  Arizona has spent several decades carefully developing the equal consideration standard to protect insureds from the potential financial ruin they face in third-party claims. Unfortunately, today, the majority has decided to depart from that jurisprudence. This will undoubtedly create confusion and generate litigation for years to come.”

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