The United States Court of Appeals for the Sixth Circuit, applying Michigan law, has held that a policy provision requiring an excess insurer’s written consent before entering into a settlement was not ambiguous and therefore barred coverage under the excess policy.  Stryker v. National Union Fire Ins., 2016 WL 6818853 (6th Cir. Nov. 18, 2016).

The insured, a manufacturer of biomedical devices, was sued for personal injuries by individual claimants.  In a separate suit, another company sought indemnification from the insured.  The insured settled the individual claims against it and was ultimately found liable to the other company.  After the insured’s primary insurer denied coverage for the claims, a court issued a declaratory judgment that the primary insurer was obligated to provide coverage.  The primary insurer thus paid out the indemnification amount owed to the other company, thereby exhausting its limits and leaving unpaid the settlements with the individual claimants.  Thereafter, the insured filed a supplemental complaint against its excess insurer to recover the remaining amount it paid to settle the individual actions.  The excess insurer disputed its coverage obligation because the insured had failed to obtain its written consent at the time the insured settled, as required under the excess policy’s definition of “ultimate net loss.”  The trial court granted summary judgment in favor of the insured, concluding that the excess carrier’s policy language was ambiguous.

On appeal, the court reversed and determined that the policy language was not ambiguous because a reasonable person would know that the policy required the excess insurer’s written consent for any and all settlements.  Because the insured did not satisfy the consent requirement, its direct settlements with the individual claimants did not constitute “ultimate net loss” under the excess policy and were therefore not covered.  The court rejected the insured’s argument that the term “claims” encompassed liability for settlements made without consent, so long as the compromise originally occurred below the excess insurer’s layer.  The court explained that the policy itself defined the term “claim” only in two ways: liability established either by “adjudication” or by “compromise with the written consent” of the excess insurer.

Further, the court rejected the insured’s argument that the excess insurer had violated the implied covenant of good faith and fair dealing because the timeliness of the insured’s request for consent was not a valid basis for refusing consent under the policy. The court determined there was no basis for such an argument because the policy language did not allow for the excess insurer to give retroactive consent for the settlements.  Finally, the court rejected the insured’s contention that the excess insurer waived its rights under the “consent to settle” provision because it denied liability and wrongfully refused to defend.  Rather, the court found that the primary insurer’s wrongful denial could not be imputed to the excess insurer simply because the excess insurer’s policy followed form.  The court determined that the excess insurer’s policies contained provisions that were unique from the primary insurer’s policy, and as such, the primary insurer’s denial did not automatically release the insured from the excess insurer’s “consent to settle” requirement.