Insured’s Failure to Obtain Insurer’s Consent Prior to Executing Settlement Term Sheet Precludes Coverage

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that an insured breached the consent-to-settle provision of its professional liability insurance policy by executing a settlement term sheet prior to seeking or obtaining the consent of its insurer and therefore was not entitled to coverage under the policy.  Onewest Bank, FSB v. Houston Cas. Col., 2017 WL 218900 (9th Cir. Jan. 9, 2017).

After extensive negotiations in the underlying case, the insured agreed to a settlement and executed a settlement term sheet.  Only after executing the term sheet did the insured inform its professional liability insurer of its settlement negotiations.  The insurer denied coverage on the ground that the insured had breached the policy’s consent-to-settle provision, which provided that the insured “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.”  The insured filed this coverage action against the insurer.  The district court granted summary judgment for the insurer, and the insured appealed.

On appeal, the Ninth Circuit affirmed the judgment of the district court, holding that the insured intended to enter into a final and binding settlement agreement when it executed the term sheet and therefore breached the consent-to-settle provision of its policy.  As such, the insured was not entitled to coverage under the policy.