No Showing of “Appreciable Prejudice” Required Because Insured Violated Consent to Settle Provision

The United States Court of Appeals for the Third Circuit, applying New Jersey law, has held that an insurer can deny coverage under a claims-made policy, without demonstrating “appreciable prejudice,” if the insured fails to comply with a clear condition precedent to coverage requiring the insurer’s written consent before agreeing to settle a claim.  Benecard Servs., Inc. v. Allied World Specialty Ins., 2021 WL 4077047 (3d Cir. Sept. 8, 2017).  The court also held that several exclusions barred coverage and that the insured could not maintain a bad faith claim against the insurers unless it established coverage in the first instance.

The policyholder, a company that managed prescription drug benefit plans, was sued for, among other things, breach of contract and fraudulent misrepresentation.  The parties settled the lawsuit.  The policyholder had an insurance program including both claims-made E&O and D&O coverage.  Up until the settlement, the E&O insurer had advanced defense costs, but it denied indemnity coverage based on the insured’s failure to obtain its consent prior to settling.  The D&O insurers denied coverage based on policy exclusions.  In the ensuing coverage action, the United States District Court for the District of New Jersey granted summary judgment in favor of the insurers. 

The Third Circuit affirmed.  As to the E&O policy, the court explained that it unambiguously required that the insured obtain the insurer’s consent to settle.  The court further noted that the insurer need not demonstrate “appreciable prejudice” under New Jersey law to deny coverage based on failure to comply with the consent provision under claims-made policies with such a requirement.  In doing so, the court rejected the insured’s arguments that its noncompliance was excused because it believed that defense costs had exhausted the policy limits and that the insurer violated its duty of good faith and fair dealing because it failed to remind the insured of the consent clause when it knew the insured was considering settlement.

The appellate court also held that the district court correctly determined that exclusions in the D&O policies barred coverage.  First, the appellate court addressed “Third Party” and “Professional Services” exclusions, holding that, despite some overlap between the exclusions, each unambiguously barred coverage for the lawsuit.  Second, the court held that a “Managed Care Activities” exclusion, which applied to “any actual or alleged act, error or omission in the performance of . . . Managed Care Activities” precluded coverage because the term “act” was broad enough to encompass misstatements or misrepresentations as well as poor or non-performance in the policyholder’s management of prescription drug plans.

Finally, the court held that a policyholder could not maintain a bad faith claim against an insurer unless it could first establish as a matter of law a right to summary judgment on the substantive coverage claim or that its claim for coverage was valid and uncontested, which the court noted were “essentially the same” test.  Because the insured had not established coverage, it could not pursue its bad faith claim.

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