The Seventh Circuit Federal Court of Appeals recently held that an insurer had no liability for its insured’s settlement of noticed claims where the insured had failed to seek or obtain consent to that settlement. Federal Ins. Co. v. Arthur Andersen LLP et al., No.07-1245 (7th Cir. Apr. 9, 2008).
The coverage litigation arose out of two claims made by participants in Arthur Andersen’s pension plan following the accounting firm’s indictment. Of the two claims, the insurer’s fiduciary liability policy only potentially covered the first, which alleged covered wrongful acts including breaches of fiduciary duty; the second claim solely sought to recover Andersen’s contractual obligations to the participants in its pension plan, an uncovered claim. After settling both claims, Andersen requested that its insurer indemnify it for the settlement. Andersen’s insurer refused on the basis that Andersen had not sought its “written consent, which shall not be unreasonably withheld,” to the settlement, as required by the policy.
In finding that the insured had breached the consent to settlement provision, the court rejected Andersen’s argument that the insurer could not rely on the consent to settlement clause because it had itself previously breached the insurance contract by not providing a prompt defense to the claims. The court noted that, although Illinois law does require insurers to provide a prompt defense to noticed claims, Andersen never tendered the defense of the claims to the insurer. Accordingly, the court ruled that Andersen had forfeited the right to immediate action by its insurer and could not complain when its insurer delayed the indemnification of its incurred defense costs. As the insurer had not committed a prior breach of the policy, Andersen’s failure to obtain the insurer’s consent to settlement was fatal to its claim for indemnification. The court also noted that the insurer probably had no duty to defend at all, since the complaint alleged claims “transparently outside the scope of the policy.”
