In an October 30 decision by the U.S. Ninth Circuit Court of Appeals, Vizio, Inc. lost an opportunity to obtain insurance coverage for a $17 million settlement of consumer class action lawsuits because it failed to request its excess insurer’s consent before agreeing to the settlement. The decision highlights the importance of requesting the insurer’s written consent to a settlement, even when the policyholder believes the insurer has failed to respond properly to the claim. Nearly all Commercial General Liability, Directors’ & Officers’ Liability, Errors & Omissions Liability and other liability insurance policies contain a provision stating that the insured must obtain the insurer’s prior written consent to any settlement the policyholder wants the insurer to pay. The purpose of this provision is to give the insurer a reasonable opportunity to evaluate whether the proposed settlement is a reasonable one in light of the insureds’ exposure to liability and the damages being claimed.
Vizio, which sells Smart TV’s, was named as a defendant in multiple consumer class actions alleging that Vizio secretly tracked what viewers were watching on its TV’s and sold the information to other companies without its customers’ consent. Vizio sought coverage for the suits from two insurers providing the company Directors & Officers (“D&O”) Liability Insurance coverage. Navigators Insurance Company provided primary D&O coverage and Arch provided excess coverage above the coverage limits of the Navigators primary policy. Vizio notified both carriers of the lawsuits in February 2016, after which Navigators denied coverage. Arch, while requesting additional information, neither accepted nor denied coverage. Vizio settled the lawsuits in 2018 for $17 million. While Vizio sought a contribution to the settlement from Navigators and another insurer, it did not notify Arch of the proposed settlement nor seek its consent to the settlement prior to entering into it.
Vizio then sued Navigators and Arch, seeking recovery of the settlement amount and alleging breach of the insurers’ duties under their policies and bad faith claim practices. In response, Arch alleged that, even if its policy afforded coverage for the consumer claims, it had no duty to fund the settlement because Vizio breached its duty under the policy to obtain Arch’s consent before entering into any settlement. The trial court granted Arch’s motion to dismiss the suit on that basis, and others.
In the appeal, Vizio argued it was not obligated to obtain Arch’s consent for three reasons, all of which the appeals court rejected in affirming the trial court’s ruling on that issue. Vizio argued first that the Arch excess policy, which “followed the form” of the Navigators primary policy, only incorporated the Navigators policy’s provisions specifying the scope of coverage, not all its terms. The court noted that the Arch excess policy specified that “coverage under this policy shall follow form to, and apply in conformance with, the provisions of the Primary Policy.” Again citing the primary policy’s express consent requirement, the court also rejected Vizio’s argument that the Arch policy’s conditions specifying the insurer’s “Duties in the Event of a Claim” did not mention obtaining Arch’s consent to a settlement.
Finally, the court rejected Vizio’s argument that Arch’s failure to state its coverage position excused Vizio from complying with the consent requirement. Vizio argued that Arch breached its obligations under the policy by failing to comply with California’s Fair Claims Settlement Practices Regulations, Code of Regulations Title 10, Section 2695.7(b). That regulation requires an insurer to accept or deny a claim within 40 days of receiving the insured’s “proof of claim.” The court found Vizio had not alleged such a violation because the regulation requires the insurer to relay its coverage decision only after receiving information that “reasonably supports the magnitude or the amount of the claimed loss.” 10 C.C.R. § 2695.2(s). The court held that Vizio’s February 2016 notice of the claim Arch was just that — a notice of claim, not a proof of claim. The court pointed out that Arch had complied with its obligation to respond to that notice, as Section 2695.5(e) of the Regulations requires only that the insurer acknowledge receipt of the notice and begin its investigation within fifteen days. The court also noted that Vizio had never updated Arch on the status of the litigation or provided Arch information which, in the words of Section 2695.2(s), “supported the magnitude of the amount of the claimed loss.” Accordingly, the court found that Vizio had not alleged facts supporting its argument that its duty to obtain Arch’s consent to the settlement was excused by Arch’s failure to perform its duties under the policy or applicable claims handling regulations. The court found that Vizio’s suit against Arch was properly dismissed by the trial court on that basis.
Take Aways
For business policyholders, the lesson of this decision is to keep all insurers issuing potentially applicable policies informed on the status of the claim, including excess carriers not involved in defending the insureds. Policyholders must also seek the prior written consent to any proposed settlement from all potentially involved insurers. Consent should be requested even from an insurer that has not formally responded to the claim, or taken a position regarding coverage. These lessons are particularly important when excess policies may be available, because excess insurers – which generally have no immediate obligations regarding the claim and are not involved in the defense — often do not assert their coverage positions when they are first notified. Often they do not become involved until the policyholder or its broker notifies the carrier that the value of the claim may exceed the amount of the primary coverage or that their involvement is necessary to resolve the claim.
In-house counsel, risk managers or others responsible for the company’s insurance program should ensure that all appropriate insurers are kept up to date on the status of pending claims and any settlement discussions. Defense counsel typically keeps the insurer update to date on claim status. Most mid-to-large brokerage firms have claims staff whose job it is to keep insurers updated on the policyholder’s behalf, though the company should take steps to ensure that whoever is performing this function is doing so diligently and consistently. Smaller firms typically do not provide this service.
The process of obtaining the insurer’s consent typically involves defense counsel’s evaluation of the insureds’ exposure, analysis of the claim’s settlement value, and a recommendation regarding the dollar range and other key terms of an appropriate settlement. That information must be provided to all insurers whose policies are potentially involved in order to secure the insurers’ consent and agreement to fund a settlement. If there are coverage issues limiting what the insurers will agree to pay, the company will usually retain insurance recovery/coverage counsel to negotiate the insurers’ contribution. In most cases all these steps should be completed before undertaking negotiations with the plaintiff, though insurers will not always disclose the most they are willing to pay prior to negotiations. Of greatest importance is to ensure that the insureds perform their obligations under the policy, and document having done so, to avoid giving up coverage which may otherwise be available.
