Insured Cannot Block D&O Coverage for Another Insured’s Settlement
A recent case in the U.S. District Court for the Southern District of New York has clarified the interpretation of consent and cooperation provisions in a directors and officers (D&O) liability insurance policy, reported Wiley Rein LLP’s Executive Blog. The court ruled that one insured party cannot use these provisions to prevent coverage for another insured party’s settlement in a bankruptcy adversary proceeding.
The case, Modell v. Argonaut Ins. Co., arose from a sporting goods company that filed for bankruptcy under Chapter 11 of the Bankruptcy Code. As part of its reorganization plan, a litigation trustee initiated an adversary proceeding against certain former directors and officers of the company. These individuals tendered the adversary proceeding to the company’s D&O carrier, which accepted coverage under a reservation of rights.
One of the former officers reached a settlement at mediation, which the insurer agreed to fund. However, another former officer, also a defendant in the adversary proceeding, sued the insurer and the settling former officer. He alleged that the settling officer admitted liability at mediation and settled without his consent, violating the policy’s consent and cooperation provisions.
The court dismissed the case, ruling that the consent provision could not be interpreted to require one insured’s consent for a settlement involving another insured. The court reasoned that such an interpretation would lead to an absurd result, as each insured would also have the right to select defense counsel for each other insured and participate in each other insured’s defense.
The court also held that the plaintiff had no standing to assert a violation of the cooperation provision, which required the insurer’s consent and benefited the insurer. The insurer had consented to the settlement with the settling former officer, and there was no violation of the cooperation provision.
Scorecard: The court ruled that one insured party cannot use the consent and cooperation provisions in a D&O insurance policy to prevent coverage for another insured party’s settlement. The court also held that the plaintiff had no standing to assert a violation of the cooperation provision.
Takeaway: This case highlights the importance of clear understanding and interpretation of consent and cooperation provisions in D&O policies. It underscores the need for insured parties to be aware of their rights and obligations under these provisions, and the potential complexities when multiple insured parties are involved in a claim. &