Insurance: Fifth Circuit Enforces a Mediation-Related Consent-to-Settle Clause (Web)

The Fifth U.S. Circuit Court of Appeals has held that an insurer’s “consent to settle” clause can be enforced when the insurer does not consent to a mediated agreement.

But in Motiva Enterprises LLC v. St. Paul Fire and Marine Insurance Co,. 2006 WL 270191 (5th Cir., Feb. 6, 2006)(available at http://www.ca5.uscourts.gov/opinions/pub/05/05-20139-CV0.wpd.pdf), the appellate panel remanded the case for an inquiry into the harm both sides may have suffered.

On remand, the trial court will look at whether the insurer breached the policy’s cooperation clause, and whether it suffered actual damages from what both the appellate and lower court agreed was the insured’s breach of the policy’s consent-to-settle clause.

Motiva had an insurance policy with National Union, a division of St. Paul Fire and Marine Insurance Co., with the standard “consent to settle” and “cooperation” clauses. The consent to settle clause required National Union’s advance consent to any settlements that it would be funding; the cooperation clause required Motiva to cooperate with National Union in the settlement and defense of claims.

In 2001, an accident at Motiva’s Delaware refinery killed one employee and injured several others. In 2002, Motiva notified National Union that it would be mediating one of the cases, and asked National Union to send a representative with full settlement authority. National Union asked Motiva to turn over all related documents. But Motiva refused to comply with this request, claiming that National Union had “never acknowledged coverage” for the claim. Despite the refusal, Motiva still demanded that National Union attend the mediation.

In August 2003, National Union tendered its offer to defend the claim, asking Motiva to cooperate fully with its defense and said that it intended to participate in the mediation. Despite the tender, Motiva did not turn over the related documents to National Union.

Although National Union’s representative was present at the mediation, he had been asked to leave before the mediation ended.

The mediation went on without National Union. Eventually Motiva settled the case for $16.5 million, asking National Union to fund the settlement. National Union refused on the grounds that Motiva had not complied with the “cooperation” clause. Motiva filed a suit to recover the sums it paid to settle the claim.

The district court granted partial judgment for National Union, holding that Motiva had breached the “consent to settle” and “cooperation” clauses. Following this, Motiva filed a motion for reconsideration and to amend judgment. The district court denied Motiva’s motion.

Motiva argued that National Union was not entitled to deny policy benefits because National Union had tendered mediation defense that was subject to its right to later deny coverage.

Motiva’s argument relied on Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir. 1983), which says that under Texas law, National Union’s reservation of rights released Motiva from the “consent to settle” clause.

But the appellate panel found that its own circuit court decision was no longer valid in the wake of Texas Supreme Court’s State Farm Lloyds Ins. Co. v. Maldonado, 963 S W. 2d 38 (Tex. 1998). In the case, the Texas Court held that because the insurer agreed to defend its insured under a reservation of rights. But the insured failed to satisfy a condition precedent of the insurance policy, so the insured couldn’t recover on the policy.

The insurer that tendered a defense with a reservation of rights was entitled to enforce a “consent to settle” clause.

Therefore, the insured Motiva, breached the “consent to settle” clause by settling the case without National Union’s consent.

The appellate panel indicated that Motiva didn’t breach the cooperation clause by asking National Union to leave the mediation. The opinion states “that questions of fact are presented on whether National Union breached the cooperation clause, and if it did breach the clause, whether the failure to cooperate operated to National Union’s prejudice.”

The appeals court asked the trial court to look at the case again, however, concluding that on remand, the district court must determine “whether National Union breached the cooperation clause, and whether it suffered actual, concrete prejudice from Motiva’s breach of any policy condition.”

For example, the decision notes that National Union can show that Motiva “had no liability or that it had no coverage or that the breach prevented it from asserting a valid defense to liability or coverage or that the settlement was unreasonable.”

--Zoltan Elek, CPR Intern