The U.S. Court of Appeals for the Ninth Circuit, affirming a decision by the U.S. District Court for the Central District of California, has ruled that a bank was not entitled to insurance coverage for its settlement of a lawsuit where it had not notified its insurer of the lawsuit until after it was settled.
The Case
Assured Guaranty Municipal Corporation sued OneWest Bank, FSB, for its alleged failure as a loan servicer to mitigate or avoid losses on mortgage loans for which Assured had guaranteed the principal and interest payments.
After engaging in extensive settlement negotiations, OneWest and Assured agreed to a settlement. The agreement was memorialized in a settlement term sheet that OneWest and Assured executed.
Prior to executing the term sheet, however, OneWest did not seek or obtain the written consent of Houston Casualty Company, which had issued a professional liability insurance policy to OneWest's parent company, IMB HoldCo LLC.
After executing the term sheet, OneWest informed Houston of its settlement negotiations in the Assured lawsuit and sought coverage under the policy.
Houston denied coverage, asserting that OneWest had breached Section 8 of the policy.
OneWest sued Houston and the U.S. District Court for the Central District of California granted Houston's motion for summary judgment on all of OneWest's claims.
OneWest appealed.
The Houston Policy
Section 8 of the Houston policy stated:
The Insureds shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs without the prior written consent of the Insurer. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy.The Ninth Circuit's Decision
The Ninth Circuit affirmed.
In its decision, the circuit court explained that Section 8 of the policy prohibited OneWest from “admit[ing] or assum[ing] any liability,” or “enter[ing] into any settlement agreement” without Houston's prior written consent.
In the circuit court's opinion, that language was “unambiguous.”
Moreover, the circuit court continued, the settlement term sheet demonstrated OneWest and Assured's mutual intent to fulfill all of the material terms of their negotiated settlement agreement. The term sheet “provided all the relevant terms of a settlement agreement.”
Therefore, the circuit court found, under California law, OneWest and Assured had intended to enter into a final and binding settlement agreement when they executed the term sheet. Consequently, it decided, the district court had correctly applied California law to rule that OneWest had breached Section 8 of the insurance policy by failing to request or obtain Houston's written consent before executing the term sheet with Assured.
As such, the Ninth Circuit concluded, Houston had no coverage obligation for OneWest's settlement with Assured in the absence of an exception to Section 8's prior written consent provision, which did not exist.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].