Court: No Voluntary Payment Violation
April 21, 2009
The 1st District Appellate Court recently held that an insured's settlement of an underlying lawsuit without the insurer's consent, following the insurer's agreement to provide independent counsel for the insured based on the insurer's reservation of rights, did not constitute a violation of the voluntary payments condition in the policy, and coverage for the settlement was not thereby precluded. Myoda Computer Center, Inc. v. American Family Mutual Insurance Co., 2009 WL 884902 (1st Dist., March 31).
The insured, Myoda, was represented by Ciardelli & Cummings, Chicago. Hinshaw & Culbertson LLP of Chicago represented the insurer, American Family.
Microsoft brought suit against Myoda in 2003 for copyright and trademark infringement. Myoda tendered the defense of the lawsuit to American Family, its general liability carrier, under the ''advertising injury'' section of the liability policy. The policy contained, among other things, a voluntary payments condition prohibiting Myoda from making payment for claims absent the agreement of American Family, at the peril of negating American Family's coverage obligations.
In response to the tender, American Family agreed to pay for Myoda's defense costs and allowed Myoda to choose independent counsel, but reserved its right to later deny coverage. By October 2003, Myoda informed American Family that Myoda was trying to settle, and asked for American Family's settlement position. American Family requested further information about the settlement.
A short while later Myoda advised that it had, in fact, worked out a settlement with Microsoft and provided American Family with the details, prior to actual execution of the deal. American Family responded that Myoda's settlement would constitute a violation of the voluntary payments condition. Two weeks later Myoda executed the settlement agreement anyway.
Myoda then brought suit seeking a declaration that American Family was obligated to reimburse Myoda for the settlement and to pay the defense costs involved with settling the lawsuit. The parties filed cross-motions for summary judgment and stipulated to the relevant facts. The trial court granted American Family's motion and denied that of Myoda, apparently based on violation of the voluntary payments condition. Myoda took this appeal.
In an opinion by Justice Denise O'Malley, the First District reversed. She began by noting the general rule that, in the absence of an insurer's breach of its duty to defend, an insured must obtain the consent of the insurer before settling the underlying action. While an insurer does not have unfettered discretion to withhold consent, the fact that the settlement amount is within the policy limits does not per se establish the reasonableness of the settlement.
She further observed that the purpose of requiring an insurer's prior consent to the settlement is to prevent collusion between the insured and the injured party. For an insurer to decline coverage based on breach of the voluntary payments clause, however, the insurer is required to show prejudice.
O'Malley then discussed the parties' case law, and found Commonwealth Edison Co. v. National Union Fire Ins. Co., 323 Ill. App. 3d 970 (1st Dist. 2001), cited by Myoda, to be the most relevant. In that case, as here, an insured settled an underlying claim following the insurer's reservation of rights and relinquishment of control of the defense due to a potential conflict of interest. Noting that the settlement did not compromise the insurer's ability to contest indemnification at a later date because of the reservation of rights, the court in Commonwealth Edison held that the insured was not required to obtain the insurer's consent prior to settlement.
O'Malley said that, as in Commonwealth Edison, American Family here is not precluded from challenging coverage for the claim against Myoda, even though American Family surrendered the defense of the case to Myoda's independent legal counsel, and even though the settlement may be a reasonable one. On the other hand, she observed that the settlement of the underlying lawsuit took place after Myoda tendered the matter to American Family, ''which would appear not to implicate the voluntary payments clause.''
O'Malley then expressed disagreement with American Family that the issue here was whether Myoda could recover the settlement amount from American Family without first obtaining American Family's consent. In O'Malley's view, the real issue was the narrower one of whether American Family was entitled to judgment as a matter of law, and she said it was not, because different people could have differing inferences on the undisputed facts of the case.
She then clarified her holding that ''Myoda did not breach the voluntary payments clause'' by making payment on the settlement, and said it was unnecessary therefore to get into the question of whether American Family had been prejudiced by a breach.
Based on this reasoning, the court reversed and remanded for further proceedings.
