The danger of ambiguous consent-to-settle clauses in professional indemnity policies

Jean-Paul Rudd, Partner at Adams and Adams

Applying the ordinary contra proferentem principle, the court found the consent clause ambiguous as to whose consent was required and construed it against the insurer that had drafted it.

Background

Kinsey & Kinsey, Inc. (Kinsey), a consulting firm, was engaged to install new HR software for a hospital client. When the client discovered that different, older software had been installed, it sued Kinsey, one of its principals, and an employee for misrepresentation and breach of contract.

Kinsey held professional indemnity insurance providing $1m of cover per claim, and its insurer managed the defence of all three defendants. Shortly after trial began, the client offered to settle its claims against the employee alone for the full $1m limit. The insurer accepted, without the consent of Kinsey or its principal and over their express objection, leaving Kinsey and its principal to face the remaining, largely uncovered claims without the benefit of the policy limit.

The jury found Kinsey liable for breach of contract in the amount of $1,390,000, which the trial judge later reduced to $786,749.29 after excluding damages precluded by the underlying contract. Kinsey settled and paid the judgment, then sued its insurer to recover that amount, arguing that the insurer had breached the policy by settling the employee’s claim without Kinsey’s consent.

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Policy language and the consent-to-settle provision

The policy gave the insurer the right to conduct settlement negotiations “in your name and on your behalf,” but provided that the insurer “shall not settle any claim without your consent, such consent not to be unreasonably withheld” (the “consent-to-settle clause”).

It defined “you” and “your” broadly, to include the named entity and “any individual insured” - a definition that could sensibly capture the firm, its principal, or the employee, individually or together.

The dispute turned on whose consent “your” required: only that of the insured on whose behalf a particular settlement was negotiated, as the insurer argued, or that of every named insured, as the firm contended.

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The court’s analysis

The court found the word “your” ambiguous, since it is capable of referring to one person or several even in ordinary usage, and this ambiguity was compounded by the policy’s own broad definition of “insured”. Where a policy term is ambiguous, it must be construed in favour of the insured and against the insurer that drafted it.

The court rejected the insurer’s argument that its right to negotiate settlements “in your name and on your behalf” resolved the ambiguity, finding that this language did nothing to identify whose consent was needed where three defendants faced a single claim under the same policy. On that basis, the insurer had breached the contract by settling the employee’s claim without the firm’s consent.

Takeaway

Consent-to-settle clauses in professional indemnity or D&O policies covering multiple insureds should clearly identify whose consent is required before a settlement is concluded. Left ambiguous, such clauses will be construed against the insurer that drafted them. Insurers should not assume that settling on behalf of one insured, even at the full policy limit, discharges their obligations to the others.