It is Expensive if an Insured’s Lawyers Don’t Read and Understand Policy

Insured May Not Expect Payment if it Settles Claim Without Insurer’s Consent

Lawyers have an obligation to protect their clients from wasting money and need to understand insurance before entering into an agreement to settle a third party law suit. When hired to represent a client in a third party lawsuit that might be covered by an insurance policy for defense or indemnity it is essential that the defense lawyers obtain, read, analyze and understand all policies available to defend or indemnify the client(s) or considering immediately giving notice to the lawyers errors and omissions insurance.

In OneWest Bank, FSB, a Federal Savings Bank v. Houston Casualty Company, U.S.Ct. of App. 9th Cir, 2017 WL 218900 (January 19, 2017) the insured and its lawyers failed to read and understand the policies available to fund a settlement with the plaintiff.


OneWest Bank, FSB (“OneWest”) appealed the district court’s grant of summary judgment in favor of Houston Casualty Company (“Houston”). OneWest commenced this insurance coverage action alleging breach of contract and breach of the implied covenant of good faith and fair dealing. These claims arise from Houston’s denial of coverage for a settlement agreement that was executed without Houston’s prior knowledge or consent.

OneWest’s parent company, IMB HoldCo LLC, and Houston first negotiated the professional liability insurance policy in 2009. They later executed a renewal to provide coverage for the period beginning March 19, 2012 and concluding May 15, 2013. The policy establishes a $10 million ceiling on liability and includes a $2.5 million self-insured retention provision.  Section 8 of the policy states, in relevant part: “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.”

On August 9, 2012, Assured Guaranty Municipal Corporation (“Assured”) sued OneWest for its alleged failure as a loan servicer to mitigate or avoid losses on mortgage loans for which Assured guaranteed the principal and interest payments. After engaging in extensive settlement negotiations, OneWest and Assured agreed to a settlement. This agreement was memorialized in a settlement term sheet, which OneWest and Assured executed.

OneWest did not seek or obtain Houston’s written consent prior to executing the term sheet. After executing the term sheet, OneWest informed Houston of its settlement negotiations in the underlying lawsuit and sought coverage under the policy. Houston denied coverage based on OneWest’s breach of Section 8 of the policy.


A prior written consent provision is enforceable in California “in the absence of economic necessity, insurer breach, or other extraordinary circumstances.” Low v. Golden Eagle Ins. Co., 2 Cal. Rptr. 3d 761, 770–71 (Ct. App. 2003) (quoting Jamestown Builders, Inc. v. Gen. Star Indem. 15 Co., 91 Cal. Rptr. 2d 514, 516 (Ct. App. 1999). This is an indispensable condition to the insured’s receiving indemnification under its policy.

Insureds cannot unilaterally settle a claim before the establishment of the claim against them and the insurer’s refusal to defend in a lawsuit to establish liability. Here, Section 8 of the policy prohibits OneWest from admiting or assuming any liability, or entering into any settlement agreement without Houston’s prior written consent. This language is unambiguous. The settlement term sheet demonstrates OneWest and Assured’s mutual intent to fulfill all of the material terms of their negotiated settlement agreement.

Under California law, OneWest and Assured intended to enter into a final and binding settlement agreement when they executed the term sheet.

Every contract implies a covenant of good faith and fair dealing. To prevail against an insurer for breach of the implied covenant, an insured must demonstrate that (1) the insurer withheld benefits due under the policy; and (2) the insurer’s reason for denying benefits was unreasonable or without proper cause. Because OneWest cannot establish that Houston has withheld benefits due under the policy, its implied-covenant claim must fail as a matter of law. Thus, OneWest’s remaining claims for declaratory relief and punitive damages fail as a matter of law.


A friend of mine sells a T shirt that states: “RTFP” which stands for “Read the F_____ing Policy”. Had One West, its risk managers and lawyers had RTFP they would have brought in Houston to investigate and participate in the settlement negotiations. By presenting a settlement agreement as an action which is completed before those affected by it are in a position to query or reverse it. As a result One West must pay the full amount of the settlement and will receive nothing from Houston because it did not RTFP.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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