Voluntary Payment Clause Effective to Defeat Claim for Settlement Paid Without Consent of Insurer
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Trident Fasteners, Inc. (TFI) is an automotive supplier in Grand Rapids, Michigan, that makes customized screws, bolts, and other fasteners for use as component parts. Automotive fasteners have a variety of uses. They can prevent leakage, distribute pressure, and hold vehicles together. But, when such fasteners do not work, things can fall apart. That is what happened to TFI’s relationship with its insurer, Selective Insurance Co. of South Carolina (Selective).
In Trident Fasteners, Inc. v. Selective Insurance Company Of South Carolina, No. 21-1439, United States Court of Appeals, Sixth Circuit (August 3, 2022) the Sixth Circuit was faced with a claim of more than a million dollars paid, voluntarily by an insured, without permission of its insurer.
When a customer threatened litigation over defective fasteners, TFI settled with that customer rather than wait for the court complaint. The issue brought to the Sixth Circuit was whether Selective had an obligation to pay for the settlement without a lawsuit having been filed against TFI.
In December 2017, Selective issued an insurance policy package (Policy) to TFI. The Policy contained commercial general liability coverage and commercial umbrella coverage, effective January 1, 2018 to January 1, 2019.
In addition to the standard agreements to defend and indemnify the policy also contained fairly standard “voluntary payment” and “no action” provisions including the following decisive language: “No insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
In October 2018, TFI reached out to Selective for coverage related to an alleged product defect, which Selective labeled Claim No. 21923029 (Insurance Claim). The Insurance Claim stemmed from a chain of events that had started four months earlier in June 2018, when TFI’s customer, Tenneco, along with MCS, a parts manufacturer, complained to TFI that they had received defective fasteners. The fasteners were installed into top mounts by MCS, pressed with a foam jounce bumper by Tenneco, and installed into truck struts by General Motors Co. TFI alleges that Elm Plating Co., the supplier that applies heat treatment to the metal fasteners, failed to properly heat treat the fasteners, resulting in bent or broken products. This alleged defect led to a recall of the fasteners and products that used the fasteners.
In April 2019. Selective then responded to TFI’s claim with a request for additional information before it would consent to TFI entering into settlement negotiations with Tenneco to resolve the issue.
On May 10, 2019, Selective denied consent for TFI to send a settlement letter and instructed it to not engage in any settlement negotiations with Tenneco. But TFI did not heed those instructions and, on June 28, 2019, it settled the dispute with Tenneco only to have Selective refuse to indemnify TFI.
TFI sued Selective, alleging that Selective materially breached the Policy, as defined under Michigan law, by acting in bad faith. TFI claimed that Selective unreasonably delayed its investigations and communications with it, refused to participate in resolution of the Insurance Claim, unreasonably withheld consent to participate in settlement negotiations, unreasonably delayed sending a reservation-of-rights letter and providing defense, and refused to pay the Insurance Claim in violation of Michigan law. TFI sought damages in excess of $1.3 million and declaratory relief. Selective answered that it was not obligated to pay for TFI’s settlement with Tenneco because TFI did not obtain Selective’s consent and moved to dismiss.
The district court granted the motion. It noted that similar “voluntary payment” and “no action” clauses have been upheld and enforced under Michigan law. It then stated that these provisions would only have been waived if Selective denied liability and refused to defend an action against TFI. “Since Tenneco never filed suit against T[FI],” the court reasoned, “Selective cannot be liable for T[FI]’s settlement payment.”
Michigan courts have recognized the duty to act in good faith as an implied contractual obligation in certain circumstances. The duty of good faith can arise in the insurance context for limited purposes, including the investigation and payment of claims and settlements.
Duty to Investigate
The duty to investigate an insurance claim involving a third party falls under the duty to defend. If the insurer had an obligation to defend and failed to fulfill that obligation, then, like any other party who fails to perform its contractual obligations, it becomes liable for all foreseeable damages flowing from the breach.
Michigan courts state that the duty of the insurer to defend the insured depends upon the allegations in the complaint of the third party in his or her action against the insured. There was no complaint against the insured that existed to trigger the duty to defend and consequently the duty to investigate.
Duty to Process the Insurance Claim
The absence of a lawsuit against the insured also resolves whether the duty to process the Insurance Claim in good faith arose. Michigan courts have viewed this duty as part of an insurer’s duty to pay the insured in a timely fashion.
TFI also proffered that it was prejudiced because of the “unreasonably late” nature of Selective’s reservation-of-rights letter.
Without a complaint filed against it, TFI had no claim based on a violation of the duty to process insurance claims since no duty existed.
Duty to Negotiate Settlements
The duty to negotiate settlements likewise requires a lawsuit before a duty to act in good faith arises. The Michigan Supreme Court has stated that “[w]hen a liability insurer has sole power and control over the litigation of claims brought, against its insured, which includes the obligation to compromise the claim if feasible, then counsel must proceed in good faith.” [Frankenmuth Mut. Ins. Co., 461 N.W.2d at 666]
Since Michigan courts require the filing of a lawsuit and since there was not a suit, the third party in this case, Tenneco, never initiated litigation proceedings, and, as a private entity. With no complaint there was nothing to prompt Selective’s duty to investigate, settle, or otherwise process the claim.
Michigan courts, like those in every state, have held that “[a]n insurer is free to define or limit the scope of coverage as long as the policy language fairly leads to only one reasonable interpretation and is not in contravention of public policy.” [Farm Bureau Mut. Ins. Co. v. Nikkel, 596 N.W.2d 915, 920 (Mich. Ct. App. 1999) (quoting Heniser v. Frankenmuth Mut. Ins. Co., 534 N.W.2d 502, 505 (Mich. Ct. App. 1995)].
An insured cannot withhold information and then force an insurer to pay out an insurance claim. The reverse would not be true, as TFI already had the facts and opportunity to investigate its insurance claim itself. TFI obtained insurance coverage from Selective to, as relevant here, hedge its litigation risk from third parties. As the risk of litigation never materialized, Selective did not owe TFI a good-faith duty and could not have breached the Policy in the absence of actual litigation filed against TFI.
Selective had no implied duty of good faith that arose prior to the filing of a complaint. That conclusion makes resolution of this appeal straightforward based on the text of the Policy. As the parties do not contest, the Policy’s plain language is unambiguous, so the appellate court applied the language. The Policy states that TFI will not “voluntarily make a payment . . . without [Selective’s] consent,” and it will not sue Selective “unless all of [the Policy’s] terms have been fully complied with.”
Because TFI settled without consent and voluntarily paid Tenneco, it breached the Policy. TFI’s Insurance Claim is precluded.
Because Selective’s duty of good faith under Michigan law would not arise until after the filing of a lawsuit against TFI, and given that there was no such lawsuit ever filed, the Insurance Claim is precluded under the Policy.
There is no duty to defend in Michigan until a suit is filed. Failure of the insured to obtain the consent of an insurer before paying $1.3 million to a claimant seeking damages for a defective product, breached the clear and unambiguous language of the policy. The insurer is not without sin because an early investigation could have protected the insured and saved it money, but in Michigan they had no duty to do so although it would have been better for the insured and save the insurer this lawsuit.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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