AIG’s OK should have been sought in D&O settlement

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    AIG

    The Arizona Supreme Court on Wednesday agreed with American International Group Inc., in a divided opinion, that a higher education service provider should have gotten the insurer’s OK before settling a directors and officers liability lawsuit.

    Apollo Education Group Inc., a higher education provider that operates several universities in various countries, had a D&O policy with AIG unit National Union Fire Insurance Co. of Pittsburgh, PA that provided up to $15 million in coverage, according to the ruling in Apollo Education Group, FKA Apollo Group Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA, a Pennsylvania Corporation.

    The policy said Apollo could not enter into any settlement agreement without AIG’s prior written consent, the majority ruling said.

    In October 2006, the company’s stock dropped 22.9%, following a Wall Street Journal article detailing an industry practice of backdating stock options for corporate executives; an investigation of Apollo by the U.S. Attorney’s Office for the Southern District of New York and the Securities and Exchange Commission; and an internal investigation followed by a public disclosure by Apollo that admitted to “various deficiencies” in the process of granting and documenting stock options.

    A class action on the matter was dismissed by the U.S. District Court in Arizona, and appealed to the 9th U.S. Circuit Court of Appeals in San
    Francisco.

    While the appeal was pending, the plaintiffs and Apollo agreed to settle the litigation for $13.1 million, which added up to $13.5 million including costs incurred to that point.

    National Union refused to consent to the settlement, but Apollo entered it anyway, paying the plaintiffs out of pocket, then filed suit against the insurer.

    The U.S. District Court granted summary judgment to National Union, and Apollo appealed. The 9th Circuit then asked the Arizona Supreme Courts advice on the issue.

    The “contract terms speak clearly and directly to whether the perspective of insurer or insured should guide the determination of whether an agreement to settle by an insured is reasonable…The provision refers to the insured in this context only in terms of what it may not do: enter into any settlement without the insurer’s consent,” the 5-2 ruling said.

    “This interpretation is supported by the contract’s overall context. Here, the parties agreed that the defense of any action would be controlled by the insurer, with any settlement subject to the insurer’s consent,” it said. “We are unpersuaded by Apollo’s argument that we should construe these terms against the insure,” it said.

    “In a D&O policy like the one there, no reason exists to not enforce the consent-to settlement provision as plainly written and agreed to by the parties,” it said.

    The dissenting opinion states, “Simply put, the policy, by its terms, does not state whether the reasonableness of National’s decision is viewed from its own perspective or Apollo’s. 

    “Nevertheless, the majority goes to great lengths searching for the answer in the policy. It fails. At bottom, the majority’s textual analysis simply proves that the policy imposed a duty on National to act reasonably in withholding its consent.” The policy is silent on the issue here, which is “whether National breached the standard of care that applies to this duty.”

    Attorneys for Apollo and an AIG spokesman did not return requests for comment.

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