A no voluntary payment clause, commonly found in liability policies, prohibits an insured from seeking indemnification from the insurer for any payment, obligation or expense undertaken without the insurer’s consent.  Included within these provisions is the prohibition against settling a claim without notice to the insurer.  Under California law, courts will enforce such provisions even where no other prejudice to the insurer is shown based on the theory that the insurer has been deprived of its right to complete control and direction of the defense of suits or claims. 

A recent case in the Northern District of California, Crowley Maritime Corporation v. Federal Insurance Company, illustrates just how harsh such a provision can be for an insured who fails to keep its insurer completely informed.  In the underlying suit, a group of minority shareholders brought a securities action against Crowley in a Delaware court.  Pursuant to the policy with its primary insurer, Federal, Crowley promptly provided notice when the claim was made and Federal agreed to accept coverage.  Crowley provided updates to Federal as the litigation progressed.  However, Crowley proceeded to enter into settlement negotiations and reach a settlement agreement with the plaintiffs in the action without providing notice to or inviting the participation of its insurers.  After a settlement agreement was reached, but before it was presented to the Delaware court for approval, Crowley approached Federal purportedly seeking consent to complete the settlement.  Federal initially delayed in responding and the court approved the settlement.  Federal ultimately denied coverage, invoking a provision of Crowley’s policy requiring prior consent before settling, offering to settle any claims or assuming any contractual obligations.  Crowley brought suit against Federal and its other excess insurers to challenge the denial of coverage. 

In a cross-motion for summary judgment, Crowley argued that the policy barred only final and irrevocable agreements and cited to several provisions in the settlement that indicated he had not yet assumed contractual obligations at the time he notified Federal to request consent.  However, the Court found the provision’s plain language to be much broader than Crowley’s interpretation and concluded that Crowley assumed contractual obligations when the settlement was signed, creating a binding agreement even if conditions subsequent, such as court approval, had yet to occur.  Because the insurance company had no notice of the settlement until after it had been executed, Crowley violated the consent requirement.  The Court further rejected Crowley’s estoppel defense based on a theory of detrimental reliance on the lack of response following notification concluding that such reliance was unreasonable because the policy required written consent.  The Court granted defendant insurer’s motion for summary judgment and denied plaintiff’s motion.