In many types of insurance policies, the carrier’s obligation to perform is tied to its consenting to the incurrence of costs or the settlement of an underlying case. One assumes that an insurer cannot withhold consent willy-nilly, for that would make coverage illusory. There is a dearth of authority, however, that makes express the circumstances in which an insurer is not permitted to withhold consent – that is to say, the circumstances in which it is required to consent. The Supreme Court of Iowa recently addressed that question and made clear that insurers are obligated to consent when faced with a reasonable request.
In Belleville v. Farm Bureau Mut. Ins. Co. (July 29, 2005), the court addressed uninsured motorist coverage and a settlement of a claim against the tortfeasor. The Belleville case in part is concerned with the insured’s claim of first-party bad faith, which the court rejects in a broad decision that is highly favorable for insurance companies. But for present purposes, that aspect of the decision is notable because the court distinguishes the relationship of the insurer and its policyholder in the UIM context from the ordinary first-party context in holding that with respect to UIM coverage the relationship between the two “is arms-length” and thus the insurer is freed from its ordinary obligations to consider the interests of the insured to be paramount, to construe the facts and coverage in the light most favorable to the insured, and to comport with other dictates associated with the carrier’s obligation of good faith and fair dealing. (p. 11-12).
Having concluded that the insurance company does not need to extend itself to accommodate the interests of the insured, the court nevertheless imposed on insurance companies a duty to consent (where coverage is tied to consent) where the request is reasonable. In other words, in an arms’ length relationship, the Iowa court recognized that, where a reasonable request is made, it would be unreasonable to withhold consent, and therefore the insurer has a duty to consent. Thus, an insurer has a duty to consent “unless it has a reasonable basis for refusing to do so.” (p. 17)
The court’s holding applies with greater force outside of the UIM context, where insurance companies are required to consider the interests of their insureds and reasonably construe the facts and policy language in their favor. Accordingly, the Iowa decision is helpful not only concerning consent-to-settlement clauses in UIM and in liability coverage generally, but also in directors’ and officers’ policies, errors and omissions policies, and other coverages where, for example, defense costs are recoverable only if they are incurred with the insurance company’s consent.
The Belleville decision also is pertinent in considering carrier claims of prejudice from breach of a duty by the policyholder, since so long as the policyholder acted reasonably the carrier cannot claim that it was prejudiced, since it would have had a duty to consent to the reasonable course of conduct anyway. See generally Coastal Iron Works v. Petty Ray Geophysical, 783 F.2d 577, 585 (5th Cir. 1986); Pickering v. Am. Employers Ins. Co., 292 A.2d 584, 591 (R.I. 1971).