Apollo Educ. Grp., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA
| Decision Date | 17 February 2021 |
| Docket Number | No. CV-19-0229-CQ,CV-19-0229-CQ |
| Citation | 250 Ariz. 408,480 P.3d 1225 |
| Parties | APOLLO EDUCATION GROUP, INC., fka Apollo Group, Inc., Plaintiff-Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, a Pennsylvania Corporation, Defendant-Appellee. |
| Court | Arizona Supreme Court |
Mark J. DePasquale, Mark J. DePasquale, P.C., Phoenix; Mark S. Hersh, Reed Smith, LLP, Chicago, IL; and Douglas E. Whitney, Douglas Whitney Law Offices, LLC, Chicago, IL, Attorneys for Apollo Education Group, Inc.
Bennett Evan Cooper, Vail C. Cloar, Dickinson Wright, PLLC, Phoenix; and Timothy M. Strong, Steptoe & Johnson, LLP, Washington, DC, Attorneys for National Union Fire Insurance Company of Pittsburgh, PA
David L. Abney, Ahwatukee Legal Office, P.C., Phoenix, Attorney for Amicus Curiae United Policyholders
¶1 The United States Court of Appeals for the Ninth Circuit certified the following question to this Court: "What is the standard for determining whether National Union unreasonably withheld consent to Apollo's settlement with shareholders in breach of contract under a policy where the insurer has no duty to defend?" The court clarified its question by asking: "Should the federal district court assess the objective reasonableness of National Union's decision to withhold consent from the perspective of an insurer or an insured?"
¶2 We hold that, under a policy without a contractual duty to defend, the objective reasonableness of the insurer's decision to withhold consent is assessed from the perspective of the insurer, not the insured. The insurer must independently assess and value the claim, giving fair consideration to the settlement offer, but need not approve a settlement simply because the insured believes it is reasonable.
¶3 Apollo Education Group, Inc. ("Apollo") is a higher-education service provider that operates several universities in various countries. At the time this case arose, it was a publicly traded corporation. National Union Fire Insurance Company of Pittsburgh, PA ("National Union") insured Apollo's directors and officers for liability up to $15 million under a directors and officers' ("D&O") liability policy. The policy included no duty to defend the insured if sued. Instead, Apollo would defend itself against any claims. Correspondingly, the policy contained no clause requiring the insured to cooperate with a defense provided by National Union ("cooperation clause").
¶4 The obligations of the parties were further specified as follows ("consent-to-settlement provision"):
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. The Insurer's consent shall not be unreasonably withheld, provided that the Insurer shall be entitled to effectively associate in the defense, the prosecution and the negotiation of any settlement of any Claim that involves or appears reasonably likely to involve the Insurer.
¶5 On October 18, 2006, Apollo'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 United States 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 57 of 100 stock option grants to executives during the relevant timeframe used incorrect dates for accounting purposes, together with a statement admitting "various deficiencies in the process of granting and documenting stock options."
¶6 A class action followed in the United States District Court for the District of Arizona. The district court dismissed the complaint with prejudice for failure to particularly allege falsity as required by Rule 9(b) of the Federal Rules of Civil Procedure. The court then denied a request for leave to amend and a motion to reconsider. Plaintiffs appealed to the Ninth Circuit.
¶7 While the appeal was pending, the plaintiffs and Apollo entered into mediation, which eventually resulted in an agreement to settle for $13,125,000. Given costs incurred to that point, the D&O policy was down to $13,500,000 to cover a settlement.
¶8 National Union refused consent to the settlement. Nonetheless, Apollo entered into the settlement agreement, paying the plaintiffs out of pocket. Apollo then sued National Union to recover the settlement amount, alleging both breach of contract and bad faith.
¶9 The district court granted summary judgment to National Union, and Apollo appealed. Finding that it could not determine under existing precedent how this Court would analyze the breach-of-contract claim, the Ninth Circuit certified the question to this Court. We have jurisdiction pursuant to article 6, section 5(6) of the Arizona Constitution, A.R.S. § 12-1861, and Rule 27(a)(1) of the Rules of the Supreme Court of Arizona.
¶10 When two parties with a contractual relationship both have an interest in the defense of an action but only one has control over that defense, conflicts are bound to occur. These conflicts are mediated by distinct bodies of law: contract law, which governs the agreement between the parties, and tort law, which provides an action for bad faith. This case presents solely contract law issues.
¶11 We begin with the language of the policy. See First Am. Title Ins. Co. v. Johnson Bank , 239 Ariz. 348, 350 ¶ 8, 372 P.3d 292, 294 (2016). "An insurance policy is a contract, and in an action based thereon the terms of the policy must govern." Dairyland Mut. Ins. Co. v. Andersen , 102 Ariz. 515, 517, 433 P.2d 963, 965 (1967). In interpreting a contract, we examine the language to deduce the intention of the parties. Fireman's Fund Ins. Co. v. New Zealand Ins. Co. , 103 Ariz. 260, 261, 439 P.2d 1020, 1021 (1968). We interpret that language according to its "plain and ordinary meaning." Teufel v. Am. Fam. Mut. Ins. Co. , 244 Ariz. 383, 385 ¶ 10, 419 P.3d 546, 548 (2018). If the terms are clear, we enforce them unless the contract is illegal or violates public policy. Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC , 242 Ariz. 108, 115–16 ¶ 39, 393 P.3d 449, 456 (2017). We also interpret the terms in the broader context of the overall contract. Grosvenor Holdings, L.C. v. Figueroa , 222 Ariz. 588, 593 ¶ 9, 218 P.3d 1045, 1050 (App. 2009).
¶12 Here, 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 consent-to-settlement provision states that "[t]he Insureds shall not ... enter into any settlement agreement ... without the prior written consent of the Insurer." Making the same point a different way, "[o]nly those settlements ... which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy." The provision further states that "[t]he Insurer's consent shall not be unreasonably withheld."
¶13 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. Otherwise, it speaks entirely to the insurer's perspective. First, it refers three times to the insurer's "consent." Consent by its nature means a deliberate, volitional act on the part of the person conveying it. Consent , Black's Law Dictionary (11th ed. 2019) ("A voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person."). In turn, consent "shall not be unreasonably withheld" by the insurer. The use of an adverb ("unreasonably") in this context sets the standard of behavior to which the person who is taking the action is held. See, e.g. , Honeycutt v. United States , ––– U.S. ––––, 137 S. Ct. 1626, 1633, 198 L.Ed.2d 73 (2017) (); Flores-Figueroa v. United States , 556 U.S. 646, 650–52, 129 S.Ct. 1886, 173 L.Ed.2d 853 (2009) (actions "knowingly" taken). Here, the action referred to is the insurer withholding consent to settlement; the requirement that withholding consent may not be "unreasonable" is directed to the insurer as well. Thus, the policy's plain language strongly suggests that the reasonableness of withholding consent is to be viewed from the insurer's perspective.
¶14 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 insured, with any settlement subject to the insurer's consent. It makes sense that the reasonableness of such consent would not be determined from the perspective of the insured, because the insured has a strong and often adverse interest in settling within policy limits, regardless of the merits of a claim. Rather, where the insurer has no control over the litigation, it is more reasonable that the insurer's perspective, which necessarily includes consideration of the strength of the underlying claim in accord with its interest in avoiding unnecessary payment, should prevail. Of course, the converse would be true where the insurer has control over the defense. The terms as agreed to by these parties reflects this reasonable understanding of the overall nature and context of the contract.
¶15 We are unpersuaded by Apollo's argument that we should construe these terms against the insurer. That rule of construction applies when the language is ambiguous; this language is not. See Teufe...
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