7th Circuit Sides with RWI Insurer, Affirming Denial of Coverage Where Seller Failed to Obtain Required Consent to Settlement

September 7, 2017 – As anticipated in the May 23, 2017 Law360 article about the case, written by Butler Rubin attorneys Jason Dubner and Mark Schwartz, the Seventh Circuit in an opinion issued last week in Ratajczak v. Beazley Solutions Ltd. (No. 16-3418) clarified the duties of an issuer of representation and warranty insurance (“RWI”) accused of bad faith and breach of contract by its policyholder. The Court unambiguously sided with the insurer.

The issue facing the Court was whether Beazley’s sell-side warranty and indemnity policy provided coverage for the pre-litigation settlement the sellers reached with the buyers following post-acquisition allegations of fraud and breach of warranties contained in the stock purchase agreement. Beazley’s policy provided that it was not bound by settlements that it does not approve, and the Court found that Beazley not only did not approve the settlement but was not even notified of the claim until settlement talks were almost complete. The sellers argued that Beazley could not prove prejudice from the delay, but the Court held that prejudice was not required under controlling New York law. According to Judge Easterbrook’s opinion, “[t]he approval requirement is absolute.” (Slip Op., at 8.)

While at least in certain jurisdictions, RWI insurers may take comfort from Ratajzak in the enforceability of such “consent-to-settle” provisions in their policies, the Court did recognize that insurers may have a duty to look beyond the express allegations of an underlying complaint to determine whether a breach of a Fundamental Representation is triggered. Although the Ratajczak Court concluded there were no such implicit or express allegations in this case, if the settled allegations had been part of a filed complaint, rather than merely threatened litigation, the Court’s opinion suggests that the insured could have tried to establish a link between the buyer’s allegations and a breach of a covered Fundamental Representation, such as one related to the accuracy of the seller’s books and records. Accordingly, Ratajzak provides lessons going forward to both the policyholder and the insurer in RWI transactions.