Opinion ID: 220152
Heading Depth: 2
Heading Rank: 3

Heading: Independent Consultant Coverage

Text: The final issue remaining is whether the costs of the independent consultant are covered. MBIA informed the insurers in September 2005 of settlement discussions requiring payment of approximately $75 million in disgorgement and penalties. Because the regulators had not completed their investigation into the Capital Asset and U.S. Airways transactions, in October 2005, they asked MBIA to add an independent consultant (IC) review of those transactions as a condition of any settlement. MBIA would pay for this review, which increased the costs of the total settlement. While MBIA made settlement overtures during this time, settlement itself remained tentative. The IC began work in mid-2006, and the insurers were first notified of the addition of the IC in September 2006. In October 2006, the insurers and MBIA again discussed settlement proposals under consideration, including the regulators' insistence on an IC review. On December 6, 2006, MBIA sent the insurers copies of its settlement offer. Any settlement was still unconsummated. Then, on December 15, 2006, MBIA gave the regulators its final offer of settlement, which the regulators accepted in late January 2007. The SEC issued a cease-and-desist order on January 29, 2007, and the NYAG finalized an assurance of discontinuance with MBIA on January 25, 2007. These events marked a final settlement, and MBIA reported the investigations and settlements to the public shortly thereafter. MBIA Inc., Current Report (Form 8-K) (Jan. 31, 2007). In July 2007, the IC issued a report exonerating MBIA from wrongdoing with respect to the Capital Asset and U.S. Airways transactions. This event officially ended the regulators' investigations. The district court held that the addition of the IC in the course of settlement discussions breached the right to associate clause in the policies and that IC-related costs are therefore not covered. MBIA, Inc., 2009 WL 6635307, at -9. Having considered the parties' nuanced and multifaceted arguments on appeal, we appreciate the difficult question the district court faced on this point. Ultimately, however, we take a different view and conclude that the IC costs were covered. We begin with the right to associate clause, which states in Federal's policy: [Federal] shall have the right and shall be given the opportunity to effectively associate with [MBIA] in the investigation, defense and settlement, including but not limited to the negotiation of a settlement, of any Claim that appears reasonably likely to be covered in whole or in part by this Policy. J.A. at 126. ACE's policy contains similar language: [ACE] shall have the right, but not the duty, and shall be given the opportunity to effectively associate with the insureds in the investigation, settlement or defense of any Claim, even if [Federal's] Underlying Limit has not been exhausted. Id. at 188. As the policy language indicates, these policies required MBIA to give the insurers the opportunity to associate in settlement discussions. MBIA argues that it notified the insurers of a proposed settlement and invited them to associate, in compliance with both right to associate clauses, by its September 27, 2005, letter seeking consent to settle the regulators' investigations. [9] See J.A. at 400, 1042, 1091, 1097. MBIA also points to settlement discussions with the insurers throughout the settlement offer process as indications that it complied with the right to associate clause. The insurers counter that although MBIA informed them of a proposed settlement of $75 million, it breached the right to associate clause when it failed to inform them until September 2006 of the addition of the IC to the settlement proposals. The purpose of the right to associate clause is to provide the insurer with an option to intervene in the defense and settlement of a claim. See Mut. Ins. Co. v. Murphy, 630 F.Supp.2d 158, 166-67 (D.Mass.2009); see also Christiania Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 277 (2d Cir.1992) (describing right to associate as opportunity); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 536 F.2d 730, 736 (7th Cir.1976) (describing right to associate as an option). To associate means to come together as partners ... or allies. Webster's Third New International Dictionary 132 (1986). This right thus allows the insured and the insurer to come together as partners in investigating, defending, or settling a claim. That partnership can be useful to an insured, who may lack the expertise and experience of an insurer, where, as here, the insured bears the duty to defend. See Outboard Marine, 536 F.2d at 736. Of course, providing the insurer with sufficient notice of the claim allows it to meaningfully exercise its option. See Christiania, 979 F.2d at 277. However, the right to associate is useful only if the insurer can use its experience throughout the process, not just at the end stages. The policies read as such. They provide, in the present tense, for an opportunity to effectively associate with [the insured] in the investigation, defense and settlement of a claim. J.A. at 126. Indeed, the Federal policy underscores this point by stating explicitly that the right to associate applies to the negotiation of a settlement. Id. These principles lead us to conclude that MBIA fulfilled its obligations under the policies' right to associate clauses. It provided sufficient notice of the claims involved in settlement discussions early enough in the process to allow the insurers to exercise their option to associate effectively. Where the insured gives the insurer an invitation to associate with adequate information about the claim under consideration for settlement, the insured has done what is required under this clause. This is not to say that the right to associate is a one-shot opportunity, but it is not the insured's duty to return to the nonparticipating insurer each time negotiations about the same claim take a new twist and ask if the insurer still wants to opt out. In short, the insured can take the insurer's RSVP at face value. That is what MBIA did here. It gave the insurers an opportunity to join with it in resolving the regulators' investigations, but the insurers declined to participate. To give the insurers the opportunity to exercise their right effectively, as it must, MBIA notified the insurers of a potential claim long before settlement was discussed. It informed the insurers of the nature of the claims and provided an estimate of the monetary amount of those claims. It also met with Federal in person to discuss possible settlements. After the insurers declined to participate in settlement negotiations, MBIA proceeded to negotiate settlements itself. As it turned out, the settlements exceeded MBIA's $75 million estimate and included a different type of costs in the form of IC expenses, as opposed to merely disgorgement and penalties provided in the settlement offers. But the IC review was not a standalone or separate claim about which MBIA had to invite the insurers to associate in defending or negotiating. It was part of the settlement with the regulators, each of which conducted a single, comprehensive investigation into all of the transactions at issue, as explained supra in Part II.A. The IC review component grew out of the natural course of settlement discussions about the same claim in which the insurers could have participated all along. The addition of the IC may have been a twist in settlement discussions, but it was not a new claim, nor was it an unforeseeable component of the settlement discussions. MBIA illustrates this reality by pointing out that ICs are not a rare component of regulatory settlements with securities regulators, so the insurers, which have extensive experience with other policyholder claims, should not have been blindsided when they found out that the settlements included such a component. See Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135, 146 (2d Cir.2008). And although the insurers argue that MBIA signed settlement agreements containing an IC review in October 2005, the fact remains that any offer of settlement made in October 2005 was preliminary; no settlement was consummated until the regulators approved it, which both the state and federal regulators did in January 2007, well after the insurers learned of the IC component. [10] Finally, even at the time they were first notified of the IC in September 2006, the insurers made no overtures to become involved in the settlement process. They cannot now argue that they were denied their rights under the right to associate clause. Because MBIA gave the insurers the opportunity to exercise meaningfully their option to participate in settlement discussions and adequately informed them of the nature and amount of claims under consideration for settlement, it did not breach its contractual obligation under the association clause. Notwithstanding this conclusion, the insurers argue that a settlement including an IC review exceeded the bounds of the insurers' agreement not to raise consent to settlement as a defense to coverage. The insurers argue that they agreed to waive this defense only for the $75 million settlement of the AHERF investigation, which they were informed about in October 2005. MBIA disagrees, saying that the insurers gave it unconditional authority to settle. It also argues that the insurers were seasonably informed of the IC component of the settlement offers so as to voice any objection before the settlements were completed. The insurers' argument is rooted in the right to consent clause in the policies, which states that MBIA will not agree not to settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation or admit any liability with respect to any Claim without [the insurer's] written consent, which shall not be unreasonably withheld. [11] J.A. at 126. A consent clause entitles an insurer `to notice of a proposed settlement and an opportunity to determine, before the settlement, whether it will grant or withhold consent.' Schwartz, 539 F.3d at 145 (quoting Travelers Indem. Co. v. Eitapence, 924 F.2d 48, 50 (2d Cir.1991)). Whether notification is sufficient depends on the circumstances. See id. at 146-47; Eitapence, 924 F.2d at 50; State Farm Auto. Ins. Co. v. Blanco, 208 A.D.2d 933, 617 N.Y.S.2d 898, 899 (N.Y.App.Div.1994). By an insurer's unreasonable delay, silence, or conduct, it can either waive a consent requirement or acquiesce in a settlement. E.g., Blanco, 617 N.Y.S.2d at 899; see also Jones Lang Wootton USA v. LeBoeuf, Lamb, Greene & MacRae, 243 A.D.2d 168, 674 N.Y.S.2d 280, 287-88 (N.Y.App.Div.1998). There is no doubt that MBIA informed the insurers about the $75 million proposed settlement with the regulators for the AHERF investigation; Federal and ACE each acknowledged that figure in responding to MBIA's request for permission to settle. J.A. at 1042-44, 1096-1100. In their letters, the insurers agreed not to raise their lack of written consent as a defense to coverage for those settlements  which the insurers carefully described as disgorgement and penalties related to the AHERF transaction. The waiver of a no-consent defense was not, as MBIA urges, unconditional. Thus, the question becomes whether, subsequent to the October 2005 settlement discussions, MBIA sufficiently notified the insurers of the addition of the IC to the settlement so as to allow them to withhold consent. We conclude that MBIA provided sufficient notification. To begin, MBIA informed the insurers that any settlement proposal was subject to change. Although MBIA did not inform the insurers about the IC until September 2006, it did so then, in October 2006, and in a December 6, 2006, letter containing copies of its final proposed offer of settlement. The offer of settlement was sent to the regulators on December 15, 2006, and not accepted until the end of January 2007. These various notifications to the insurers were enough to allow them determine, before the settlement, whether [they] will grant or withhold consent. Schwartz, 539 F.3d at 145. In Schwartz, we held that a jury could find that eleven hours of notice (overnight) was sufficient to satisfy a similar consent provision. See id. at 145-47. To be sure, Schwartz involved a situation where the insurer was deeply involved in settlement discussions and monitoring, so the eleven-hour time period in that case may have been enough because of the peculiar circumstances present there. See id. Thus, while we do not in any way suggest that notification must meet a temporal bright line, we hold that in these particular circumstances, MBIA notified the insurers about the IC with more than sufficient time to digest the information under any conceivable standard. We explain briefly. Even if we assume that the December 6 letter was the notification and the December 15 date was the time beyond which the settlement was no longer subject to change or objection, the insurers had over a week to decide whether to voice an objection or lack of consent. They had been informed of the nature of the claims to be settled and had solid indications of the dollar amount of those claims. Moreover, the insurers participated in at least two meetings with MBIA in September and October 2006 to discuss settlement proposals, including the possibility of an IC review. However, after no meeting or letter notice did the insurers do anything or voice any objection. Nor have they provided any explanation for their inaction. Given these facts, we conclude that MBIA provided sufficient notice of the IC component of the settlement. The insurers' agreement to waive lack of consent to settlement in 2005 was, by their silence and inaction, reasonably perceived by MBIA to be a continuing waiver of that defense as they learned more about the contours of the final settlement being considered, without expressing any objection to the additional provisions of the evolving settlement. See, e.g., Blanco, 617 N.Y.S.2d at 899 (acquiescence in settlement or waiver of prior consent provision indicated by silence, insurer conduct, or unreasonable delay). Although it may belabor the point, we note that the ultimate settlement arose from a single claim, see supra Part II.A., and included elements that grew out of a single course of settlement discussions, see supra Part II.C. Given that the insurers were notified about the IC and did not object, MBIA was entitled in this case to presume that the insurers would not raise lack of written consent as a defense to coverage with respect to the IC costs. Before we conclude, there is one loose end. The insurers argue that the Assurance of Discontinuance (AOD) entered into with state regulators precludes coverage of IC-related costs. The district court did not consider this argument. Ordinarily, we will not review an issue the district court did not decide. However, whether we do so or not is a matter within our discretion. Colavito v. N.Y. Organ Donor Network, Inc., 486 F.3d 78, 80 (2d Cir.2007) (Sack, J.) (internal quotation marks and citations omitted). Mindful that [w]e review a grant of summary judgment de novo applying the same standard as the district court, Graham v. Long Island R.R., 230 F.3d 34, 38 (2d Cir.2000), we exercise our discretion in this case to consider this argument in the first instance in order to minimize inefficiency and conserve judicial resources. This question is a pure matter of contract interpretation, and no facts are in dispute. Contracts are construed to give the intention of the parties effect, so an unambiguous contract must be enforced according to the plain meaning of its terms. Cont'l Ins. Co., 603 F.3d at 180 (internal quotation marks omitted). If we find, as we do here, that the contract is unambiguous, we may then award summary judgment. Int'l Multifoods Corp., 309 F.3d at 83 (internal quotation marks omitted). The AOD says in the section outlining the $25 million in disgorgement and civil penalties: MBIA agrees that it shall not ... seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to, payment made pursuant to any insurance policy, with regard to any or all of the amounts payable pursuant to this Assurance. J.A. at 338-39. The AOD then, in a separate section, goes on for six pages to discuss the requirements of the IC review, for which MBIA agreed to pay, with no limitation on MBIA's ability to seek or obtain reimbursement. That section states that the IC's compensation and expenses shall be borne exclusively by MBIA, and shall not be deducted from any amount due under the provisions of this Assurance. Id. at 344. The plain terms of the AOD fix the limitation on reimbursement to amounts due under the AOD. An amount is the sum total to which anything mounts up or reaches in number or quantity. 1 Oxford English Dictionary 411 (2d ed. 1989). Amounts relate here to the amounts laid out in the contract: $10 million in disgorgement and $15 million in civil penalties, not to unspecified compensation and expenses incurred by an IC. Moreover, IC-related expenses necessarily are not a set amount due because the IC, at the time the agreement was signed, was set to do work in the future. Finally, the AOD itself distinguishes IC expenses from any amount due under the AOD when it says that IC expenses may not be deduced from the any amount due. It also contains two separate sections dealing with separate topics  first, a monetary payment amount for disgorgement and civil penalty and, second, an open-ended commitment to engage the IC to determine whether MBIA engaged in misconduct  but the reimbursement limitation appears only in the first section. Given the terms of the AOD and its structure, we conclude that the AOD does not preclude MBIA's seeking reimbursement for IC-related costs. Although it merely confirms our conclusion, it is instructive that the IC ultimately determined that MBIA did not engage in misconduct with respect to the Capital Asset and U.S. Airways transactions. If the IC had concluded otherwise, liability would have been outstanding under the AOD, and any agreement as to payment for such liability could have included a restriction on MBIA's ability to obtain reimbursement. Absent a prohibition on obtaining reimbursement for these costs, MBIA may seek coverage for them. Indeed, MBIA is entitled to coverage for costs related to the IC's review because the IC investigation was a covered investigation cost under the policies. The IC component was a thorough investigation of the claims relating to the Capital Asset and U.S. Airways transactions and falls within the definition of Investigation Costs under the policies.