During the pendency of the appeal, the estate filed an amended complaint based solely on a premises liability claim. That complaint alleged that as a business owner, the lounge breached its duty of care to Horton as a business invitee by failing to protect him from an intoxicated patron. The attorney for the estate notified the insurer that if Auto-Owners refused to provide the insured with a defense, the lounge and the estate would settle. The insurer responded that it would not consent to any settlement.

K.C.’s executed the settlement agreement in 1998 and the trial court entered judgment in favor of Horton and against K.C.’s for $300,000. Then, the estate filed this supplemental petition against Auto-Owners seeking the settlement amount from Auto-Owners. The trial court in that matter ruled against the insurer and this appeal followed.

The Court of Appeals of Ohio, Ninth District, noted that the sole assignment of error claimed by the insurer contended that the trial court erred in finding that it denied coverage to K.C.’s. K.C. argued that Auto-Owners denied coverage and so forfeited its right to insist on compliance with its policy terms and conditions requiring Auto-Owners’ consent to any settlement. Specifically, the insured avers that once Auto Owners decided to seek and obtain a judgment that it had no coverage obligations under the policy, it could not prohibit the insured from entering into settlement negotiations with the injured party. The court pointed out that the insurer did indeed defend the insured, albeit under a reservation of rights.

The court said that upon receiving notice of the claim against K.C.’s in the underlying action, the insurer provided a defense, and despite filing a declaratory judgment action, the insurer continued to defend K.C.’s. Because the insurer did not refuse to defend K.C.’s at any point in the underlying action, K.C.’s was not at liberty, and indeed was barred from, entering into a settlement with the plaintiff without the consent of the insurer. As a result, the court found that the trial court erred in finding that the consent judgment was binding on Auto-Owners.

The judgment of the trial court was reversed.

Editor’s Note: The general liability policy declares that the insured will not make a payment, assume any obligation, or incur any expense without the consent of the insurer. The insured in this instance sought to get around this condition by claiming that since the insurer filed a declaratory judgment action seeking a declaration of no coverage, the insurer had forfeited its right to prevent consent judgments.

The Appeals Court found that where an insurer unjustifiably refuses to defend an insured and thus leaves the insured to fend for itself, the insured is at liberty to make a reasonable settlement without prejudice to its rights under the insurance contract. In this case, however, the insurer did defend the insured and its reservation of rights letter and its declaratory judgment action did not leave the insured at liberty to consent to any settlement.