High Court Allows Insureds to Settle Without Insurer Consent
An insured does not have to demonstrate bad faith in order to settle certain claims without its insurance company’s consent, the state Supreme Court has ruled, thereby reinstating an $80 million settlement in personal injury actions against a nuclear facility owner.
The court’s ruling in Babcock & Wilcox v. American Nuclear Insurers reversed a Superior Court decision that found an insured could only settle a claim being defended under a reservation of rights by the insurer if the insured could demonstrate the insurance company was acting in bad faith.
Rather, the Supreme Court has now adopted the standard that was employed by the Allegheny County jury in the case, which found Babcock & Wilcox’s settlement was “‘fair and reasonable from the perspective of a reasonably prudent person in the same position of [insureds] and in light of the totality of the circumstances,'” Justice Max Baer said for the majority.
That is the “standard which we adopt herein as the proper standard to apply in a reservation of rights case where an insured settles following the insurers’ refusal to consent to settlement,” Baer said in the case of first impression.
Justice J. Michael Eakin wrote a concurring and dissenting opinion joined by Chief Justice Thomas G. Saylor in which he said a showing of bad faith should be required. Eakin agreed the Superior Court’s ruling should be reversed, but only to be sent back for a determination of whether American Nuclear Insurers acted in bad faith in refusing to settle.
Eakin said the majority wrongly distinguished Babcock & Wilcox from the court’s precedent in the 1957 case of Cowden v. Aetna Casualty & Surety, which found an insurer cannot be held liable for exercising its right not to settle unless it acted in bad faith.
“The law is clear that the parties to an insurance contract must act in accordance with the terms of that contract, and an insurer owes its insured a duty of ‘the utmost good faith,'” Eakin said. “In this case, there has been no determination about whether ANI acted reasonably when it decided to defend the underlying litigation rather than settle, but it is apparent—as long as ANI acted in good faith—it was within its rights to do so.”
In a footnote to the majority opinion, Baer responded to the dissent, noting a higher burden of proof of bad faith is appropriate when an insured seeks coverage for an amount in excess of the policy limits. But Baer said the lower standard of proof adopted in this case is proper when the insurer’s liability is confined to the previously contracted policy limits. In Babcock & Wilcox, the $80 million settlement was substantially less than the $320 million in potential coverage, Baer said.
The underlying case is more than 20 years old, filed as a federal class action in 1994 against Babcock & Wilcox and Atlantic Richfield Co. by more than 500 plaintiffs claiming to have suffered bodily injury and property damage from the emissions from two B&W nuclear facilities in Pennsylvania. A 1998 jury trial of eight test cases resulted in an initial verdict of $36 million, but a new trial was ordered over evidentiary issues, Baer said.
ANI was defending B&W under a reservation of rights, asserting the policy might not have covered damages not caused by nuclear energy hazard or damages in excess of the policy limits. ANI refused consent to any settlement in the case, concluding it had a strong likelihood of a defense verdict, Baer said. Babcock & Wilcox and Atlantic Richfield ultimately settled the cases for a combined $80 million in 2008 and 2009 and sought reimbursement from ANI. The insurer cited to the policy’s settlement consent clause in arguing against reimbursement.
When the matter got to the Superior Court, it weighed both the Cowden bad-faith standard and the fair and reasonable standard outlined in a 1987 Arizona case United Services Auto Association v. Morris, which said insureds can be reimbursed for settlements the insurance company did not consent to if they were fair and reasonable and entered in good faith.
The Superior Court went with a third option that both parties “vehemently” opposed, Baer said. Under the test, when an insurer defends under a reservation of rights, the insured has two options. It can accept the defense and remain unqualifiedly bound by the consent-to-settle provision of the policy, or it can decline the insurer’s provision of a qualified defense and conduct its own defense with its own counsel retained at the insured’s expense. Under the second option, if it is found the insurer owes coverage, the insured can recover the defense costs and the settlement costs if they are fair, reasonable and noncollusive, Baer said.
But Baer said the Supreme Court was rejecting that test as unworkable under Pennsylvania law. As the parties noted, Pennsylvania law does not give an insured the option of rejecting an insurer’s defense because that would constitute a breach of the policy, thereby releasing the insurer from coverage obligations, Baer said.
Traci Rea of Reed Smith filed an amicus brief on behalf of trade group United Policyholders in support of Babcock & Wilcox. She said the Supreme Court’s ruling Tuesday holds that, under a situation of a reservation of rights, an insured can agree to settle without forfeiting coverage up to the policy limits if the settlement was fair, reasonable and noncollusive.
“It’s a ruling that I think balances the interests of both the insurance carriers and the policyholders,” Rea said, adding it preserves the bargain that was struck when the policy was purchased.
Rea said this issue comes up “all the time,” but there was never a clear standard. She said the court’s ruling provides that clarity and may help other courts around the country that are deciding similar cases.
What the ruling doesn’t do, Rea said, is give policyholders free reign to handle the case however they want. The cooperation clause in most policies requires the insured to cooperate with the carrier. When a settlement comes in, the insured has to communicate it to the insurer and seek consent.
“It’s only after the insurance carrier breaches its obligation of fair dealing” by refusing a settlement that is in the best interest of the policyholder that the policyholder can then settle without consent under this new standard, Rea said.
Thomas M. Reiter of K&L Gates represented Babcock & Wilcox and declined to comment on the ruling.
Andrew Amer of Simpson Thacher & Bartlett in New York represented ANI and did not return a call seeking comment.