An insured did not forfeit its insurance coverage when it reasonably settled a lawsuit without the insurer’s consent, where the insurer had defended the suit subject to a reservation of rights, the Pennsylvania Supreme Court held in Babcock & Wilcox Co. v. American Nuclear Insurers, __ A.3d __ (No. 2 WAP 2014, filed July 21, 2015). American Nuclear Insurers (ANI) insured nuclear facility owners Babcock & Wilcox Co. and Atlantic Richfield Co. (Insureds) against liability arising from nuclear energy hazards. The plaintiffs in a class action lawsuit begun in 1994 alleged injuries from exposure to radiation emissions from Insureds’ facilities. ANI defended the case under a reservation of rights because it contested whether the policy covered damages not caused by nuclear energy hazards or which exceeded the policy limits. A 1998 jury trial of eight test cases resulted in a verdict of over $36 million. A new trial was granted but never held when settlement discussions ensued. ANI refused several settlement offers because it was confident in obtaining a defense verdict. Nevertheless, Insureds settled the cases for $80 million and sought reimbursement from ANI. ANI refused, citing to a cooperation clause in the policy requiring ANI’s consent to any settlement. The trial court ruled in favor of Insureds, holding that they were entitled to reimbursement because their settlement was “fair and reasonable” and made in “good faith and without collusion.”
On ANI’s appeal, the Superior Court considered competing standards for deciding whether ANI was liable for the settlement amount. Insureds relied on a 1987 Arizona case holding that an insurer may be liable to reimburse a settlement that is fair, reasonable and non-collusive, if coverage is determined to apply. ANI argued that it should be liable only if it acted in “bad faith” in refusing to settle, citing Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223 (Pa. 1957) (holding that insurer must pay judgment in excess of policy limits for its bad faith failure to settle below policy limits). The Superior Court adopted a third approach from a 1978 Florida case that allows an insured to reject an insurer’s defense under a reservation of rights and recover its fair and reasonable costs to defend and settle the case if coverage applies.
The Supreme Court reversed the Superior Court’s decision, holding that its approach was unworkable because an insured cannot reject an insurer’s defense without breaching the policy. Writing for the majority, Justice Baer considered other jurisdictions’ approaches to this issue of first impression. The majority adopted a variant of the “fair and reasonable” standard limited to cases “where an insurer defends subject to a reservation of rights and breaches its duty to settle in a case where the policy is ultimately found to cover the relevant claims.” In such cases, an insured may accept a settlement over the insurer’s refusal where the settlement is “fair and reasonable from the perspective of a reasonably prudent person in the same position of
In a concurring and dissenting opinion, Justice Eakin, joined by Chief Justice Saylor, criticized the majority for relying on out-of-state, non-precedential decisions given the Court’s binding decision in Cowden, which held that an insurer cannot be held liable for exercising its right not to settle unless it acted in bad faith. Justices Eakin and Saylor would remand for further proceedings on that specific issue.