Babcock & Wilcox Co. v. American Nuclear Insurers
131 A.3d 445, 635 Pa. 1 (2015)
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Rule of Law:
When an insurer defends an insured subject to a reservation of rights and breaches its duty by refusing consent to a fair and reasonable settlement of a claim ultimately found to be covered by the policy, the insured may settle the claim without the insurer's consent, and the insurer will be liable for the settlement amount if it is proven to be fair, reasonable, and non-collusive.
Facts:
- In 1994, plaintiffs filed a federal class action lawsuit against Babcock & Wilcox Company (B&W) and Atlantic Richfield Company (ARCO) (collectively, Insureds), claiming bodily injury and property damage from emissions from their nuclear facilities.
- Insureds denied that their facilities released any emissions or that the harm suffered by plaintiffs resulted from their operations.
- American Nuclear Insurers (ANI or Insurer) acknowledged its duty to defend Insureds, but from the outset, it contested whether the policy covered aspects of the claims, defending subject to a reservation of rights.
- ANI asserted in 1994 and again in 1999 that the policy did not cover damages not caused by a nuclear energy hazard, damages exceeding policy limits, claims for injunctive relief and punitive damages, and suggested B&W might have breached its duty to cooperate.
- In 1998, a jury trial for eight test cases resulted in an initial verdict totaling over $86 million against Insureds, but the federal court subsequently granted a new trial due to evidentiary issues.
- Throughout the ongoing litigation, ANI consistently refused consent to any settlement offers presented to it, concluding that the case had a strong likelihood of a defense verdict given the weak evidence for plaintiffs' claims and favorable court rulings.
- Despite ANI's refusal, Insureds ARCO and B&W settled with the class action plaintiffs in 2008 and 2009 for a total of $80 million, which was substantially less than the $320 million of potential coverage available under the policy.
Procedural Posture:
- In 1994, plaintiffs initiated a federal class action lawsuit against B&W and ARCO in federal district court.
- In 1998, a federal jury returned a verdict against B&W and ARCO in initial test cases, but the federal court later granted a new trial due to evidentiary issues.
- Separately, ANI filed a declaratory judgment action in state court against B&W and ARCO to determine coverage issues and alleged breach of contract.
- The state trial court in the declaratory judgment action ruled on certain coverage triggers and determined that B&W and ARCO were entitled to separate counsel.
- The state Superior Court affirmed this declaratory judgment, and the Pennsylvania Supreme Court denied allocatur (further review) of that decision.
- Following their settlement with the federal class action plaintiffs, B&W and ARCO sued ANI in the Allegheny County Court of Common Pleas (state trial court) seeking reimbursement for the $80 million settlement.
- The state trial court initially opined that the Cowden bad faith standard should apply, but upon reconsideration, applied the Morris fair and reasonable standard.
- After a two-week trial, a jury determined that B&W and ARCO's settlement with the plaintiffs was fair and reasonable.
- The state trial court molded the verdict to include prejudgment and post-verdict interest in favor of B&W and ARCO.
- ANI appealed this judgment to the state Superior Court.
- The state Superior Court reversed the trial court's judgment, adopting a new 'Taylor/Insured's Choice Test' and remanded the case for a new trial.
- B&W and ARCO then appealed the Superior Court's decision to the Pennsylvania Supreme Court.
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Issue:
Does an insured forfeit its right to insurance coverage by settling an underlying claim without its insurer's consent, when the insurer has defended the suit subject to a reservation of rights and refused to consent to settlement, if the settlement is fair, reasonable, and non-collusive, and coverage is ultimately found to exist?
Opinions:
Majority - Justice Baer
No, an insured does not forfeit its right to insurance coverage by settling a claim without the insurer's consent, provided the insurer defended subject to a reservation of rights and breached its duty by refusing a fair and reasonable settlement, and the settlement is fair, reasonable, and non-collusive, and coverage ultimately applies. The Court rejected both the Cowden bad faith standard, which requires an insured to prove insurer bad faith to recover excess verdicts, and the Superior Court's unworkable Taylor/Insured's Choice Test. Instead, the Court adopted a variation of the Morris fair and reasonable standard, limited to cases where the insurer defends under a reservation of rights and breaches its duty by refusing a fair and reasonable settlement, thereby exposing the insured to potential responsibility if coverage is ultimately denied. This standard acknowledges the inherent conflict of interest when an insurer defends but disputes coverage, allowing the insured to protect itself by settling reasonably without the higher burden of proving the insurer's bad faith. The burden of demonstrating the settlement's reasonableness, fairness, and non-collusion falls on the insured.
Concurring-in-part-and-dissenting-in-part - Justice Eakin
Yes, an insured should forfeit its right to coverage when settling without the insurer's consent unless the insured proves the insurer acted in bad faith in refusing to settle, as established by the Cowden bad faith standard. While agreeing to reject the Taylor/Insured's Choice Test, Justice Eakin argued that the well-established Cowden standard, which enforces the actual terms of the insurance contract, should apply. A reservation of rights letter, he reasoned, merely reminds the insured of existing contractual provisions and does not constitute a refusal to defend or a breach of contract by the insurer. Therefore, it should not grant the insured permission to bypass the consent-to-settle clause in violation of the policy terms. The Morris fair and reasonable standard, in his view, improperly allows an insured to breach the contract's requirement for insurer consent based on an anticipation of an excess verdict or a belief that the insurer acted unreasonably, undermining fundamental contract principles.
Analysis:
This case significantly alters the landscape of insurance litigation in Pennsylvania, particularly concerning an insurer's duty to defend under a reservation of rights. By adopting a modified Morris fair and reasonable standard, the Pennsylvania Supreme Court recognized the inherent conflict of interest that arises when an insurer defends a claim but simultaneously disputes coverage. This ruling empowers insureds to protect themselves by settling reasonable claims without risking forfeiture of coverage, even if the insurer withholds consent, as long as the settlement is fair, reasonable, and non-collusive. The decision creates a new pathway for insureds to recover settlement costs within policy limits without the higher burden of proving the insurer's bad faith, which was previously required for excess judgments.
