Thanks to a recent ruling by the Pennsylvania Supreme Court, policyholders may now settle cases that are being defended by an insurer under a reservation of rights so long as the settlement is fair, reasonable and non-collusive. See Babcock & Wilcox Co. et al. v. American Nuclear Insurers, Case Number 2 WAP 2014 (Pa Sup. Ct., July 21, 2015). In order to recover, policyholders will not have to prove that their insurers acted in bad faith in refusing to settle.
In Babcock & Wilcox, the insureds sought indemnification for an $80 million settlement that was paid to underlying plaintiffs who claimed injurious exposure to radiation. The insurers, who were defending under a reservation of rights, refused to pay the settlement and argued that the insureds’ settlement without the insurers consent breached the following so-called “consent to settlement” clause that is standard in liability policies:
Assistance and cooperation of the Insured. The insured shall cooperate with the companies, and upon the companies’ request, attend hearings and trials and assist in making settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance. The insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.
The insurers argued that the consent to settlement clause grants insurers unilateral authority to settle underlying lawsuits. They argued, therefore, that the insureds breached the insurance policy when it settled without the insurers’ consent and that the insurers should not be liable for the settlement amount absent proof that the insurers acted in bad faith in refusing to settle.
In rejecting the insurers’ argument, the Pennsylvania Supreme Court held that, “if an insurer breaches its duty to settle while defending subject to a reservation of rights and the insured accepts a reasonable settlement offer, the insured need only demonstrate that the insurer breached its duty by failing to consent to a settlement that is fair, reasonable, and non-collusive. . . .”
In so ruling, the Court left intact the standard applicable when an insurer refuses to settle and the insured is hit with a verdict that exceeds policy limits. In those cases, “if the insured establishes that the insurer breached its duty of good faith by failing to settle, the insurer is held responsible for the entire verdict, which resulted from the bad faith decision not to settle, even if it far exceeds policy limits.”
Quoting another court, the Pennsylvania Supreme Court reasoned that, “[t]he bad faith standard is simply not appropriate here, where the issue is one of contractual liability as opposed to extra-contractual liability.” Accordingly, the Supreme Court held that the court below erred “by requiring an insured to demonstrate bad faith when the insured accepts a settlement offer in a reservation of rights case.”
This is an extremely important victory for policyholders in that it will free them to wrest control of underlying cases and settle them without insurer consent. Coverage for the amounts paid in settlement will be preserved so long as the settlement is fair, reasonable and non-collusive; proof of insurer bad faith will not be required.
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