Free At Last: PA Supreme Court Frees Policyholders From Consent To Settlement Provisions

free at last

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.

Questions? Let me know.

One Man’s Cow Manure is Another’s Liquid Gold: The Wisconsin Supreme Court Dumps on Policyholders

cow goldGuest Blogger: Emily Breslin Markos, Esq., Weisbrod Matteis & Copley PLLC

The Wisconsin Supreme Court recently held that cow manure used to fertilize a farm was a “pollutant” triggering the pollution exclusion in a farmer’s insurance policy. See Wilson Mutual Insurance Company v. Falk (Dec. 30, 2014). The Wisconsin Department of Natural Resources (“DNR”) advised the farmer that manure used as fertilizer had contaminated neighboring wells. The DNR cleaned up of the neighboring wells, and sought reimbursement from the farmer.

The farmer sought coverage under two farm-owner insurance policies. The insurer, Wilson Mutual, then filed a declaratory judgment action to determine whether the alleged contamination was covered by the policies. The central question before the Court was whether cow manure used to fertilize farm fields was a “pollutant” falling within the exclusion for bodily injury or property damage which results from the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” into or upon land, water or air. Id. at 6.

The trial court found that the manure triggered the pollution exclusion but the court of appeals reversed, holding that a reasonable farmer considers cow manure to be “liquid gold,” and not a pollutant.

The Wisconsin Supreme Court agreed with the trial court, and held that a “reasonable insured would consider manure that seeped into a well to unambiguously be a pollutant.” Id. at 18. The Court had some precedent for this holding, the Wisconsin Supreme Court having concluded previously that bat guano can be a pollutant, despite its potential beneficial use as a fertilizer.

The Court noted that while “to a reasonable farmer” manure is generally not a pollutant under the test, manure “in relation to a well” is a pollutant. Id. at 23. The analysis of whether manure is a pollutant had to take place in the context of the occurrence at issue. Thus, the Court held that “manure is a unique and largely undesirable substance commonly understood to be harmful when present in a well.” Id. at 25.

The news wasn’t all bad for the farmer. A separate policy provision under the incidental coverages section provided that Wilson Mutual would indemnify the farmer up to $500 for each occurrence of damage to the property of others. The pollution exclusion did not apply to this provision. The provision additionally required Wilson Mutual to defend the farmer for claims of property damage. This actually entitled the farmer to a full defense for all claims because “[w]here an insurer’s policy provides coverage for even one claim made in a lawsuit, that insurer is obligated to defend the entire suit.” Id. at 39. Of course, the Court noted that, practically speaking, Wilson Mutual could extinguish its duty to defend and indemnify by settling each claim at the policy limit of $500.

Overall, the case serves as an important reminder that the interpretation of insurance policies is often subjective and largely dependent on context. One man’s pollutant is quite often another’s liquid gold.

Emily Breslin Markos is an associate at Weisbrod Matteis & Copley PLLC, where she focuses her practice on commercial litigation and insurance coverage counseling and litigation for policyholders. She received a B.A. from Brywn Mawr College in 2004 and graduated magna cum laude from Rutgers University School of Law – Camden in 2010. She can be reached at or 267.262.5589.

Three’s a Crowd: Adventures in the Tripartite Relationship

An insurance company’s duty to defend its policyholder is at least as important as its duty to indemnify — if not more so. Indeed, it has been estimated that 55 cents out of every claim dollar is paid for defense.

The not insignificant expense associated with defending claims has caused insurers to seek greater control over the defense of claims asserted against policyholders. With increasing frequency, insurers are insisting on the use of panel defense counsel, the adherence to strict billing guidelines and the pre-approval of even the most basic costs. The resulting tensions have led defense counsel to seek guidance from their bar associations and policyholders to seek relief from the courts. Those tensions are exacerbated even further when conflicts of interest between insurers and policyholders arise.

This article discusses the nuances of the tripartite relationship involving insurers, policyholders and defense counsel and examines the current state of the law governing that relationship.

I. The Policyholder Is Always The Client

Even when an insurer is defending an action without reservation, the policyholder remains the client of the defense counsel retained and paid by the insurer. In certain jurisdictions, however, the insurer is also considered the client when a tripartite relationship is formed. Notwithstanding whether the insurer is also considered the client, insurers will invariably insist that they are entitled to control that defense, especially when they are defending without reservation.

According to insurers, the right to control will include the right to select defense counsel, approve all tactical decisions and settle any claim within policy limits. At times, however, the policyholder and insurer may have divergent views on how to defend a case or the policyholder may have business reasons for not wanting to settle a case within policy limits. In those situations, the Model Rules of Professional Conduct for attorneys provide necessary guidance for defense counsel and their clients.

Rule 1.2(a) of the Model Rules dictates that the lawyer must consult with and abide by a client’s decisions concerning the representation. Moreover, Model Rule 5.4(c) provides that a lawyer “shall not permit a person who recommends, employs or pays a lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering . . . legal services.” Thus, irrespective of whether the insurer is also deemed the client, defense counsel must consult with the policyholder, and not permit the insurer to interfere with counsel’s judgment in defending the interests of the policyholder.

II. An Insurer May Not Insist On Unfettered Compliance With Its Billing Guidelines   

In an effort to reduce litigation costs, insurers are increasingly insisting that defense counsel comply with stringent billing guidelines. Those guidelines typically impose strict reporting requirements and require defense counsel to seek prior insurer approval of any significant costs to be incurred. The insurer’s interest in reducing costs will, in many instances, diverge from the policyholder’s interests in obtaining the best possible defense.
When compliance with insurer-imposed billing guidelines will compromise the defense, defense counsel must protect the policyholder’s interests. In those circumstances, defense counsel must first consult with both the insurer and the policyholder. If the insurer is unwilling to modify or withdraw the limitation a billing guideline places on the defense, and the policyholder is unwilling to accept that limitation, Rule 1.7(b) requires that defense counsel withdraw from representation of both the policyholder and the insurer. Rule 1.7(b) provides, in pertinent part, that “[a] lawyer shall not represent a client if the representation of that client will be materially limited by the lawyer’s responsibilities to another client or to a third person . . . .”

A specific cost-reduction mechanism employed by insurers, which has come under fire recently, is the use of third-party auditors to review defense counsel bills. Such “legal bill audits,” typically involve an examination of hourly rates charged, time spent and defense counsel’s work product to determine the reasonableness of the amounts charged. In the usual case, defense counsel may share this type of information with the insurer because such sharing is either required by the insurance policy or it is permissible in those jurisdictions in which the insurer is also considered the client of defense counsel. When the disclosure would affect a material interest of the policyholder, however, defense counsel may not share such information with the insurer, absent informed consent from the policyholder. For example, defense counsel are usually prohibited from disclosing information to the insurer that could adversely affect the policyholder’s coverage under the insurance policy at issue. An apt example was provided by the Pennsylvania Bar Association:

Generally, an attorney representing an insured need only inform the Insurer of the information necessary to evaluate a claim. For example, assume an attorney represents an Insured in a premise liability slip and fall. During the course of the representation, the attorney discovers that the subject property is a rental property, not a residential property as set forth in the policy.
Although this information may radically affect coverage, the attorney is prohibited from releasing this information to the Insurer or any other third parties. In the foregoing hypothetical, the attorney would simply inform the Insurer of the nature of the injuries claimed by plaintiff and the circumstances surrounding the incident. The insurer would have all of the information necessary to evaluate the value and basis for the claim and the Insured’s confidentiality would be protected.

Pa. Bar Assoc. Comm. On Legal Ethics and Prof. Resp. Informal Op., No. 97-119, 1997 WL 816708 at *2 (Oct. 7, 1997).

Moreover, the majority of jurisdictions have concluded that defense counsel may not disclose confidential information to a third-party auditor, absent the policyholder’s informed consent. Unlike the case with insurers, disclosure of such information to third-party auditors, with whom defense counsel have no employment or contractual relationship, may result in a waiver of any applicable privilege. In order to secure informed consent from the policyholder, defense counsel must discuss the nature of the disclosures sought by the third-party auditor as well as the consequences of disclosure (i.e., potential waiver of privilege) and non-disclosure (i.e., insurer may view non-disclosure as a breach of the duty to cooperate under the insurance policy).

III. When Conflicts Arise, The Insurer Must Relinquish Control Over The Defense 

When a conflict of interest between the insurer and policyholder arises, an insurer must typically relinquish any right to control the defense, including the right to select defense counsel. “It is settled law that where conflicts of interest between an insurer and policyholder arise, such that a question as to the loyalty of the insurer’s counsel to that policyholder is raised, the policyholder is entitled to select its counsel, whose reasonable fee is to be paid by the insurer.” St. Peter’s Church v. American Nat. Fire Ins. Co., No. 00-2806, 2002 WL 59333 at *10 (E.D. Pa. Jan 14, 2002).

A classic example of a conflict necessitating the retention of independent counsel may arise where the insurer reserves the right to deny coverage for certain of the underlying claims, but not others. In that situation, an insurer “would be tempted to construct a defense which would place any damage award outside policy coverage.” Public Serv. Mut. Ins. Co. v. Goldfarb, 442 N.Y.S.2d 422, 427 (N.Y. 1981).

Another prime example of a conflict sufficient to cause an insurer to relinquish the control over the defense is where the insurer lacks the economic motive for mounting a vigorous defense. This situation may arise where the underlying claimant prays for damages that are well in excess of the insurer’s policy limits. See, e.g., Emons Indus., Inc. v. Liberty Mut. Ins. Co., 749 F. Supp. 1289, 1297 (S.D.N.Y. 1990).

IV. Conclusion

The tripartite relationship between the insurer, policyholder and defense counsel provides fertile ground for confusion and abuse. Even when an insurer defends a matter without reservation, the policyholder remains the client and can properly object to any limitations placed on the defense by the insurer. If defense counsel reasonably believes that an insurer-imposed limitation will materially impair the defense, defense counsel must withdraw from representing both the insurer and the policyholder.

When a conflict of interest between the insurer and policyholder arises, the insurer must relinquish control over the defense and the policyholder is entitled to select defense counsel. Such a conflict may arise where an insurer reserves the right to deny coverage for only certain of the underlying claims, or where the insurer does not have an economic incentive to defend vigorously, or where the insurer could construct a defense placing any damage award outside of coverage.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.