The Superior Court, in the recent decision of The Babcock & Wilcox Co. v. American Nuclear Insurers, 2013 PA Super. 174 (July 10, 2013), created a new option for insureds who are offered by their insurer a defense subject to a reservation of rights. The Superior Court held that an insured may reject a defense under a reservation of rights, provide and control its own defense and, under certain circumstances, require the insurer to reimburse it for defense costs and any settlement reached or judgment entered against the insured.
The case, which began in 1994, has a convoluted history. The facts shared in this article are streamlined to the extent possible as they relate solely to the Superior Court’s recent decision.
Over 300 residents filed suit in federal court against owners of two nuclear power plants (referred to collectively as “B&W”), claiming personal injuries and property damage as a result of exposure to radioactive emissions from the those plants. The insurers (collectively referred to as ANI) provided a defense to B&W under multiple policies extending several years. During the litigation, the parties agreed to try eight “test cases.” Those plaintiffs prevailed, securing a verdict of approximately $35 million. The federal court subsequently granted a new trial related to evidentiary errors.
Before the new trial took place, a coverage issue arose as to the amount of insurance available to B&W under the ANI policies. Moreover, there was an issue as to whether the insurers were obligated to provide separate counsel for each insured (the B&W defendants comprised the Babcock and Wilcox Company and B&W Nuclear Environmental Services). Before the new trial could take place, ANI filed a declaratory judgment action in state court, alleging it had no duty to provide separate counsel to the insureds. B&W filed its own declaratory judgment action, seeking a declaration regarding the coverage issues and asserting a claim for bad faith.
The Honorable R. Stanton Wettick of Allegheny County bifurcated the claims, issuing an order that the litigation would first solely focus on whether ANI was obligated to provide separate counsel to each insured. Upon consideration of the issues, Judge Wettick entered an order that ANI owed B&W separate representation. Judge Wettick granted ANI’s subsequent motion for reconsideration, but then issued an order indicating he reached the same conclusion as before. He certified the issue for immediate appeal. The Superior Court affirmed Judge Wettick’s decision.
Sometime thereafter, despite being represented by counsel provided by ANI, B&W retained its own counsel who—over ANI’s objection—settled the underlying claims for approximately $80 million. B&W funded the settlement proceeds, which were paid.
B&W sought reimbursement for the $80 million, which ANI refused, arguing that B&W violated the “consent to settle” provisions in the policies at issue (the provisions precluded B&W from settling claims, acceding to any judgment, or interfering with the defense provided by ANI). The trial court was asked to identify the standard that would be used in determining whether ANI had an obligation to reimburse B&W for the settlement funds it paid. B&W argued that the standard should be whether the settlement was reasonable and entered in good faith. According to B&W, ANI breached its duty to consent to a reasonable settlement within the policy limits, which permitted B&W to settle without the insurer’s consent. B&W claimed that reimbursement was required unless the settlement amount was reasonable and non-collusive.
ANI argued that the appropriate standard was enunciated in Cowden v. Aetna Casualty and Surety Co., 389 Pa. 459, 134 A.2d 223 (1957). The court should enforce the “consent to settle” provision (thus denying B&W’s request for reimbursement) unless B&W could establish the following four elements:
(1) There was no real chance of a defense verdict in the underlying matter;
(2) There was little possibility of a verdict or settlement within policy limits;
(3) The insurers’ decision to proceed to trial (rather than settle) was not premised on the belief that there was a good possibility of prevailing; and
(4) The insurers’ decision to litigate rather than settle was made “dishonestly.”
The trial court ultimately concluded that the appropriate standard was whether the settlement was fair and reasonable. The court also found that this was not a case where the verdict was likely to exceed policy limits.
The issue regarding the appropriate standard was appealed to the Superior Court and is subject of that court’s most recent opinion in this matter. The Superior Court canvassed decisions from several states and ultimately adopted the decision Taylor v. Safeco Insurance Company, 361 So.2d 743 (Fla. Ct. App. 1978). It found that in those instances where an insured is offered a defense under a reservation of rights, the insured has two options. The insured can accept the defense with the understanding that it is “unqualifiedly” bound by the terms of the “consent to settle” provision. Under this option, the insurer retains control of the defense, including the right to litigate or settle. The insured’s “sole protection” lies in a bad faith action.
The second option is to reject a defense under a reservation of rights and defend the case on its own or through counsel it retains. The insured retains control of its defense including the option to settle. If it is later determined that the claim is one covered by the insurance policy at issue, the insured may recover from the insurer its defense costs and the costs of settlement, to the extent the costs are fair, reasonable, and non-collusive.
The Superior Court remanded the Babcock and Wilcox case for a determination as to whether B&W had rejected the insurers’ offer to provide a defense, and, if so, whether the insurer acted in bad faith in declining to settle or engage in settlement negotiations.
What It Means to You
Insurers should take this recent decision into consideration. Reservation of rights should include a discussion regarding the enforceability of the consent to settle provision if the insured accepts the defense, along with an option for the insured to reject the defense under a reservation of rights.
The concerns arising from this case are many. If the insured rejects a defense and enters into a settlement agreement with the plaintiff, and assuming that coverage is found to exist, there will likely need to be a hearing to address the issue of whether the settlement is fair, reasonable, and non-collusive. Determining the value of a case is a difficult proposition, and will more likely lead to a range rather than a definitive figure (barring the simple property damage variety). The settlement amount may be rather high and a figure the insurer—had it been fully engaged—would never have paid. But even if the figure is high, the insurer would be obligated to pay, as long as the figure was found to be within the range of reasonable values.
An insured who retains its own counsel may secure one who is incompetent and who fails to maximize the insured’s defenses, resulting in a judgment higher than would otherwise have been entered if the insurer’s attorneys had been involved. An insurer may be saddled with poor effort and the associated result.
In those instances where the insured rejects the insurer’s offer of a defense, the insured may secure counsel whose rate is double or triple what the insurer typically pays, causing the insurer to bear expenses that were not considered during the underwriting process. This is one of many unresolved issues that emerges from the Superior Court’s decision.