In The Babcock & Wilcox Co. v. Am. Nuclear Insurers, No. 525 WDA 2012, 2013 Pa. Super. LEXIS 1630 (Pa. Super. Ct. July 10, 2013), the Superior Court of Pennsylvania addressed the circumstances under which an insured, who does not have consent from its insurer, may settle a case without violating the insured's duty to cooperate when the insurance policy contains Consent to Settlement Clauses. This issue is important because almost all commercial insurance policies contain Consent to Settlement Clauses.

American Nuclear Insurers (ANI) provided insurance coverage to The Babcock & Wilcox Co. (B&W) for nuclear hazards at two nuclear fuel processing facilities. The insurance policy at issue included Consent to Settlement Clauses, which read:

  • [T]he companies may make such investigation, negotiation and settlement of any claim or suit as they deem expedient[;] 
  • The insured shall not, except at its own cost, make any payment, assume any obligation or incur any expense[;] 
  • This policy does not apply ... to liability assumed by the insured under contract, other than an assumption in a contract with another of the liability of any person or organization which would be imposed by law on such person or organization which would be imposed by law on such person or organization in the absence of an express assumption of liability[; and/or] 
  • No action shall lie against the companies or any of them, unless, as a condition precedent thereto ... the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the companies[.]

Plaintiffs claiming injuries due to radiation exposure brought claims against B&W. ANI paid for independent defense counsel to represent and defend B&W under a reservation of rights. B&W, acting over ANI's objections, entered into a settlement with hundreds of plaintiffs for $80 million plus pre-judgment interest of over $15 million (which was less than the insurance policy's limits).

Following the settlement with the injured claimants, B&W sought reimbursement for the full amount paid to settle with the plaintiffs. ANI argued that it had no obligation to reimburse B&W because B&W violated the Consent to Settlement Clauses. At the trial court level, the court ruled that B&W would be entitled to reimbursement if the settlement was determined to be fair, reasonable, and non-collusive. Thereafter, a jury determined that the settlement was fair, reasonable, and non-collusive, and, the court entered judgment against ANI and in favor of B&W for $80 million plus prejudgment interest of over $15 million. ANI then appealed this judgment.

In this appeal, a three-judge panel of the Superior Court, in a case of first impression, evaluated the appropriate standard for determining whether an insured is obligated to honor Consent to Settlement Clauses in an insurance contract when an insurer tenders a defense subject to a reservation of rights. The three-judge panel agreed that the trial court's ruling should be reversed and the judgment should be vacated, but there was a 2-1 split regarding the appropriate standard the trial court should apply to evaluate whether B&W can recover its settlement costs. The majority adopted the rule set forth in Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. Ct. App. 1998) and its progeny.1 Under the Taylor approach, an insured's obligation to honor Consent to Settlement Clauses depends on whether the insured accepts an insurer's tender of a qualified defense. If the insured accepts a defense subject to a reservation tendered by the insurer, the insured is bound to the terms of the Consent to Settlement Clauses and the insurer retains full control of the litigation. Under these circumstances, if an insurer objects to settlement, the insurer is only responsible for the settlement costs if the insured can show that the insurer's refusal to accept the settlement constituted bad faith. On the other hand, if the insured declines an insurer's tender of a qualified defense and furnishes its own defense, the insured retains full control of the litigation. This includes control over a settlement decision, and the insured may recover its fair and reasonable defense and indemnity costs from the insurance company, even when the insurer objects to settlement, if the settlement was entered into in good faith.

The Superior Court reversed the trial court's ruling, vacated the judgment, and remanded the case to the trial court with instructions to follow the Taylor standard and determine whether: 1) B&W had rejected ANI's offer of a defense under a reservation of rights; and, if so, 2) whether ANI had acted in bad faith by refusing to settle or participate in the settlement negotiations. This decision set forth a new standard in Pennsylvania for evaluating whether an insured may settle a case over an insured's objections when the insurance policy contains Consent to Settlement Clauses. Given the prevalence of Consent to Settlement Clauses, it is important for insureds and insurers to understand the implications of the Superior Court's decision. We will continue to monitor this case and provide updates if B&W appeals this decision.

Footnote

1 The minority disagreed with the Taylor approach. Instead, the minority found that the Pennsylvania Supreme Court's decision in Cowden v. Aetna Cas. & Surety Co., 134 A.2d 223 (Pa. 1957) supplied the applicable rule and the majority should not have looked to Florida law. Specifically, the minority argued that under Cowden, B&W was required to honor the Consent to Settlement Clauses unless B&W could establish that ANI acted in bad faith under Cowden.

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