COVID-19 Resource Center

November 28, 2015

Reservation of Rights Does Not Reserve Insurer’s Right to Consent to Settle

The Pennsylvania Supreme Court in Babcock & Wilcox v. American Nuclear Insurers, 2015 Pa. LEXIS 1551 (July 21, 2015), a case of first impression, addressed the issue of whether an insured forfeits insurance coverage by settling a tort claim without the consent of its insurer, when the insurer defends the insured subject to a reservation of rights, asserting that the claims may not be covered by the policy.

Hundreds of class action plaintiffs brought suit against Babcock & Wilcox and ARCO (insureds), who were insured under a policy issued by American Nuclear Insurers (ANI). The plaintiffs claimed injury caused by emissions from nuclear facilities owned by the insureds. ANI agreed to provide a defense subject to a reservation of rights based on coverage issues related to certain aspects of the claims. A jury trial resulted in a verdict of over $36 million. A new trial was granted due to evidentiary issues relating to, inter alia, the scientific and medical evidence presented in support of the plaintiffs’ case.

The new trial never occurred as, during the course of litigation, the insureds presented settlement demands to ANI, who denied its consent to settle. Consequently, the insureds settled the class action suit directly with the plaintiffs for a total of $80 million. The potential coverage available under ANI’s policy was up to three times the settlement amount.

The insureds then filed suit against ANI seeking reimbursement of the settlement proceeds they paid. ANI defended the suit on the basis that, under the policy, the insureds were required to cooperate with it and to obtain ANI’s consent settle, which decision was exclusively ANI’s.

Following a trial and appeals, the Supreme Court determined that, if the settlement was fair and reasonable from the perspective of a reasonably prudent person in the same position of the insured and in light of the totality of the circumstances, then the insurer must pay the settlement if within the policy limits and subject to coverage. Under these circumstances, an insured does not have to meet the higher burden of proving that the insurer acted in bad faith in refusing to settle. Indeed, the settlement agreed to between the class action plaintiffs and the insureds was twice the initial jury verdict. ANI, conversely, believed that there was a high likelihood of a defense verdict given the evidentiary rulings following the initial trial.

What It Means to You

As Babcock demonstrates, defending on a reservation of rights, while encouraged, creates a new set of issues. Provided the carrier is notified of the potential settlement, the door is now open for an insured to settle a claim without the insurance carrier’s consent and without forfeiting potential coverage. If challenged, the settlement will be evaluated by a judge or jury to determine whether it was fair, reasonable, and without collusion, a much lesser standard than what is required to establish the carrier’s bad faith in refusing to settle.