If the carrier denies coverage or provides a qualified defense under a reservation of rights, they may lose the ability to control the defense and settlement. And, the carrier may be responsible to reimburse the insured for both.
If allowed to stand by the PA Supreme Court, the decision in Babcock & Wilcox Company, et al. v. American Nuclear Insurers, et al., 2013 PA Super. 174, 2013 PA Super. will dramatically change the rules for providing a qualified defense under a reservation of rights letter in Pennsylvania. The court viewed the Babcock case as one of First Impression in its review of the insured’s ability to settle a case without the insurer’s consent when the insurer is providing a qualified defense under a reservation of rights letter.
The case involved a class action filed by hundreds of plaintiffs allegedly harmed by radiation from nuclear fuels at plants operated by Babcock & Wilcox.
American Nuclear provided coverage at two Babcock and Wilcox facilities and agreed to provide a defense under a reservation of rights. A trial of eight “test cases” trial resulted a verdict of $33.7 million. The court granted a new trial based on evidentiary errors and that is when a coverage dispute arose regarding the available limits of coverage. Over the objections of American Nuclear, Babcock and Wilcox entered into a settlement and sought reimbursement from American Nuclear.
The consent-to-settle clause in general liability policies holds that the insured is not allowed to enter into a settlement that would bind the insurer without the insurer’s consent. The insurer retains control of the defense and any settlement opportunities. Courts have generally held that any conflict between the rights of the insured to be protected from exposures beyond the limits of available coverage and the desire of the insurer to protect its assets are balanced with the possibility of a bad faith action against the insurer after a verdict in excess of available coverage.
The case law in Pennsylvania on this had been well settled since the PA Supreme court decided Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459 (1957). The court held the consent-to-settle clause was valid unless the policy holder can show by clear and convincing evidence that there was no real chance of a defense verdict; and there was little possibility of a verdict or settlement within policy limits; and the insurance company’s decision to proceed to trial rather than settle was not based on their bona fide belief, predicated upon all of the circumstances of the case, that there was a good possibility of winning; and the insurance company’s decision to litigate rather than settle was made dishonestly.
In the Babcock case, the trial court ultimately held that an insurer’s breach of its duty to consent to a reasonable settlement within available coverage allows the insured to settle without the insurer’s consent and without forfeiting its coverage provided the settlement is reasonable and entered into in good faith. The trial court found essentially no distinction between a defense conditioned on a reservation of rights and a denial of coverage.
On appeal, Superior court adopted an alternate approach and adopted a standard from the Florida courts. In Taylor v Safeco Insurance Company, 361 So. 2d (Fla.Ct. App. 1978), the court held the insurer was obligate to indemnify the insured as long as the settlement was reasonable and not entered into in bad faith, fraudulently or collusively or without any effort to minimize liability. In the majority decision, the Superior Court noted the Taylor case when it wrote,
“The court held that, “[j]ust as the insurer is not required to abandon its contest of a duty to pay as a condition of fulfilling an assumed or admitted duty to defend, the insured is not required to abandon control of his own defense as the price of preserving his claim, disputed by the insurer, that the insurer pay any judgment.” Id. At 745. (citing Bergh v. Canadian Univ’l Ins. Co., 197 So.2d 847, 849-50 (Fla. Ct. App. 1967); Butters, 513 S.W.2d at 425).”
This requires a major departure from the way carriers have traditionally dealt with Reservation of Rights cases. Most insured defendants in personal lines cases do not have the resources necessary to take over the defense and resolve the case with the plaintiff. The story is quite different for commercial and municipal insured entities. Many of these entities not only have counsel on staff or retainer, but also have resources sufficient to handle the defense and resolve the case. When combined with the probability of recovery against the insurer for indemnity and expense, the opportunity may become attractive.
My first reaction was one of amazement. But, as I read into the case further, it makes sense. Under the policy, the insured gives up its right to control in exchange for the good faith of the insurer. But, when coverage is qualified based on facts or policy language, not having that control present a clear conflict which should not be offset only after a verdict which exceeds available coverage.
The insured may still be obligated to litigate the coverage position against the carrier and will be required to prove the reasonableness of the settlement. However, when being provided with a qualified defense the Babcock case opens new alternatives for many insured clients.
Carriers should give careful consideration before issuing a ROR letter and even more thought should there be "push back" from the insured. It will take time for the industry to adopt new best practice standards for the handling of cases after Babcock. Most immediate, is the question of a duty to notify the insured of the right to reject the qualified defense in favor of personal counsel and control. This too may soon be ripe for litigation.