Pennsylvania Supreme Court Adopts “Reasonableness” Standard for Enforcing Cooperation Provision When Insurer Breaches its “Duty to Settle”

The Pennsylvania Supreme Court has held that a group of insureds could recover from their insurers for a settlement that was “fair, reasonable and non-collusive” regardless of whether the insureds obtained the insurers’ consent as required by the policies and regardless of whether the insureds failed to show that the insurers acted in bad faith. The Babcock & Wilcox Co. v. Am. Nuclear Insurers, No. 2 WAP 2014 (Pa. July 21, 2015).

The insureds, operators of nuclear facilities, were sued by hundreds of claimants alleging that their facilities had released radioactive or toxic materials. The insureds sought coverage for the suits, and their insurers agreed to defend them subject to a reservation of rights. Over the insurers’ objection, the insureds ultimately settled the outstanding claims within policy limits. The insurers refused to fund the settlement, maintaining that the insureds breached the policies’ cooperation clause by settling without the insurers’ consent.

In the coverage litigation that followed, the court held that the insureds could recover for the settlement from their insurers provided that the settlement was for covered loss and was “fair, reasonable, and non-collusive.” The court began its analysis by reviewing Pennsylvania case law and surveying different approaches utilized by courts across the country, and it ultimately adopted a standard permitting settlement without an insurer’s consent even short of insurer bad faith. In so doing, the court adopted what it called a “fair and reasonable standard limited to those cases where an insured accepts a settlement offer after an insurer breaches its duty by refusing a fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case….” Expounding on that framework, the court “observe[d] that a determination of whether the settlement is fair and reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.” The court stated that reasonableness would be determined from whether the settlement was “fair and reasonable from the perspective of a reasonably prudent person in the same position of [the insureds] and in light of the totality of the circumstances.”

The court identified several limitations to its ruling, however. First, the court noted that “not all reservations of rights are equal,” and that “[p]arties and courts may need to consider whether a particular reservation of rights justifies diverging from the contract’s cooperation clause,” suggesting that the “standard” set forth in this decision may not apply to cases with different facts, circumstances, and policy language. In addition, the court expressly noted that an insurer’s liability for breaching the duty to settle would be limited to policy limits, concluding that an insurer could not be liable for extra-contractual liability absent bad faith. Finally, the court noted that an insurer’s obligation for settlements would be for settlements that actually represented covered loss under the relevant policy.

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