Supreme Court Addresses Ability of Insured To Settle Claim Itself When Being Defended Under Reservation of Rights By Liability Carrier

In the case of Babcock & Wilcox Co. v. American Nuclear Insurers & Mutual Atomic Energy Liability Underwriters, 2 WAP 2014 (Pa. July 21, 2015)(Maj. Op. by Baer, J.)(Concurring and Dissenting Op. by Eakin, J.), the Pennsylvania Supreme Court addressed the issue of first impression 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, and asserts that the claims may not be covered by the policy.

The underlying facts involved an insurance carrier that refused to settle a class action claim against its insureds.  The carrier believed in a strong chance for a defense verdict. 

The insured was not of the same opinion and went ahead and negotiated a settlement of the underlying matter with the class action plaintiffs.

The insureds then pursued a reimbursement of the settlement amount paid from the its liability carrier who refused to settle the matter.

After a jury trial on the matter, the jury found that the settlement brokered by the insured was fair and reasonable.

The Superior Court had ruled that an insured could only settle a claim that was being defended under a reservation of rights by the insurer if the insured could demonstrate the insurance company was acting in bad faith.

The Supreme Court reversed and held that an insured does not have to demonstrate bad faith in reservation of rights cases order to settle certain claims without its insurance company’s consent. 

In so ruling the Pennsylvania Supreme Court reinstated an $80 million settlement in personal injury actions against a nuclear facility owner.

The Babcock Supreme Court adopted the standard that was employed by the Allegheny County trial in the case, which found that the insured’s settlement of the case was “‘fair and reasonable from the perspective of a reasonably prudent person in the same position of [insureds] and in light of the totality of the circumstances.’”

The Supreme Court stated that this was the “standard which we adopt herein as the proper standard to apply in a reservation of rights case where an insured settles following the insurers’ refusal to consent to settlement.”  

Anyone wishing to review this Babcock Majority Opinion may click this LINK.

The Concurring and Dissenting Opinion may be viewed HERE.    


Sources:  I send thanks to Don Eodice of Eodice Consulting for bringing this decision to my attention. 

See also, Article: "High Court Allows Insureds to Settle Without Insurer Consent," by Gina Passarella of The Legal Intelligencer (July 22, 2015).