Yes, you read the title of this post correctly. PA insureds being defended under a ROR can now settle their case without insurer consent. If the coverage issues are ultimately resolved against the insurer, so long as the insured’s settlement was “fair and reasonable”, the carrier is stuck with the result. Such is the 3-2 (PA’s Supreme Court is 3 judges short of a full complement because of a variety of scandals) decision in the case of Babcox & Wilcox Company, et al. v. American Nuclear Insurers, et al.

The central facts of Babcox are as follows. Class action lawsuits were filed against Babcox & Wilcox back in the 1990s. These class actions claimed that the plaintiffs had suffered bodily injury and property damage caused by emissions from nuclear facilities owned by Babcox & Wilcox. In response to the lawsuits, American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (collectively “ANI”) agreed to defend Babcox & Wilcox under a reservation of rights. ANI reserved its right to contest indemnity in respect of damages that were not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages.

As the underlying class actions progressed, ANI believed that the cases were defensible because of, among other things, the lack of medical and scientific support for plaintiffs’ claims. ANI thus refused to settle the case at the demands being made. However, Babcox & Wilcox thought otherwise and decided to settle the class actions for a total of $80,000,000 – a high figure but less than the Policy limits of $320,000,000. It appears that the settlement was specific to damages that were covered by the Policy. In light of this, Babcox & Wilcox then demanded that ANI reimburse it for the $80,000,000 settlement. ANI declined and argued that Babcox & Wilcox had breached the Policy’s “consent to settle clause.” It is this argument that the PA Supreme Court has now rejected by holding that “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims”, an insurer is obligated to pay that settlement if the settlement is “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.”

There’s a lot to digest in the opinion (as well as the dissent), but as we told the press, we think this case is a game changer. Insurers are now faced with a no win situation. If they think a coverage issue may someday arise and they don’t reserve and defend, they face the potential of being estopped from raising the defense at a later point in time (or they might be faced with an §8371 bad faith claim for reckless claims handling). However, if a coverage concern is raised, the insurers lose the right to control the settlement negotiations as the insured can, on its own, resolve the case. In this regard, we think case values might skyrocket since a plaintiff no longer has to take a discount on her case because of a fear of coverage concerns. Rather, the plaintiff can settle and then assume the right to contest coverage. If the coverage concerns are ultimately rejected by the court, the insurer will have to pay the “fair and reasonable” settlement amount, which might well be a higher number than what the case otherwise would have settled at. In short, Pennsylvania just became a lot less hospitable to the insurance industry.

For more information about this post please e-mail Bob Cosgrove .