Pennsylvania Supreme Court Allows Insured To Settle Without Consent Of Insurer Defending Under Reservation Of Rights

Bad faith claims can have major consequences for insurers. Stopping the Setup gets into the minds of plaintiffs' lawyers and addresses the ways they try to create bad-faith claims against insurance companies. This overview gives you gives you 10 tips for avoiding bad faith failure to settle claims in matters where exposure potentially may exceed policy limits. Over the course of the next few weeks, our insurance team will delve deeper into each of these steps, providing insights into ways insurers can identify the bad-faith "set up", stop it or challenge it in court.

Whether you are a claims professional or in-house or outside counsel, whether your focus is on cybersecurity, construction, professional liability, or anything in between, Dentons will provide you with the tools you need to stop the bad faith setup.

Finally, there is a ruling in an important Pennsylvania case that has been making its way up to that state's highest court in the past year: the Pennsylvania Supreme Court held that an insured does not breach its insurance policy, and therefore forfeit its insurance coverage, by settling a tort claim without the consent of its insurer, when the insurer is defending subject to a reservation of rights—as long as the settlement is fair, reasonable, and non-collusive. Babcock & Wilcox Co. v. American Nuclear Insurers, No. 2 WAP 2014, 2015 WL 4430352 (July 21, 2015).

The Court in Babcock concluded that "the Superior Court erred by requiring an insured to demonstrate bad faith [on the part of the insurer] when the insured accepts a settlement offer in a reservation of rights case." Id. at *16. The Court adopted a variation of the Arizona "fair and reasonable" standard set forth in United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (Ariz. 1987) to hold insurers responsible for settlements within their policy limits made by insureds without consent in cases that meet the following conditions:

The insurer is defending insured under a reservations of rights; The insurer breaches its duty to settle by refusing a fair and reasonable settlement; After the insurer breaches its duty by refusing to settle, insured accepts offer; The policy is ultimately deemed to cover the relevant claims; and The settlement is determined to be fair and reasonable. Babcock, at *16. With this decision, Pennsylvania has joined a growing minority of states that allow...