Pennsylvania Supreme Court Holds That Insured Did Not Forfeit Coverage By Settling Without Insurer's Consent Even Though Insurer Was Defending Under A Reservation Of Rights

In an issue of first impression, the Pennsylvania Supreme Court has held that an insured does not forfeit coverage by entering into a fair, reasonable, and non-collusive settlement without the insurer's consent when the insurer is defending the insured under a reservation of rights and the insurer has declined to settle. Babcock & Wilcox Co. v. American Nuclear Insurers, — A.3d — (2015), 2015 WL 4430358, Case No. 2 WAP 2014 (Pa. July 21, 2015).

The insureds were sued in a class action over alleged bodily injury and property damage caused by emissions from nuclear facilities. Id. at *1. The insurer (which issued $320 million in coverage) defended under a reservation of rights, asserting that the policy did not cover damages not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages. Id. After an initial verdict against the insureds of $36 million, a retrial was granted. Id. The insurer refused consent to any settlement offers, believing the case could be successfully defended. Id. at *2. The insured then proceeded to settle with the class action plaintiffs for $80 million. Id.

In the ensuing declaratory judgment action, the insurer argued that there was no coverage for the settlement because the insured had violated the consent to settlement clause. Id. The insured urged the trial court to adopt United Services Auto. Ass'n v. Morris, 154 Ariz. 113 (1987), which held that, when the insurer has reserved rights, it should be liable for an insured's settlement as long as coverage applies and the settlement is "fair and reasonable" and entered into in good faith. The insurer argued that insurers should only be responsible for such a settlement under Cowden v. Aetna Cas. And Sur. Co., 389 Pa. 459 (1957), which held that an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits. The trial court adopted the test advanced by the insureds and a jury determined that the insured's settlement with claimants was fair and reasonable. Id. at *3. On appeal, the intermediate appellate court adopted an entirely different test (requiring the...