2015 Pa. LEXIS 1551 (Pa. July 21, 2015)
The Supreme Court of Pennsylvania has held that an insured defended under a Reservation of Rights may agree to settle with a tort claimant absent its insurer’s consent without risking forfeiture of rights to indemnity so long as the settlement involved a covered claim and the amount is reasonable, non-collusive and within policy limits. Babcock & Wilcox Co. v. American Nuclear Insurers, 2015 Pa. LEXIS 1551 (Pa. July 21, 2015). There was no issue about reimbursement of defense costs; those had been paid by the insurer.
The case arose in the context of hundreds of radiation exposure claims resolved for the aggregate sum of $80 million. Prior to settlement approximately $40 million had been spent on defense under eroding liability policies with remaining limits of $280,000,000.00. Settlement was reached while a declaratory judgment action was pending. Under the policies a decision to settle rested exclusively with the insurer which “may make such investigation, negotiations and settlement of any claim or suit as they deem expedient.” The policies did not cover “liability assumed by the insured under contract.” And the policies included an assistance and cooperation clause which provided that the insured “shall not, except at his own cost, make any payments, assume any obligations or incur any expense.”
The insured successfully pursued an action for reimbursement of the settlement paid. The trial judge determined that the settlement was for covered claims and a jury found the amount paid was fair, reasonable and at arm’s length. The insurance company argued that settling without its consent materially breached an express obligation under the insurance contract, the breach should relieve any obligation to fund the settlement, and it could be responsible for payment only if found to have acted in bad faith by refusing to settle.
The Supreme Court affirmed the trial verdict. The majority held an insured defended under a Reservation of Rights may, despite control of settlement provisions running to the insurance company, enter into a settlement agreement and thereafter recover the full amount paid so long as the insured proves that: (1) there is coverage for the settled claim; and (2) the settlement sum was fair, reasonable and non-collusive. To deflect criticism that its decision means an insurer is now open to a claim of reimbursement even where it has not breached any duty under the insurance contract, the Supreme Court fashioned a modified lack-of-good-faith / bad-faith test that permits a jury to find a breach by proof the insured’s decision to settle was fair, reasonable and non-collusive. Two dissenting justices argued that under existing precedent an insured defended under a Reservation of Rights may not unilaterally settle absent bad faith on the part of the insurance company.
The Court unanimously reversed an earlier ruling by the Superior Court which adopted the “Insured’s Choice Test” borrowed from the Florida case of Taylor v. Safeco Insurance Co., 361 So. 2d 743 (Fla. Dist. Ct. App. 1978). Under the Insured’s Choice Test, an insured may reject a defense under a Reservation of Rights, furnish its own defense either pro se or through independent counsel, and settle the underlying claim under terms it believes best. If coverage is found to apply the insured may recover defense costs and the settlement amount to the extent fair, reasonable and non-collusive. The Court reaffirmed the principle that an insured does not have the option of rejecting an insurer’s defense under a Reservation of Rights because to do so [in the absence of insurer bad faith or a conflict of interest] would constitute a breach of the insurance policy and in consequence of the breach releases the insurer from the duty to provide coverage. All justices also reaffirmed existing precedent to the effect that an insurance company has the right to defend under a Reservation of Rights, that such action may be taken unilaterally, and that a declaratory judgment action is appropriate to avoid the risk of potential bad faith or an inept defense which might expose the insurer to payment at the conclusion of the case.
Sean L. Corgan of Ricci Tyrrell Johnson & Grey was invited to be a guest speaker at The Drexel Law School co-op program’s Supervisor Roundtable on September 11, 2015. The topic for this Roundtable discussion is Best Practices in Supervision and Mentoring.
The law firm of Ricci Tyrrell Johnson & Grey has been an active partner in the Drexel Law School co op program. In the Fall of 2014 and Summer of 2015, Drexel Law Students have interned at Ricci Tyrrell Johnson & Grey under the supervision of Mr. Corgan.
Mr. Corgan has been asked to be a member of panel of co-op supervisors to discuss their respective supervision practices.
The Philadelphia Bar Association will hold its Bench-Bar & Annual Conference on Friday, Oct. 16 and Saturday, Oct. 17 at Borgata in Atlantic City.
The Bench-Bar & Annual Conference offers an opportunity for Philadelphia barred attorneys and members of the judiciary to meet and discuss important legal topics and recent court decisions. It is also an opportunity to earn Continuing Legal Education (CLE) credits through unique course offerings.
William J Ricci of Ricci Tyrrell Johnson & Grey was invited to be a member of the Faculty at the Bench Bar & Annual Conference this year. He, along with Lawrence E. Bendesky, Esquire and Honorable John M. Younge of the Philadelphia Court of Common Pleas, Civil Division will do a course presentation regarding the 2014 Supreme Court decision, Tincher v,. Omega Flex, 64 A.3d 626 (PA. 2014) and its impact on Product Liability Law in Pennsylvania.