What Are the Rights of an Insured When it Wants to Settle a Case Being Defended Under a Reservation of Rights?
In Babcock & Wilcox Co. v. Am. Nuclear Insurers, 2015 Pa. LEXIS 1551 (Pa 2015) the Pennsylvania Supreme Court was asked to determine what the rights are of an insured when it wants to settle a case being defended under a reservation of rights. This case was a large class-action mass tort that had been going on for over 20 years, which had been defended under a reservation of rights. However, a declaratory judgment action had been resolved favorably to the insured. While the insurer claimed most of its reservations had been rendered moot, there was still a chance that the final verdict would not be covered by the policy.
The insurance carrier believed it had a strong case and could obtain a defense verdict of all claims at trial. Thus, it refused the settlement demands of the Plaintiffs. The insureds, though, were not as confident and settled the case for about 25% of the potential value of the claim. ($80 million settlement of potential $320 million claim). The insureds then sought reimbursement from the carrier for the settlement.
The Pennsylvania Supreme Court held that when a case is being defended under a reservation of rights and the insured decides to settle the claims they maintain their right to seek reimbursement of the payment. In order to be reimbursed for the settlement payment, the insured must prove:
- that coverage exists for the relevant claims
- that the settlement is reasonable
The insured does NOT have to establish that the insurance carrier acted in bad faith when refusing the settlement demand.
The Court did have one significant reservation when making this decision: The Pennsylvania Supreme Court stressed on multiple occasions that this was an arms lengths transaction between the insured and plaintiffs with actual money exchanging hands. Based on the Courts opinion, this rule of law would not apply to a settlement that results in an assignment of the insured’s rights to the Plaintiff.
While the language of the opinion focused on the underlying settlement, it did not discuss how the insured and insurer should resolve coverage issues. The following hypothetical scenario is likely to arise now:
The lawsuit involves a case that involves claims that are clearly excluded, as well as claims that are covered by the policy. The carrier must defend against all claims subject to a reservation of rights. The non-covered claim is the stronger of the two claims with a potential value of $200,000. The covered claim is extremely weak and worth less than half of that amount. The policy limits are $300,000. The Plaintiff demands $150,000 to settle all claims. The insurance carrier refuses to settle, but the insured decided to settle the case for $150,000. A reasonable settlement for the uninsured claims but the release extinguishes all claims. What if the settlement was for $50,000?
And the $64,000 question going forward: What must an insurance carrier and appointed counsel tell their insured when they receive and reject an offer in a case being defended under a reservation of rights?
For questions, comments or additional information, please contact Robert Foster, Partner in our Insurance Practices Group, at email@example.com or via phone at 215.495.6514.