Babcock & Wilcox Co. v. American Nuclear Insurers
76 A.3d 1
Pa. Super. Ct.2013Background
- Babcock & Wilcox (B & W) operated two nuclear fuel facilities; American Nuclear Insurers (ANI) provided large-limit policies and defended the Hall litigation subject to reservations of rights.
- Hundreds of claimants sued for alleged radiation exposure; B & W negotiated and paid an $80 million settlement over ANI’s objections.
- ANI relied on standard consent-to-settlement policy clauses that prohibit an insured from settling without insurer consent and reserved coverage defenses while funding B & W’s defense costs.
- The trial court instructed a jury to decide whether B & W’s $80 million settlement was “fair, reasonable, and non-collusive”; the jury found that it was and judgment for $80 million plus interest was entered against ANI.
- On appeal, the Superior Court vacated that judgment and remanded, adopting a framework that distinguishes (1) an insured’s acceptance of a defense tendered under a reservation of rights (insurer retains control; insured bound by consent clause; remedy for insurer misconduct is Cowden bad-faith), and (2) an insured’s rejection of that tender (insured controls defense and, if coverage later established, may recover fair, reasonable, non-collusive settlement and defense costs).
- The Superior Court directed a new trial limited to (a) whether B & W rejected ANI’s defense, and if not, (b) whether ANI acted in bad faith by refusing to participate in settlement negotiations or to settle (Cowden inquiry).
Issues
| Issue | Plaintiff's Argument (B & W) | Defendant's Argument (ANI) | Held |
|---|---|---|---|
| Whether an insured may recover settlement amounts after settling over an insurer’s objection when insurer defended under a reservation of rights | Alfiero/majority-rule: when insurer denies coverage or effectively repudiates, insured may settle in good faith and recover if settlement is fair and reasonable | Contractual enforcement: consent-to-settlement clause and insurer’s right to control defense remain enforceable when insurer defends under reservation; recovery only if insurer acted in bad faith under Cowden | Adopted a compromise (Taylor): insured has two options — accept defense (bound by consent clause; Cowden bad-faith standard applies) or reject defense (insured controls defense; if coverage later found, insured can recover fair, reasonable, non-collusive settlement and defense costs). Jury verdict vacated and remanded to decide whether B & W rejected the defense or whether ANI acted in bad faith |
| Proper standard for adjudicating insurer liability for settlements entered over insurer objection | Use fairness/reasonableness of settlement (Alfiero/Morris line) | Use Cowden four-part bad-faith test when insurer provided defense | Rejected Alfiero/Morris as inconsistent with Pennsylvania contract law; Cowden applies when insured accepted insurer’s defense; fairness-only standard applies only when insured rejected insurer’s defense |
| Effect of insurer defending under reservation of rights on insured’s duty to comply with consent clause | Reservation entails sufficient conflict to permit insured to settle to protect itself | Reservation does not breach insurer’s obligations; insured remains bound to consent clause absent insurer’s material breach or bad faith | Reservation of rights alone is not a contract breach that frees insured from consent clause; insured may reject the reservation and assume control, but if it accepts the defense it remains bound and must prove bad faith to recover |
| Remedy and scope on remand | Upheld jury’s finding that settlement was fair — order reimbursement | ANI argues trial should have focused on contractual enforcement and Cowden bad-faith questions | Remanded for new trial limited to whether B & W rejected ANI’s defense and/or whether ANI acted in bad faith in refusing to settle or participate in negotiations; vacated the prior judgment |
Key Cases Cited
- Cowden v. Aetna Cas. & Sur. Co., 389 Pa. 459, 134 A.2d 223 (Pa. 1957) (establishes Pennsylvania bad-faith standard for insurer refusal to settle within policy limits)
- Alfiero v. Berks Mut. Leasing Co., 347 Pa.Super. 86, 500 A.2d 169 (Pa. Super. Ct. 1985) (insured may recover from excess insurer when insurer repudiates coverage and insured makes good-faith, reasonable settlement)
- Birth Ctr. v. St. Paul Cos., 567 Pa. 386, 787 A.2d 376 (Pa. 2001) (reaffirms Cowden principle that insurer breaches duty of good faith by refusing to settle when appropriate)
- Jerry’s Sport Ctr., Inc. v. Amer. & Foreign Ins. Co., 606 Pa. 584, 2 A.3d 526 (Pa. 2010) (discusses insurer’s right to defend under reservation of rights and to select counsel)
- Morris v. United Servs. Auto. Ass’n, 154 Ariz. 113, 741 P.2d 246 (Ariz. 1987) (majority-rule source for permitting insured to settle after insurer defends under reservation; court critiques and declines to adopt wholesale)
- Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. Ct. App. 1978) (adopted framework permitting insured to reject reservation and control defense; Superior Court endorses a Taylor-like compromise)
- Vincent Soybean & Grain Co. v. Lloyd’s Underwriters of London, 246 F.3d 1129 (8th Cir. 2001) (refuses to allow insured to recover where insurer defended under reservation absent bad faith)