When an insurer tenders a defense subject to a reservation of rights, the insured may choose one of two options:
When an insurer tenders a defense subject to a reservation of rights, the insured may choose one of two options: (1) accept the defense, in which case it remains unqualifiedly bound to the terms of the consent to settle provision of the policy; or (2) the insured may decline the insurer’s tender of a qualified defense and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense.
The Superior Court of Pennsylvania’s opinion in this case provides some much-needed clarity regarding an insured’s ability to control the pace and outcome of litigation when represented by insurer-appointed counsel. The plaintiffs (B&W) purchased nuclear hazards insurance coverage from the defendant (ANI) for two of their nuclear facilities. The plaintiffs and the facilities’ prior owner/operator (ARCO), were subsequently named as defendants in a class action seeking damages allegedly caused by the plaintiff’s facilities’ radioactive emissions. A dispute arose between the plaintiff and the defendant concerning the plaintiff’s limits of coverage and entitlement to defense counsel, as well as the defendant’s obligation to provide separate counsel to the prior owner/operator.
Ultimately, during the pendency of the class action, the defendant filed a declaratory judgment action against the plaintiff, seeking a declaration regarding its duties and making claims for bad faith and breach of contract against the plaintiff. The plaintiff countered with its own declaratory judgment action, seeking declarations regarding the available limits of coverage and alleging bad faith against the defendant. On April 5, 2001, the Court of Common Pleas of Allegheny County ordered the defendant to separately defend and indemnify both the plaintiff and the prior owner/operator. The insurer appealed, and the Superior Court affirmed the trial court’s order. The plaintiff’s counsel subsequently negotiated global settlement of the class action for an amount less than the available policy limits.
The plaintiff tendered settlement to the class plaintiffs and subsequently sought to recover reimbursement and fees from the defendant insurance carrier. The defendant, who had not consented to settlement, refused to reimburse the plaintiff on the basis that it had violated the consent to settlement clause in the defendant’s policy. Additional litigation ensued, and the trial court ruled that the plaintiff was entitled to reimbursement if the settlement was fair, reasonable and non-collusive. The jury subsequently determined that the underlying settlement was fair, reasonable and non-collusive, and the trial court ordered that the defendant insurance carrier was obligated to pay $80 million, plus prejudgment interest, to the plaintiff.
On appeal, the Superior Court evaluated this issue of first impression by first examining numerous state and federal courts’ treatment of an insured’s obligation to honor a policy’s consent to settle clause. The court noted that an insurer’s defense of an insured does not waive the insurer’s claims that a policy exclusion applies, nor does it extinguish an insurer’s right to control the defense and select counsel, even when tendered subject to a reservation of rights.
Ultimately, after weighing the various approaches employed by a number of different jurisdictions, the court held that, when an insurer tenders a defense subject to a reservation of rights, the insured may choose one of two options:
(1) the insured may accept the defense, in which case it remains unqualifiedly bound to the terms of the consent to settle provision of the policy. In this scenario, the insurer retains full control over the litigation, and the insured is protected against injuries stemming from the insurer’s conduct in the defense through a potential bad faith suit; or
(2) the insured may decline the insurer’s tender of a qualified defense and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense. Under this option, the insured retains full control over the defense, including the option of settling the claim pursuant to its own terms. If coverage is found, the insured may recover the defense costs and costs of settlement from the insurer, to the extent the costs are deemed fair, reasonable and non-collusive.
Significantly, under the second option, the insured is not bound by the consent to settle provision of the policy. So long as the settlement is fair, reasonable and non-collusive, the insurer will be obligated to reimburse its insured.
The original owner/operator and the plaintiff filed a petition for allowance of appeal to the Pennsylvania Supreme Court on August 9, 2013; however, unless and until the Supreme Court grants allocatur, the Superior Court’s opinion remains in effect.
While Babcock did not change any existing Pennsylvania doctrines, it did clarify an insured’s right to decline an insurer’s tender of a qualified defense, as well as the risks and benefits associated with this choice.
Case Law Alerts, 4th Quarter 2013