Yesterday the Pennsylvania Supreme Court issued a decision on an issue of first impression in Pennsylvania. The issue was: "whether an insured forfeits insurance coverage by settling a tort claim without the consent of its insurer, when the insurer defends the insured subject to a reservation of rights, asserting that the claims may not be covered by the policy." Stated another way: "whether an insurer is liable under its insurance policy for a settlement made by its insured without securing the insurer's consent, when the insurer is defending the claim subject to a reservation of rights?"
Typically court decisions favor insurance companies and not the insured. The Pa Supreme Court has now changed the landscape in Babcock & Wilcox v. American Nuclear Insurers et. Al.
- First, the test is no longer a bad faith test.
- Second, an insured is entitled to settle a case without the insurers consent.
- Third, a duty is now imposed on insurance companies to enter into fair and reasonable settlements despite the issuance of a reservation of rights letter;
- Finally, the insurance company will be liable to the insured for the cost of settlement if the insured demonstrates "that the insurer breached its duty by failing to consent to a settlement that is fair, reasonable and non-collusive.
This case has changed the landscape of cases that are defended by insurance companies under a reservation of rights. Private Counsel advising clients, who are being defended by an insurer under a reservation of rights, need to monitor the cases and when warranted discuss with their client if the case should be settled. Obviously seek permission from the insurer but do not let the lack of permission prevent your client from settling if the settlement is fair and reasonable under the circumstances.
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