Policyholders sometimes have to struggle with insurance companies over getting consent to a settlement offer the policyholder views as reasonable and would like to accept, only to be rebuffed. Now, in Pennsylvania, insurers refuse settlement offers at their peril, and may be on the hook to cover a settlement even if their policy language states that the insurer, not the insured, has the sole authority to agree to a settlement. The Pennsylvania Supreme Court recently joined a number of other states that require insurance companies to cover settlements agreed to without their consent as long as the settlements are fair, reasonable, and in good faith.
The case, Babcock & Wilcox Co. v. American Nuclear Insurers, involved a class action lawsuit filed in 1994 in which residents who lived near nuclear facilities claimed to have suffered bodily injury and property damage caused by emissions from nuclear facilities owned by Babcock & Wilcox and Atlantic Richfield Company. The facility owners' insurers, American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters ("ANI"), defended the class action on behalf of the insureds subject to a reservation of rights. ANI refused any settlement offers from plaintiffs because it felt there was a strong likelihood there would be no liability to the insureds in the underlying action. In the face of these refusals, the policyholders eventually settled with the plaintiffs for $80 million (substantially less than the $320 million of potential coverage) and sought coverage for the settlement.
The policies at issue contained a standard "Assistance and Cooperation" clause that included the following language: "The insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense." The insureds maintained that as long as a settlement was "fair and reasonable and entered in good faith" and the underlying claim was within the policy's coverage, then they should be reimbursed for the settlement. The insurer countered that the provision required insurer consent of any settlement agreed to by the insured, and that requirement should only be set aside if the carrier acted in bad faith in refusing consent. The trial court sided with the insureds and held a trial at which a jury found that the settlement was, in fact, fair and reasonable.
On appeal, the Supreme Court of Pennsylvania looked at Pennsylvania law and the law of other states and concluded that, where an insurer defends under a reservation of rights and refuses to approve a reasonable settlement, the insured can still obtain coverage for the settlement if it shows both that the claims are covered under the policy and the settlement is reasonable, fair, and in good faith (e.g., not collusive). The court rejected the insurer's argument that in order to obtain coverage the insured had to show the insurer acted in bad faith in refusing to approve the settlement.
While the policy language at issue in Babcock & Wilcox, as in many older policies, does not actually include the term "consent" or state that the insured must obtain "consent" to settle (it simply stated that the insured could not unilaterally make any payments or assume any obligations except at its own cost), the court read the language as permitting fair, reasonable, and good faith settlements even in the absence of insurer consent. More recent policies, though, do include such language requiring the insurer's written consent to a settlement. Many policies further provide that an insurer must not unreasonably withhold that consent. The Babcock & Wilcox decision thus reinforces an understanding that has become memorialized in modern insurance contracts: that both the policyholder and insurer have rights and obligations when considering whether to settle underlying claims. And more specifically, that an insurer should not refuse to consent to a fair and reasonable underlying settlement.
This decision serves as a reminder to policyholders to make sure their liability policies include language providing that an insurer must not unreasonably withhold consent to settlements. Policyholders also need to understand that there are potential coverage consequences to unilaterally accepting a settlement without consent.
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