Pennsylvania Supreme Court Holds That Insured Did Not Forfeit Coverage By Settling Without Insurer’s Consent Even Though Insurer Was Defending Under a Reservation of Rights

In an issue of first impression, the Pennsylvania Supreme Court has held that an insured does not forfeit coverage by entering into a fair, reasonable, and non-collusive settlement without the insurer’s consent when the insurer is defending the insured under a reservation of rights and the insurer has declined to settle.  Babcock & Wilcox Co. v. American Nuclear Insurers, — A.3d — (2015), 2015 WL 4430358, Case No. 2 WAP 2014 (Pa. July 21, 2015).

The insureds were sued in a class action over alleged bodily injury and property damage caused by emissions from nuclear facilities.  Id. at *1.  The insurer (which issued $320 million in coverage) defended under a reservation of rights, asserting that the policy did not cover damages not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages.  Id.  After an initial verdict against the insureds of $36 million, a retrial was granted.  Id.  The insurer refused consent to any settlement offers, believing the case could be successfully defended.  Id. at *2.  The insured then proceeded to settle with the class action plaintiffs for $80 million.  Id.

In the ensuing declaratory judgment action, the insurer argued that there was no coverage for the settlement because the insured had violated the consent to settlement clause.  Id.  The insured urged the trial court to adopt United Services Auto. Ass’n v. Morris, 154 Ariz. 113 (1987), which held that, when the insurer has reserved rights, it should be liable for an insured’s settlement as long as coverage applies and the settlement is “fair and reasonable” and entered into in good faith.  The insurer argued that insurers should only be responsible for such a settlement under Cowden v. Aetna Cas. And Sur. Co., 389 Pa. 459 (1957), which held that an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits.  The trial court adopted the test advanced by the insureds and a jury determined that the insured’s settlement with claimants was fair and reasonable.  Id. at *3.  On appeal, the intermediate appellate court adopted an entirely different test (requiring the insured to have rejected the insurer’s defense and the insurer to have acted in bad faith in declining to settle) and remanded to the trial court for a new trial on these issues.  Id. at *5.

The Pennsylvania Supreme Court granted review to consider this issue of first impression, described as “whether an insured forfeits the right to insurance coverage when it settles a lawsuit without the insurer’s consent, where the insurer has defended the suit subject to a reservation of rights.”  Id. at *5.  Declining to strictly construe the consent to settlement requirement of the insurance policy and rejecting the test applied by the intermediate appellate court, the court opted for a modified Morris standard, holding that the insurer will be on the hook “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.”  Id. at *16.  The court further held that the settlement must be “fair and reasonable from the perspective of a reasonably prudent person in the same position of [Insureds] and in light of the totality of the circumstances.”  Id.  The court therefore reinstated the trial court judgment.  Id.

Chambers Ranks Duane Morris Among Top Five Insurance Practices in U.S.

Duane Morris is pleased to announce that Chambers USA has once again singled out the success of the firm’s Insurance practice group. Chambers and Partners’ annual survey of the American legal profession consistently ranks Duane Morris among national leaders in insurance law and in 2015 ranked the firm in its top five for representation of Insurers in Insurance Dispute Resolution. Chambers has praised the group as being “A full-service insurance practice that has unparalleled bench strength at the highest level of insurance work,” and that it “Possesses the expertise to assist on all coverage matters across a huge range of arenas, as well as reinsurance, bad faith and policy drafting advice.” Nationally, Chambers recognized practitioners Philip Matthews, Max Stern and Thomas Newman for their work and contributions and in California, Andrew Gordon, Ray Wong and Richard Seabolt have also been recognized.

Duane Morris Attorney Thomas Newman Authors “Satisfying a Self-Insured Retention or Deductible in a Third Party Claim”

Duane Morris of counsel Thomas R. Newman authored an article that was recently published in the FDCC Quarterly. “Satisfying a Self-Insured Retention or Deductible in a Third Party Claim” explores the risks in protecting against third-party claims and that is not financially necessary for the commercial policyholder to purchase liability insurance. The article will additionally discuss the differences between a “deductible” and an “SIR” and even considers why a policyholder could choose one instead of the other even if the dollar amount is the same. Subsequently, the article will examine whether an SIR may be satisfied by “other insurance” and finally, address how a deductible can be satisfied and whether the defense consts will erode the SIR.

To read the article in its entirety, please visit the FDCC Quarterly website.

Duane Morris Partner Philip R. Matthews Elected a Fellow of the American College of Coverage and Extracontractual Counsel

Duane Morris congratulates partner Philip R. Matthews on being elected a Fellow of the American College of Coverage and Extracontractual Counsel (ACCEC). The ACCEC is composed of preeminent coverage and extracontractual counsel in the United States and Canada, representing the interests of both insurers and policyholders. As the most selective class of ACCEC membership, Fellows must be licensed to practice in the highest court of their respective state and must have at least 15 years of experience in insurance law. For more information, please visit the ACCEC website.

Matthews, of the firm’s San Francisco office, has nearly four decades of experience and has been involved in representing insurers in some of the largest exposures facing the insurance industry during his career, including representing insurers in some of the largest trials and appeals in California. He practices in the area of general civil litigation and insurance counseling and litigation with an emphasis on complex cases, as well as resolving complex insurance coverage disputes through alternative dispute resolution procedures.

Two Important Insurance Matters Set For The California Supreme Court’s May Calendar

Yesterday, the California Supreme Court set two important and much anticipated insurance cases for May oral argument.

On May 26, 2015, the Court will hear argument in Fluor v. S.C. (Hartford Accident & Indemnity Company), No. S205889, which presents the following issue: Are the limitations on assignment of third party liability insurance policy benefits recognized in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 inconsistent with the provisions of Insurance Code section 520?

On May 28, 2015, the Court will hear argument in J.R. Marketing, L.L.C. v. Hartford Casualty Insurance, No. S211645, which presents a rare opportunity for guidance from the Supreme Court on independent Cumis counsel issues. The case present the following question: After an insured has secured a judgment requiring an insurer to provide independent counsel to the insured (see San Diego Fed. Credit Union v. Cumis Ins. Society Inc. (1984) 162 Cal.App.3d 358), can the insurer seek reimbursement of defense fees and costs it considers unreasonable and unnecessary by pursuing a reimbursement action against independent counsel or can the insurer seek reimbursement only from its insured?

Both matters will be heard in San Francisco on the 9:00 a.m. calendars. Under California rules, the Supreme Court must issue its decisions in the matters within 90 days after the argument.

Application Exclusion Bars Coverage for Claims Arising from Known, Undisclosed Circumstance

A California Court of Appeal has affirmed a summary judgment in favor of the insurer on defense and indemnity with respect to claims that arose from circumstances known to the policyholder when it applied for professional liability insurance but that were not disclosed to the insurer in the application.  Crown Capital Securities, L.P. v. Endurance American Specialty Ins. Co. (Cal.Ct.App, 2d Dist., Div. 5, 4/10/15).  Because the application stated that a claim is excluded from coverage if arising from any undisclosed circumstance that was required to be disclosed in response to a question asked, and the application requested disclosure of circumstances that may result in a claim, the policyholder was not entitled to coverage for claims arising from the known but undisclosed circumstance.

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California Guidance on Complex Duty to Defend Disputes over Additional Insured Status

In McMillin Companies, LLC v. American Safety Indemnity Co. (4th Dist. Div. 1, No. D063586, January 22, 2015 (published in relevant part)), the California Court of Appeal for the Fourth District has provided some meaningful guidance on how a trial court should handle issues that regularly come up in cases where an alleged additional insured claims breach of the duty to defend by multiple insurers, including explaining the significance of an insurer’s unsuccessful attempt to obtain summary judgment on the duty to defend, the significance of other insurer settlements on claims against the remaining insurer, and the procedure for applying an offset to the policyholder’s claim for such settlements.

Continue reading “California Guidance on Complex Duty to Defend Disputes over Additional Insured Status”

The Illinois Duty to Defend: Litigation Insurance against Groundless Suits Even When Extrinsic Facts Known to Both Insurer and Insured Would Otherwise Abrogate Coverage

On January 13, 2015, the Illinois Appellate Court issued its opinion in Illinois Tool Works, Inc. v. Travelers Casualty and Surety Co., 2015 IL App. (1st) 132350 (1st Dist. 2015), wherein the court held the insurer had a duty to defend its insured against numerous vaguely pleaded toxic tort complaints. The central issue in Illinois Tool Works was whether facts extrinsic to the underlying complaint, known to both the insurer and insured, can abrogate the duty to defend. The Illinois Appellate Court held that undisputed extrinsic facts not pleaded in the underlying complaint cannot relieve an insurer of its duty to defend unless and until proven in the underlying action. Continue reading “The Illinois Duty to Defend: Litigation Insurance against Groundless Suits Even When Extrinsic Facts Known to Both Insurer and Insured Would Otherwise Abrogate Coverage”

Duane Morris Partner Philip Matthews to be Co-moderator for “A View from the Bench” at ACI’s Asbestos Claims & Litigation Conference

Duane Morris partner Philip R. Matthews will be co-moderator for the “View from the Bench” panel at the Asbestos Claims & Litigation Conference, hosted by the American Conference Institute on January 15-16, 2015 at the Union League of Philadelphia. The panel will take place on Friday, January 16, at 8 a.m.

For more information or to register for this event, please visit the American Conference Institute website.

Duane Morris Partner Max Stern to Moderate Panel at the American Conference Institute’s National Forum on Insurance Allocation

Duane Morris partner Max H. Stern will be moderating a panel at the American Conference Institute’s (ACI) National Forum on Insurance Allocation on October 29, 2014 at the Carlton Hotel on Madison Avenue in New York. Mr. Stern’s session is titled, “In-House Roundtable: Counsel and Claims Professional Insights on New and Emerging Issues in Insurance Coverage and Allocation,” and will take place at 9:35 a.m.

For more information or to register for this event, please visit the American Conference Institute’s website.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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