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From Products Liability Law Daily, July 22, 2015

Insurer must cover $80M settlement of radiation exposure claims

By Susan Engstrom

An insurer was obligated to cover an $80 million payment made by the owners of two nuclear fuel processing facilities to settle radiation exposure claims, even though the insurer had not consented to the settlement, Pennsylvania’s highest court held. In cases such as this one, where an insurer defends an insured under a reservation of rights and breaches its duty to settle, the insured may accept a settlement offer over the insurer’s refusal if the settlement is fair, reasonable, and non-collusive. Contrary to the superior court’s ruling, the insured is not required to demonstrate bad faith on the part of the insurer (Babcock & Wilcox Co. v. American Nuclear Insurers, July 21, 2015, Baer, M.; Eakin, J., concurring and dissenting).

Background. In June 1994, Babcock & Wilcox Co. (B&W) and Atlantic Richfield Co. (ARCO) were sued by a class of several hundred individuals who alleged that they had sustained bodily injury and property damage caused by exposure to radioactive emissions from two nuclear fuel processing facilities owned by B&W and previously owned by ARCO. In 1998, the trial court tried eight “test cases” from the above action in a single jury trial in which verdicts were returned totaling $33.7 million against B&W and ARCO, and an additional $2.8 million against B&W only.

A new trial subsequently was granted based upon evidentiary errors but, while that trial still was pending, American Nuclear Insurers (ANI)—which had long provided insurance coverage for nuclear hazards at the two fuel processing facilities—filed a declaratory judgment action against B&W and ARCO in Pennsylvania state court. Among other things, ANI sought a declaration regarding whether it had a duty to provide separate counsel to both ARCO and B&W in the underlying suit. ANI also alleged bad faith and breach of contract by B&W. B&W countersued, and the two insurance coverage actions were consolidated. The trial court ultimately ruled that ANI had a duty to pay for independent defense counsel for each of the two companies, and the order was affirmed on appeal.

Settlement. B&W and ARCO (collectively, the insureds) and the underlying plaintiffs entered into settlement negotiations and reached an agreement under which the insureds would pay $80 million to settle the remaining claims, plus more than $15 million in prejudgment interest. ANI did not participate in the negotiations and disagreed with the decision to settle.

At a status conference following the settlement, ANI and the insureds disagreed over the legal standard to be applied in determining the insurer’s coverage obligations, but the trial court ultimately concluded that the insureds would be entitled to reimbursement of the $80 million that they had paid in settlement of the underlying plaintiffs’ claims over ANI’s objection so long as the settlement was fair, reasonable, and non-collusive. The parties proceeded to trial, and the jury determined that the settlement was fair, reasonable, and non-collusive. The trial court entered judgment against ANI and in favor of the insureds in the aggregate amount of $80 million plus prejudgment interest of more than $15 million, after which the insurer appealed.

Superior court ruling. According to the superior court, when an insurer tenders a defense subject to a reservation of rights, the insured has two options: (1) it may accept the defense, in which case the insured remains unqualifiedly bound to the terms of the consent-to-settlement provision in the insurance policy, unless the insurer has acted in bad faith; or (2) it may decline the insurer’s tender of a defense and furnish its own defense and, if coverage is found, the insured may recover its defense and settlement costs as long as those costs are fair, reasonable, and non-collusive.

The superior court remanded the case for a new trial for a determination of whether the insureds had in fact rejected the insurer’s defense and, if not, whether the insurer had acted in bad faith in declining to settle or participate in settlement negotiations.

Analysis. The state high court rejected the superior court’s test as unworkable. An insured under Pennsylvania law does not have the option of rejecting an insurer’s defense because doing so would constitute a breach of the policy, thereby releasing the insurer from its obligation to provide coverage. Moreover, most insureds would not have the funds to allow them to employ an independent defense.

The high court then turned to the parties’ arguments in considering an issue of first impression in Pennsylvania: whether an insured forfeits the right to coverage when it settles a lawsuit without the insurer’s consent, where the insurer has defended the suit subject to a reservation of rights. The insureds asserted that the insurer should reimburse them for the settlement so long as coverage applied and the settlement was fair and reasonable. The insurer, however, contended that its obligation to pay the settlement could be imposed only if it had acted in bad faith in refusing to settle.

The Arizona Supreme Court held that an insurer may be liable to reimburse a settlement that is fair, reasonable, and non-collusive, if coverage is determined to apply. In the instant case, the Pennsylvania high court adopted a variation of this fair and reasonable standard limited to those cases 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. The court observed that a determination of whether the settlement is fair and reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.

In addition, if an insurer breaches its duty to settle while defending subject to a reservation of rights and the insured accepts a reasonable settlement offer, the insured need only demonstrate that the insurer breached its duty by failing to consent to a settlement that is fair, reasonable, and non-collusive, rather than demonstrating bad faith by the insurer, as the damages sought are subject to the policy limits to which the insurer originally contracted.

In this case, the jury determined that the settlement was “fair and reasonable from the perspective of a reasonably prudent person in the same position of [the insureds] and in light of the totality of the circumstances,” a standard that the instant court adopted as the proper one to apply in a reservation of rights case where an insured settles following the insurer’s refusal to consent to settlement.

The court concluded that the superior court erred by requiring an insured to demonstrate bad faith when the insured accepts a settlement offer in a reservation of rights case. Accordingly, the superior court’s decision was reversed, and the trial court’s judgment was reinstated.

The case is No. 2 WAP 2014.

Attorneys: James A. Dattilo (Dattilo & Associates, PC) for Atlantic Richfield Co. Thomas More Reiter (K&L Gates LLP) for Babcock & Wilcox Power Generation Group, Inc.

Companies: Atlantic Richfield Co.; Babcock & Wilcox Power Generation Group, Inc.

MainStory: TopStory DamagesNews ChemicalNews PennsylvaniaNews

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