The Pennsylvania Supreme Court has agreed to hear arguments over whether two insurers should be on the hook to indemnify a company for the $80 million it paid to settle claims over radiation exposure.
The court granted a hearing Jan. 24 in Babcock & Wilcox v. American Nuclear Insurers on a single issue: whether a policyholder must forfeit its right to insurance coverage if it settles a claim without its insurer's consent in a case in which the insurer is defending the insured subject to a "reservation of rights."
The state Superior Court in July ruled that when an insurer agrees to defend an insured subject to a reservation of rights, the insured may either accept the insurer's defense -- and remain bound by a consent-to-settlement clause while allowing the insurer to control the litigation -- or instead furnish its own defense.
In the latter case, the company would retain control of the litigation, but its costs may or may not be covered by the insurer depending on whether those costs are deemed fair, reasonable and noncollusive.
The case stems from lawsuits against Atlantic Richfield Co. and Babcock & Wilcox (now BWX Technologies), which have paid $80 million to more than 300 claimants over illnesses, death and property damage stemming from the plants' operations in Apollo and Parks Township, 25 miles northeast of Pittsburgh.
In arriving at this holding, a three-judge panel in Babcock & Wilcox ruled unanimously to reverse ruling that two insurers -- American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters, referred to collectively in the court's opinion as "ANI" -- must indemnify Babcock & Wilcox Co. for the $80 million plus prejudgment interest it paid to plaintiffs to settle claims over radiation exposure, against ANI's protests.
The panel instead ordered a new trial, directing the lower court to determine whether B&W rejected its insurers' defense and whether the insurers' refusal to settle the case or participate in the settlement talks constituted bad faith.
The court was split 2-1, however, on which approach the trial court should apply on remand.
Noting a dearth of Pennsylvania precedent regarding an insurer's obligation to honor a consent-to-settlement clause in an insurance contract when it has agreed to defend an insured subject to a reservation of rights, the majority adopted the approach set forth in the Florida Court of Appeal's 1978 ruling in Taylor v. Safeco Insurance.
In that decision, the court held that when an insured settles after rejecting an insurer's defense, the insurer is obligated to cover only the amount of the settlement up to the policy limits if the settlement was "reasonable" and not entered into "in bad faith, fraudulently, collusively, or without any effort to minimize his liability."
Writing for the majority in B&W, Judge David N. Wecht said Taylor "provides the standard most consistent with Pennsylvania law."
"We find that the Taylor approach, in providing an insured the option to decline a defense tendered subject to a reservation of rights, but protecting an insurer's right to control the defense when it is accepted by the insured, best balances the interests of insurer and insured, and better honors the binding nature of the insurance contract," Judge Wecht said.
He was joined by Judge John L. Musmanno. Judge Judith Ference Olson penned a concurring and dissenting opinion, stating that she agreed the case should be remanded for a new trial but disagreed with the application of Taylor.
The B&W case has come before the Superior Court once before, in 2002.
At that time, the trial court had ruled, and the Superior Court affirmed, that ANI had a duty to pay for separate counsel to defend the separate interests of B&W and its predecessor, Atlantic Richfield Co., against suits alleging injury and property damage caused by radiation emissions from Pennsylvania's Apollo and Parks facilities.
B&W eventually settled the Hall action for $80 million over ANI's objection and, in 2009, Allegheny County Common Pleas Judge R. Stanton Wettick Jr. ruled that ANI had no duty to indemnify B&W because B&W was not able to meet its burden under Cowden.
But in 2011, Judge Wettick revisited the issue and reversed course on his previous holding.
Following a trial in February 2012, a jury found that the $80 million settlement was fair, reasonable and noncollusive. Judge Wettick subsequently issued an order requiring ANI to indemnify B&W for the settlement.
Counsel for B&W, Atlantic Richfield and ANI could not be reached.
Zack Needles: email@example.com or 215-557-2493. Read more stories like this at www.thelegalintelligencer.com.