In Babcock & Wilcox Co. v. American Nuclear Insurers, 131 A.3d 445 (Pa. 2015), the Pennsylvania Supreme Court fashioned a new and hybrid test to measure settlements made by the insured without the carrier's consent. The new test does not require a showing of bad faith. The most the insured can recover if successful is the policy limit.
The new test of reasonableness applies only where the liability carrier is defending the insured under a reservation of rights, and the insured reaches a settlement with the injured claimant for covered claims after the carrier refuses to settle.
In the light of previous decisions under Pennsylvania law, the Pennsylvania Supreme Court reworked a test established in Arizona in a case called Morris:
[W]e adopt a variation on the Morris 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.
Babcock & Wilcox Co. v. American Nuclear Insurers, 131 A.3d 445, 462 (Pa. 2015).
Unlike an extracontractual or bad-faith-in-settlement claim, the maximum amount that the insured can recover in such a suit is capped at the policy limit:
In contrast, 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, as described above, rather than demonstrating bad faith by the insurer, as the damages sought are subject to the policy limits to which the insurer originally contracted.
Babcock & Wilcox Co. v. American Nuclear Insurers, 131 A.3d 445, 462-63 (Pa. 2015).
The Court immediately applied the new standard of liability to the case before it. The insureds "ARCO and B & W, respectively in 2008 and 2009," presented settlement demands to the liability carrier which refused to give consent to settle. The insureds went ahead and settled "with the class action plaintiffs for a total of $80 million, which was substantially less than the $320 million of potential coverage." Babcock & Wilcox Co. v. American Nuclear Insurers, 131 A.3d 445, 448 (Pa. 2015).
The Court held that the settlement for the covered claims in this case was reasonable and reinstated the trial court's judgment in favor of the insureds' recovery of the sums they paid in settlement even without the carrier's consent.
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