Babcock & Wilcox Co. v. Am. Nuclear Insurers

• Decision Date: 21 July 2015
• Docket Number: No. 2 WAP 2014,2 WAP 2014
• Court: Pennsylvania Supreme Court
• Parties: The BABCOCK & WILCOX COMPANY and B & W Nuclear Environmental Services, Inc. v. AMERICAN NUCLEAR INSURERS and Mutual Atomic Energy Liability Underwriters and Other Interested Party, Atlantic Richfield Company. American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters v. The Babcock & Wilcox Company and B & W Nuclear Environmental Services, Inc., and Atlantic Richfield Company. Appeal of Babcock & Wilcox Power Generation Group, Inc. (f/k/a The Babcock & Wilcox Company) and Babcock & Wilcox Technical Services Group, Inc. (f/k/a B & W Nuclear Environmental Services, Inc.), and Atlantic Richfield Company.

131 A.3d 445

The BABCOCK & WILCOX COMPANY and B & W Nuclear Environmental Services, Inc.

v.AMERICAN NUCLEAR INSURERS and Mutual Atomic Energy Liability Underwriters and Other Interested Party, Atlantic Richfield Company.

American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters

v.The Babcock & Wilcox Company and B & W Nuclear Environmental Services, Inc., and Atlantic Richfield Company.

Appeal of Babcock & Wilcox Power Generation Group, Inc. (f/k/a The Babcock & Wilcox Company) and Babcock & Wilcox Technical Services Group, Inc. (f/k/a B & W Nuclear Environmental Services, Inc.), and Atlantic Richfield Company.

No. 2 WAP 2014

Supreme Court of Pennsylvania.

Argued Oct. 7, 2014.

Decided July 21, 2015.

James A. Dattilo, Dattilo & Associates, P.C., Pittsburgh, for Atlantic Richfield Company.

Thomas More Reiter, Esq., K & L Gates LLP, Pittsburgh, for Babcock & Wilcox Power Generation Group, Inc., Babcock & Wilcox Technical Services Group, Inc.

John Norig Ellison, Esq., Jay M. Levin, Philadelphia, Esq., James Christopher Martin, Esq., Traci Sands Rea, Esq., Reed Smith LLP, Pittsburgh, for United Policyholders, et al.

Jon Geoffrey Hogue, Esq., Pittsburgh, John Edward Murray, Esq., Murray, Hogue & Lannis, Andrew Amer, Esq., for American Nuclear Insurers, Mutual Atomic Energy Liability Underwriters.

Nicholas Andrew Cummins, Esq., Philadelphia, Bennett, Bricklin & Saltzburg, L.L.P., for Pennsylvania Defense Institute.

Randy J. Maniloff, Esq., White and Williams, L.L.P., Philadelphia, for Property Casualty Insurers Association of America.

CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, STEVENS, JJ.

OPINION

Justice BAER

.

We granted review to consider an issue of first impression regarding whether an insured forfeits insurance coverage by settling a tort claim without the consent of its insurer, when the insurer defends the insured subject to a reservation of rights, asserting that the claims may not be covered by the policy. After review, we reverse the decision of the Superior Court and reinstate the judgment of the trial court.

The case history spans two decades, beginning with the 1994 filing of a federal class action lawsuit against Appellant–Insureds Babcock & Wilcox Company (B & W) and Atlantic Richfield Company (ARCO) (collectively, Insureds) brought by plaintiffs claiming to have suffered bodily injury and property damage caused by emissions from nuclear facilities owned by Insureds.¹ Over time, the class action grew to include over 500 named plaintiffs, who lived near the nuclear facilities. Insureds denied that the facilities released any emissions or that the harm suffered by plaintiffs resulted from the facilities. Nevertheless, a 1998 jury trial of eight test cases resulted in an initial verdict totaling over $36 million or approximately $4.5 million per plaintiff. The federal court, however, granted a new trial due to evidentiary issues. The retrial was never held given the subsequent settlement discussed below.

While the underlying tort action was pending in federal court, disputes arose between Insureds and their insurers, Appellees American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (collectively ANI or Insurer). At the outset of the litigation, Insurer acknowledged that it would defend Insureds but contested whether the policy covered aspects of the claims, and thus defended subject to a reservation of rights. Specifically, in 1994, Insurer, inter alia, asserted that the policy did not cover damages that were not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages. Letter of June 20, 1994, R.R. at 148a–151a. The 1994 reservation of rights was supplemented as to B & W in October 1999, by a letter indicating, inter alia, that Insurer reserved its right to disclaim coverage for Insureds' liability based upon Insureds' pressuring of Insurer to settle, which Insurer viewed, in connection with other actions, as a breach of Insureds' duty to cooperate.² Letter of October 5, 1999, R.R. at 3206–08.

While the details are not relevant to the current dispute, Insurer filed a declaratory judgment action in state court days after the 1999 reservation of rights letter, raising challenges relating to the coverage limit, whether B & W and ARCO were entitled to separate representation, and bad faith and breach of contract allegations, including the breach of the duty to cooperate, against the Insureds. The Insureds counter claimed, raising bad faith allegations against Insurer. While staying various claims for future determination, including the breach of the duty to cooperate claim, the court decided issues regarding the trigger of coverage and held that B & W and ARCO were entitled to separate counsel. The Superior Court affirmed on appeal, and this Court denied allocatur.³

During the course of the litigation, Insurer refused consent to any settlement offers presented to it due to its conclusion that the case had a strong likelihood of a defense verdict given the lack of medical and scientific support for plaintiffs' claims and decisions by the federal trial court regarding procedural and evidentiary issues in the pending retrial, which Insurer viewed as highly favorable to Insureds' ultimate outcome. Nevertheless, after presenting the settlement offers to Insurer and being denied consent, Insureds ARCO and B & W, respectively in 2008 and 2009, settled with the class action plaintiffs for a total of $80 million, which was substantially less than the $320 million of potential coverage.⁴

Insureds then sought reimbursement of the settlement amount from Insurer in the Allegheny County Court of Common Pleas. Insurer countered that reimbursement was not permissible because the insurance contract contained a standard consent to settlement clause, also referred to as a cooperation clause, requiring Insureds to cooperate with Insurer and to obtain Insurer's consent to settle:

Assistance and cooperation of the Insured. The insured shall cooperate with the companies, and upon the companies' request, attend hearings and trials and assist in making settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance. The insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.

Insurance Agreement, Condition 6, Reproduced Record (R.R.) at 59a. Under the insurance policy the decision to settle rested exclusively with Insurer which "may make such investigation, negotiations and settlement of any claim or suit as they deem expedient." Id. at I(A)(1), R.R. at 57a. Moreover, the policy expressly did not cover "liability assumed by the insured under contract...." Id. at Exclusion (c), R.R. at 58a.

Relevant to the question at bar, the trial court recognized that the case presented the issue of "under what circumstances will a court require an insurance company, whose policy is found to provide coverage, to reimburse an insured that settled the underlying litigation over the objections of the insurance company" in a case involving a standard consent to settlement clause when the insurer has defended its insured subject to a reservation of rights. Tr. Ct. Op., July 5, 2011 at 2. As discussed in more detail below, Insureds asserted that Insurer should reimburse Insureds for the settlement so long as coverage applies and the settlement is fair and reasonable and entered in good faith, a test derived in part from the seminal case of United Services Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987)

(hereinafter "Morris fair and reasonable standard"). Insurer, in contrast, argued that the obligation to pay the settlement could only be imposed on Insurer if it acted in bad faith in refusing to settle, seeking application of this Court's test in Cowden v. Aetna Cas. and Sur. Co., 389 Pa. 459, 134 A.2d 223 (1957), where we held that an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits (herein after "Cowden bad faith standard").⁵

While initially opining in December 2009 that the Cowden bad faith standard should apply, the trial court reconsidered its decision in July 2011 and applied the Morris fair and reasonable standard. Judge R. Stanton Wettick reasoned that while the interests of insurers and insureds generally align when the insurer has accepted responsibility for defense and indemnity, the parties' interests increasingly diverge the more the insurer believes the policy does not cover the claims, as when the insurer defends under a reservation of rights. He observed that, in a reservation of rights case, an insured would prefer to cap the potential liability as it ultimately may be responsible for the full settlement in the event that insurer is successful in its challenge to coverage, whereas the insurer does not want to settle as it would relinquish its challenge to coverage. Tr. Ct. Op., July 5, 2011 at 5. Relying upon Morris and decisions from other jurisdictions, the trial court opined that a reservation of rights case is more akin to a case where an insurer has refused coverage and defense. Id. at 5–6. Accordingly, the court adopted the test forwarded by Insureds under which an insurer, defending subject to a reservation of rights, is required to reimburse an insured for a settlement reached in violation of the consent to settle clause where coverage is found to exist and the settlement is "fair and reasonable" and made in "good faith and without collusion." Id. at 6–11 (citing in support Insurance Co. of North America v. Spangler, 881 F.Supp. 539 (D.Wyo.1995)

; Morris, 154 Ariz. 113, 741 P.2d 246 ; Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637 (Iowa 2000) ; Patrons Oxford Ins. Co. v. Harris, 905 A.2d 819 (Me.2006) ; and Martin v. Johnson, 141 Wash.App. 611, 170 P.3d 1198 (2007) ); Tr. Ct. Order, July 5, 2011 ...