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Insurance Law

Babcock & Wilcox v. American Nuclear Insurers: Why Insurers Are The Real Winners In Pennsylvania High Court’s Adoption Of Arizona’s Morris Rule

Justice Stanley Feldman (Ret.) Of The Arizona Supreme Court -- Author of Morris -- Provides Comment

[Disclosure: I, along with two colleagues, filed an amicus brief with the Pennsylvania Supreme Court, in Babcock & Wilcox Company v. American Nuclear Insurers, on behalf of an insurance industry trade association, in support of ANI’s position.]

Barring something very unusual, it is a simple matter to figure out which party was the winner after reading a judicial opinion. On its face, that certainly applies to the Pennsylvania Supreme Court’s recent decision in The Babcock & Wilcox Company v. American Nuclear Insurers, 2 WAP 2014 (July 21, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], where the court reinstated a multi-million dollar jury verdict in favor of B&W, concerning coverage for injuries and damages allegedly caused by emissions from its nuclear facilities.

But despite how easy it seems to identify the winner and loser in B&W, every so often judicial opinions can resemble a fun house mirror. This is one of those times. Yes ANI suffered a significant loss. But when the fat lady sings on B&W, it will go down as a case that provided significant benefits for insurers as a whole. B&W is a very complex and protracted case -- spanning two decades. Mercifully I can explain why I believe that insurers were the winners without any need to discuss its specifics.

My opinion concerning the score in B&W stands in contrast to that of a recent Commentary in Law360 that saw it differently. That Commentary concluded that “[t]he Pennsylvania Supreme Court fashioned a new and dramatic rule favoring policyholders and harming insurers and it did so while openly disregarding clear policy language.”

The Supreme Court in B&W succinctly, and conveniently, described the issue in the opening paragraph: “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 [for $80 million], when the insurer defends the insured subject to a reservation of rights [to the tune of $40 million], asserting that the claims may not be covered by the policy.”

The court, just as succinctly and conveniently, provided the answer in the last paragraph: “In this case, after an extensive trial where the jury was presented with voluminous evidence relating to the strength of the underlying action and the settlement offer, the jury determined that the settlement was ‘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,’ a standard which we adopt herein as the proper standard to apply in a reservation of rights case where an insured settles following the insurers' refusal to consent to settlement. We conclude 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.”

The reason why B&W can be explained, without needing to discuss the case itself, is because the test that the Supreme Court adopted, for the handling of insurer-provided defenses under a reservation of rights, applies in ALL cases – even if they bear no resemblance to B&W. That is also at the heart of why the case is so significant – it has across the board applicability. Many coverage cases are important – but have the ability to be influential only in the context of certain limited factual or policy scenarios. B&W, however, will be a cloud that hangs over every case being defended under a reservation of rights—regardless of the nature of the facts and coverage issues. To put it another way, B&W isn’t some pollution exclusion case that, while fascinating, has no relevance until the next time someone claims that their apartment smells like pastrami on account of the deli next door.

The story of B&W is that the Pennsylvania high court adopted a variation of the Arizona Supreme Court’s decision in United States Auto Ass’n. v. Morris, 741 P.2d 246 (Ariz. 1987), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. This nearly 30 year old decision was written by Justice Stanley Feldman (Ret.). The word Morris appears in the B&W opinion 41 times. You know what they say about imitation. So I reached out to Justice Feldman to ask him about the Pennsylvania Supreme Court’s flattery. His Honor -- now with the Arizona law firm of Haralson, Miller, Pitt, Feldman & McAnally -- was kind enough to provide with me his thoughts. I’ll get to those in a bit. [I also had the privilege of interviewing Justice Feldman in the July 16, 2014 issue of Coverage Opinions.]

The Pennsylvania Supreme Court described the Morris decision in terms of the insured’s characterization: “As noted, we granted review to consider as an issue of first impression 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. Insureds advocate adopting the Morris fair and reasonable standard. They contend that when an insurer defends subject to a reservation of rights, an insured must be able to protect itself from the potential of an adverse and uninsured decision in the underlying tort case, if the insurer is ultimately deemed correct in concluding that the policy does not cover the claim. Further, Insureds claim that the insurer in a reservation of rights scenario is ‘in the attractive position of being able to avoid exposure either because the insured prevails at trial or because the insurer’s coverage defense is successfully asserted[.]’ Insureds contend that the Morris fair and reasonable standard provides protection for the insured by allowing the insured to accept settlement, while still preserving the insurer’s rights to contest coverage, challenge the fairness and reasonableness of the settlement including whether it resulted from fraud or collusion, and maintain control over other aspects of the defense including the choice of counsel and the defense strategy prior to settlement.”

While Justice Feldman of course could not disclose any of the Arizona high court’s discussion that led to the Morris decision, he did share with me his own thinking behind it: “[T]hink of the serious plight of an insured who has purchased indemnity along with the right to a defense and been told that the most important part of the purchase may not be performed. True, the insured can let the insurer manage the tort defense and wait for the end of the case to find out whether he will be indemnified. But the worse the result, the more likely the coverage issue will be litigated.”

But Justice Feldman was not unaware that it is a two-way street and insurers also have interests with entitlement to protection. To Justice Feldman the answer to this push and pull was a balancing of interests: “To me, Morris seems like the fairest answer to both insurer and insured. The insured is free to try to come to a reasonable settlement of the claim. The insurer will not be liable for the Morris settlement if the court finds it was unreasonable, collusive, or fraudulent, and will not be prejudiced in its attempt to show that coverage did not exist and that the reservation of rights was therefore proper.”

Besides this practical rationale for his crafting of the rules in Morris, Justice Feldman also described a more legalistic basis: “In all fairness, why should an insurer that erroneously refuses to acknowledge its duty to indemnify be entitled to control the defense and possible settlement of the case? [W]hy shouldn’t the failure to acknowledge the obligation to indemnify be considered an anticipatory breach prohibiting the insurer from later attempting to avoid the coverage that had existed by claiming that the Morris agreement was a violation of the cooperation clause? I am aware of the criticism in some of the treatises that the Morris doctrine violates the contractual agreement between the parties. But the anticipatory breach point refutes that position. Anyhow, there is not policy language that gives the insurer the simultaneous right to refuse to acknowledge the duty to indemnify while at the same time retaining the right to control the defense. Also Babcock & Wilcox is a very unusual case; in the vast majority of cases the reservation of rights letter places the insured in the position which is both dangerous and untenable. The insured has lost control of the defense and at the same time is not assured of indemnification. And in the great majority of cases is probably unaware of the danger this presents.”

A look at how the Pennsylvania Supreme Court’s adoption of Morris may play out makes it easy to see the benefits that B&W affords to insurers.

Consider an insurer defending its insured, under a reservation of rights, and trial is approaching (or maybe not). The plaintiff makes a settlement demand. Even if there is no legitimate risk of an excess verdict, the insured would still like to see the case settled, since the reservation of rights exposes it to the potential for uncovered damages. This scenario plays out – and without any difference on account of the facts and coverage issues -- just about every minute of every day in the liability claims context.

While the insured is pressing the insurer to settle, the insurer may not desire to do so. After all, the insurer, in the business of making these very decisions, may believe that the settlement demand is too high–based on its liability and/or damages evaluation. In this situation, under B&W, the insured can now settle the case – without concern that doing so will be a violation of the policy’s prohibition against voluntary payments. [Since the insured may not be financially able to settle the case, assignments of policy rights to plaintiffs may become an issue here. But that is a subject beyond the scope of this Commentary.]

Of course, some may say that the insured has just settled a case for more than it’s worth -- and is now turning to its insurer to pay up. But B&W offers insurers certain protections against this consequence. First, the insurer can challenge the fairness and reasonableness of the settlement including whether it resulted from fraud or collusion. So an insured that agrees to an overly rich settlement – even if it’s covered – takes the risk of exposure for uncovered damages.

Second, the insurer can also contest its obligation to provide coverage for the settlement. Not to mention that, under Pennsylvania law, it is unlikely that the insurer will be liable for its insured’s declaratory judgment fees, even if the insured prevails on coverage. So an insured that settles a case for too much, or even the right amount for that matter, faces the risk of not being able to recover for the settlement, as well as exposure for DJ fees that it very likely also will not be able to recover.

Third, despite the fact that the insurer defended under a reservation of rights, it may not in fact be interested in pursuing the coverage defenses. In this case, an insurer confronted with what it views as an overpriced settlement demand is protected: it can simply withdraw the reservation of rights and continue to litigate the case.

Lastly, as the B&W court noted, on account of the protection afforded to insureds under Morris, they will have a much more difficult time arguing that, by being provided with a defense under a reservation of rights, they are entitled to retain independent counsel at the insurer’s expense. This is a significant benefit for insurers -- as they are constantly confronted with demands for independent counsel by their insureds.

Once B&W starts to play out in Pennsylvania, insureds will find themselves confronted with the old adage: be careful what you wish for.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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