Monthly Archive for March, 2010

MARCH 2010 BAD FAITH CASES
COWDEN BAD FAITH STANDARD APPLIES IN DETERMINING COVERAGE OBLIGATION WHERE INSURED SETTLES CLAIM WITHOUT INSURER’S CONSENT (Allegheny - Judge Wettick)

In Babcock & Wilcox Company v. American Nuclear Insurers, the court addressed the standard to be applied in determining the coverage obligations of the insurer where an insured settles an underlying covered claim without the consent of an insurer that is providing coverage and a defense. 
In the underlying lawsuit, plaintiffs sued the insured for damages arising from radiation exposure from two nuclear facilities owned and operated by the insured.  The insured had insurance policies with the carrier totaling $320 million in coverage.  The insured retained its own counsel and settled the lawsuit for less than the policy limits. The insurer disagreed with the decision to settle.  The insured sought reimbursement for the full amount it paid to settle the suit.  The insurer argued that it had no obligation to make any payment because of the consent-to-settlement clauses in the policies issued to the insured. 
The court ordered the parties to submit cross motions to determine the legal standard to be applied.  The insured proposed the following standard: “If an insurer breaches its duty to consent to a reasonable settlement within insurance limits, the insured may settle without the insurer’s consent, without forfeiting its insurance coverage, provided the settlement is reasonable and entered into in good faith.”  The court rejected this standard explaining that settlement clauses should be enforced where the insurer is providing coverage and a defense, and the insured settles a claim without the insurer’s consent.  The court recognized that the insured’s proposed standard is the standard that is applied in situations where the insurer denies coverage and does not provide a defense. The court stated that if it accepted this standard, it would be transferring to the insured the authority which the policy gives to the insurer to control the litigation. 
The insurer argued that the articulation of the bad faith standard, which follows from Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459 (1957), and its progeny should apply.  In Cowden, the underlying lawsuit would have settled if the insurance company had been willing to pay the policy limits.  The verdict exceeded the policy limits, and the insured sought to recover the amount by which the verdict exceeded the policy limits.  The Cowden Court addressed the nature and extent of the duty owed to an insured by his insurer against liability for personal injury to others where the insured, by the terms of the policy, cedes to the insurer the right to control litigation.  The court summarized Cowden as follows:
The Court ruled that the insurer’s right to control the litigation is not absolute. While it is the insurer’s right under the policy to make a decision as to whether a claim should be litigated or settled, “it is not a right of the insurer to hazard the insured’s financial well-being.” There is an obligation of good faith which “requires that the chance of a finding of nonliability be real and substantial and that the decision to litigate be made honestly.” The Court stated that there is a requirement that the insurer also consider the interests of the insured which requires a balancing of the interests of the insurer and insured in a manner such that the insurer “treat the claim as if it were alone liable for the entire amount. But, that does not mean that the insurer is bound to submerge its own interest in order that the insured’s interests may be made paramount. It means that when there is little possibility of a verdict or settlement within the limits of the policy, the decision to expose the insured to personal pecuniary loss must be based on a bona fide belief by the insurer, predicated upon all the circumstances of the case, that it has a good possibility of winning the suit.”  Finally, the Court stated that “bad faith, and bad faith alone” is the requisite to render the insurer liable and that “bad faith must be proven by clear and convincing evidence.”
The court held that the application of the bad faith standard set forth in Cowden was more consistent with Pennsylvania case law.  Under the Cowden standard, the consent-to-settlement clause protects the insurance company’s decision unless bad faith is established.  Therefore, the insurer would have no obligation to reimburse the insured for the amount paid to settle the lawsuit unless the insured can establish by clear and convincing evidence that the insurer acted in bad faith in refusing to settle. 
The court entered an order selecting the Cowden standard to govern the situation in which an insurance company that is providing coverage and a defense does not consent to a settlement within policy limits proposed by the insured.  The court did not address what the insured must show in order to establish bad faith. 
Date of Decision: December 1, 2009
Babcock & Wilcox Co. v. Am. Nuclear Insurers, Nos. GD99-011498, GD99-016227 (Consolidated), Common Pleas Court of Allegheny County, 2009 Pa. Dist. & Cnty. Dec. LEXIS 151 (C.C.P. Dec.1, 2009) (Wettick, J.).