Archive for the 'PA – Reservation of Rights' Category


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This case involves attorney malpractice insurance, and when a carrier is estopped from denying coverage for failing to issue a timely reservation of rights letter.

The underlying plaintiff brought two actions against the attorney arising out of the same underlying medical malpractice action: (1) a 2017 legal malpractice action and (2) a 2019 disgorgement action seeking return of a referral fee paid to the insured attorney.

As to the 2019 claim, the underlying plaintiff had demanded return of the referral fee even prior to the disgorgement action. The record indicates that at some point prior to the disgorgement action being filed, the carrier issued a reservation of rights letter, stating the attorney would not be covered for any disgorgement. Another reservation of rights letter was issued after the 2019 suit was filed.  The carrier defended the disgorgement action, but refused to indemnify after judgment was entered against the attorney, who had to disgorge his referral fee and pay treble damages.

The carrier brought a declaratory judgment action seeking a ruling that it had no duty to indemnify either the 2017 or 2019 actions. The insured counterclaimed for coverage, based on estoppel, and bad faith.  The underlying plaintiff, a party to the case, also asserted estoppel.

The present posture involved cross-motions for summary judgment.

Carrier estopped from denying coverage for failing to issue timely reservation of rights letter

As to the 2017 case, the malpractice carrier defended the first action without timely issuing any reservation of rights letter. Thus, the court held the insurer was estopped from later denying coverage in the 2017 malpractice action.

In reaching this conclusion, Judge Kearney provides a detailed analysis of when an insurer may be estopped from denying coverage for failing to issue a reservation of rights letter, which is worth reading in detail for any attorney doing coverage work. Without reciting every detail, Judge Kearney outlines the basic issues as follows:

  1. To estop an insurer from denying defense or coverage, the insured must show the insurer induced a belief in facts on which the insured relied to his detriment.

  2. In determining detrimental reliance, courts will assess whether the insured suffered actual prejudice.

  3. “Actual prejudice occurs when an insurer assumes the insured’s defense without timely issuing a reservation of rights letter asserting all possible bases for a potential denial of coverage.”

  4. “When an insurer receives notice of a claim, it has a duty ‘immediately to investigate all the facts in connection with the supposed loss as well as any possible defense on the policy.’”

  5. “[The insurer] cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, taking advantage of a defect in the policy.”

  6. “The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.”

No estoppel in second action and no bad faith

Earlier in the case, the court dismissed the insured’s bad faith counterclaims on the 2017 action, but had allowed the bad faith counterclaims on the 2019 action to proceed.

As to the 2019 action, the insurer promptly issued a reservation of rights and denial of coverage when it learned of the potential disgorgement claim. Moreover, it had even informed the insured prior to the second action’s actual filing that there was no coverage for disgorgement claims.

The court found the carrier was not estopped from asserting it owed no duties in the second action. Judge Kearney especially focused on the absence of prejudice to the insured.  Clearly, the court further agreed that the carrier had no indemnification duty toward the insured in the 2019 case, absent an effective estoppel argument.

As to bad faith, once the court found the insurer had reserved its rights and properly denied coverage in the second action, it rejected the bad faith claim.

Judge Kearney observed there is no common law bad faith claim in Pennsylvania, only statutory bad faith and the contractual breach of the implied duty of good faith and fair dealing. In this case, the insured did not raise statutory bad faith, so the court solely looked at the contractual duty of good faith and fair dealing claim.

“An insurer violates its implied contractual duty to act in good faith when it gives a ‘frivolous’ or ‘unfounded’ excuse not to pay insurance proceeds. As we find [the insurer] has no duty to defend or indemnify [the insured attorney], we cannot find its decision not to do so ‘unfounded’ or ‘frivolous.’”

Finally, the court found the underlying plaintiff had no standing to bring an estoppel counterclaim, even if she did have standing to argue for coverage.

Thus, the insured won summary judgment on coverage in the 2017 claim, but the insurer was successful on the 2019 claim.

Date of Decision: October 8, 2020

Westport Insurance Corporation v. McClellan, U.S. District Court Eastern District of Pennsylvania No. 20-1372, 2020 WL 5961047 (E.D. Pa. Oct. 8, 2020) (Kearney, J.)

Important Pennsylvania Superior Court Opinion on Reservation of Rights Letters – (1) Investigate to Assure a Sufficient Level of Specificity, (2) Don’t Rely on Boilerplate, and (3) Use Multiple Reservation of Rights Letters as a Best Practice Where New Facts Develop (Pennsylvania Superior Court)

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The insured was exclusively in the business of snow and ice removal. The carrier issued a policy having an exclusion for snow and ice removal. The insured was sued for a slip and fall on an icy parking lot.

Despite the clear exclusion, the insurer did not expressly reference the exclusion in its reservation of rights letter. Rather, the insurer defended the case for 18 months before first raising the exclusion via a declaratory judgment complaint, seeking a declaration that it had no duty to defend or indemnify.  The insured counterclaimed for defense and coverage, bad faith, fraud, and most significantly for present purposes, that the insurer “should be estopped from ceasing its representation and indemnification….”

After discussing that a defense was being provided, the reservation of rights letter states, in pertinent part: “In the meantime, please be aware that [the insurer] will be handling this matter under a reservation of rights. This means that [it] reserves all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop. Those rights include, but are not limited to, the rights to decline coverage for this claim and to withdraw assigned defense counsel.” As stated, the letter did not specifically reference the snow and ice exclusion.

The trial court found this broad language sufficient to preserve the insurer’s right to assert the snow and ice exclusion 18 months later, and granted the insurer summary judgment on all counts. The Superior Court reversed.


The Superior Court observed some general principles in reaching its decision:

  1. Pennsylvania law does not require an insurance company to list every potential defense to coverage in its reservation of rights letter. However, the small body of recent case law discussing this precise issue suggests that some level of specificity is necessary.”

  2. “[I]nsurance companies can … choose to send multiple reservation of rights letters during the evolution of a case as a best practice.”

  3. “Pennsylvania counterbalances the insurer’s broad obligation to defend even claims as to which coverage may not apply by providing the insurer [with] the option of defending subject to a reservation of its rights later or simultaneously to contest coverage.”

  4. “Where the insurer assumes the duty to defend, the insurer can simultaneously challenge whether the claim is covered under the insurance policy, even if the underlying case settles. An insurer’s defense of the insured, therefore, does not waive the insurer’s claims that a policy exclusion applies.”

  5. An insurer is “required to provide timely and sufficient notice of any such reservation of rights to the insured….”

  6. The reservation of right must “(1) be submitted in a timely fashion; and (2) ‘fairly inform the insured of the insurer’s position’ in order to preserve an insurer’s assertion of policy exclusions once a defense of the insured has been mounted.”

  7. “[A]n insurance company preserves defenses via a reservation of rights ‘[i]f its investigation is conducted with reasonable dispatch and its disclaimer is made with promptness upon the discovery of the facts….”

  8. An insurer “cannot delay its decision and refrain from giving notice to the insured until such time has elapsed that his rights in relation to the accident are prejudiced or may become so….”

  9. “’[W]here an insurer fails to clearly communicate a reservation of rights to an insured, prejudice may be fairly presumed.’” (Court’s emphasis)

  10. The court quoted, and emphasized, a nearly 40-year old Superior Court opinion as guiding precedent: “[A] liability insurer will not be estopped [from setting] up the defense that the insured’s loss was not covered by the insurance policy, notwithstanding the insurer’s participation in the defense of an action against the insured, if the insurer gives timely notice to the insured that it has not waived the benefit of its defense under the policy. However, a reservation of rights in this respect, to be effective, must be communicated to the insured. It must fairly inform the insured of the insurer’s position and must be timely, although delay in giving notice will be excused where it is traceable to the insurer’s lack of actual or constructive knowledge of the available defense.” (Court’s emphasis)

  1. It cited a 91-year old Supreme Court precedent for the proposition “When an insurance company or its representatives is notified of loss occurring under an indemnity policy, it becomes its duty immediately to investigate all the facts in connection with the supposed loss as well as any possible defense on the policy. It cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, take advantage of a defect in the policy. The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.”

  2. “[I]nsurance carriers may be estopped from asserting a policy exclusion where it has ‘lulled the insured into a sense of security to his detriment.’”

The reservation of rights letter was timely

In this case, the insurer issued the reservation of rights letter within three weeks of the suit against the insured, and before any defense was undertaken. The court generally observed “that a reservation of rights letter sent close-in-time to the institution of a potentially covered legal action is ‘timely’ under Pennsylvania law.” The Court found the instant reservation of rights letter timely.

The reservation of rights letter did not “fairly inform the insured of the insurer’s position”

The court observed that the reservation of rights letter stated the insured’s defense was “potentially covered,” and that defense counsel was being appointed. Although the letter stated the insured had “a right to obtain private counsel on its own initiative, it simultaneously instructed [the insured] to refrain from discussing the case with ‘anyone other than your attorney or a properly identified representative of [the insurer].’”

As set out above, the letter only “generally reserved all of [the insurer’s] rights under ‘applicable law, insurance regulations and policy provisions,’ including the right to deny coverage. However, the letter failed to specifically identify any emergent coverage issues. Instead, it simply purported to include any and all issues that may become relevant as this matter continues to develop.’”

In this case, while the reservation of rights letter may have adequately apprised the insured that something might occur in the future affecting coverage, “it provided no notice whatsoever of the existing coverage issue appearing on the face of the Policy, i.e., the snow and ice removal exclusion.” The Court found the insurer failed in its duties to investigate before issuing the reservation of rights letter.

The Court stated that “[a]ny complete review of the Policy would have immediately revealed the existence of this exclusion.” If the insurer had reviewed the policy and cited the exclusion, it would have “vitiated any obligation … to defend or indemnify….” “Instead, the boilerplate language relied upon by [the insurer] obfuscated this absolute defense to coverage, and caused [the insured] to reach the reasonable conclusion there was no pressing need to secure back-up counsel.”

The Court added that while insurers do not have to list everybody potential defense in a reservation of rights letter, the trend in the “small body of recent case law discussing this precise issue suggests that some level of specificity is necessary.” Thus, the Court tied specificity in a reservation of rights letter to the insurer’s duty to investigate before issuing a reservation of rights.

Thus, it was not the lack of specificity, standing alone, that doomed the insurer here. “The lack of specificity in [the insurer’s] reservation of rights letter is not determinative, in and of itself. We are not announcing some new paradigm by which Pennsylvania insurance companies must prophylactically raise all potential coverage defenses in order to preserve them. However, the lack of specificity in the letter bespeaks the deficient investigation carried out by [the insurer].” (Court’s emphasis) In this case the insurer had both the policy language and actual knowledge of the nature of the claim, but waited 18 months before specifically raising the exclusion.

There was presumptive prejudice sufficient to create an estoppel

The Court observed that insurer’s own conduct may lead to estoppel in belatedly asserting exclusions where, e.g., the insurer lulls the insured into a sense of security detrimental to the insured’s interests, or only raised the exclusion 9 months accepting exclusive control of the defense.

Here, where the insurer failed to “’clearly communicate’ its coverage position and the inherently speculative nature of determining how the case might have unfolded differently had the insurance company acted with appropriate diligence, prejudice can be fairly presumed in this instance.” Thus, the Court held, “[a]s a consequence of [its] deficient investigation, [the insurer’s] reservation of rights letter failed to ‘clearly communicate’ the extent of the rights being reserved, which resulted in presumptive prejudice….”

[As a practical matter, asserting the exclusion could have alerted the insured immediately that coverage was unlikely, and that it needed to get its own counsel instead of waiting for the other shoe to drop.]

“As a result of this prejudice, [the insurer] should have been estopped from asserting this policy exclusion for the first time eighteen months later without sufficient notice to [the insured] regarding [the insurer’s] coverage position.”

Thus, the trial court’s decision was reversed, and the case remanded.

Date of Decision: April 24, 2020

Selective Way Insurance Co. v. MAK Services, Superior Court of Pennsylvania No. 1289 EDA 2019, 2020 Pa. Super. LEXIS 342, 2020 PA Super 103 (Pa. Super. Ct. April 24, 2020) (Bowes, Shogan, Strassburger, JJ.)


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Like the recent Middle District Ferguson decision, the opinion in this case involves good news and bad news. First, the court addresses head on whether statutory bad faith must be predicated on a denial of benefits, or can be independently sustained based upon a variety of poor claims handling practices. That’s good for those seeking clarity on this issue. The bad news is that, like Ferguson, this opinion never addresses head on the 2007 Pennsylvania Supreme Court decision in Toy v. Metropolitan Life Insurance Company.

As we have set forth many times on this Blog, the Toy decision strongly appears to require the denial of a benefit as a predicate to bringing a statutory bad faith claim, meaning a refusal to pay proceeds due under the policy, unreasonably delaying payment of proceeds due under the policy, or refusing to pay for a defense due under the policy. Under Toy, other types of poor conduct in claims handling go to evidence of statutory bad faith, without being actionable bad faith standing alone. See this 2014 article for a more detailed discussion.

In the present case, an excess carrier paid $19,000,000 to settle a malpractice suit, contingent on its right to recoup that payment. The insured objected. The insurer brought suit to recover the money, and the insured counterclaimed for breach of contract, common law contractual bad faith, statutory bad faith, and for a declaratory judgment.

The court denied the insurer’s motion to dismiss the counterclaims, and the insurer brought a motion for reconsideration on whether the bad faith claim was adequately pleaded, and whether the damage claims were too speculative and contingent to stand. Both motions were unsuccessful. [We only address the bad faith claim.]

The court focused on the Pennsylvania Supreme Court’s 2017 Rancosky decision to address the issue of whether an actionable statutory bad faith claims requires “the plaintiff must allege that the insurer has denied benefits under the policy. … [and] that only either a refusal to pay benefits or a delay in paying benefits that becomes an effective denial can constitute a denial of benefits sufficient to state a claim under § 8371.” The court points out that the Rancosky majority did not address that issue, but Justice Wecht’s Rancosky concurrence “listed several types of conduct, including poor claims-handling, a failure to respond to the insured, and other similar conduct, which could give rise to a § 8371 claim and that list is broader than a refusal or delay in paying benefits.” Although the majority had not adopted that concurrence, because the majority did not expressly refute the concurrence, the District Court “remain[ed] convinced that the Pennsylvania Supreme Court, if confronted with the issue … would hold that [the insured] had stated a claim.”

[Note: Per the above comment, however, it strongly appears that the Pennsylvania Supreme Court did address the issue in 2007. A review of the carrier’s brief indicates that it argued Toy stood for the proposition “that ‘bad faith’ under § 8371 is strictly limited to ‘those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss.’” The carrier further argued that Rancosky did not overrule or limit this principle, and if anything reaffirmed it. The District Court clearly rejected the notion that Rancosky limited statutory bad faith claims to the denial of benefits, but never addressed whether Toy did so.]

Thus, the motion for reconsideration was denied. The court held that the insured stated a claim by alleging “poor claims-handling, a failure to respond to the insured, and other similar conduct, which could give rise to a § 8371 claim,” wholly independent of any refusal to pay or delay in paying benefits.

Date of Decision: January 23, 2020

Ironshore Specialty Insurance Co. v. Conemaugh Health System, U. S. District Court Western District of Pennsylvania CASE NO. 3:18-cv-153, 2020 U.S. Dist. LEXIS 11060 (W.D. Pa. Jan. 23, 2020) (Gibson, J.)

Two recent examples of cases finding that statutory bad faith claims must be based upon a denial of benefits are Judge Dubois’ 2019 Buck decision, and Judge Kearney’s 2019 Boring decision. In her 2019 Purvi decision, Judge Beetlestone states that, with limited exceptions, “the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits….” (Emphasis in original).


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This dispute arises out of a Title Insurance Company’s initial refusal to defend its insured against a third party claim. The plaintiff in the underlying action proceeded pro se, and filed three different complaints before obtaining counsel. Based on the confusing and unclear language in the complaints, the insurer denied coverage.

It was not until a fourth Complaint was filed that the insurer provided a defense under a reservation of rights. Notably, however, the insurer only agreed to defend the covered claims, and refused to provide a defense for the uncovered claims. The insurer’s position went against well-established Pennsylvania case law requiring insurers to defend against both covered and uncovered claims until all potentially covered claims had been dismissed or resolved.

The insured brought suit alleging that the insurer acted in bad faith by delaying its defense, and by refusing to defend against all claims as required under Pennsylvania law. In determining that there was no bad faith, the Court reviewed the policy and held that the insurer correctly determined that its duty to defend was not triggered until the filing of the fourth Complaint. Because the insurer’s refusal to defend was based on a correct interpretation of the policy, its denial of benefits was not unreasonable, and the plaintiff was unable to satisfy the first element of bad faith.

With regard to insurer’s refusal to defend all claims, the court observed that the general rule that if any claim is covered, then under Pennsylvania law, the insurer must defend all claims, i.e., both covered and uncovered claims. The title insurer argued, however, “that title insurance policies should be construed differently, to extend the duty to defend only to those claims within the contours of the policy.” The title insurer relied upon case law from other jurisdictions and the title policy language; and the insured relied upon Pennsylvania public policy as set forth in case law. The court determined that it should rely upon Pennsylvania precedent, and rejected the title insurer’s argument.

As to bad faith, however, the court held that the insurer’s position was not taken in bad faith for two reasons. First, although unsupported by any Pennsylvania case law, this title insurance exception was an issue of first impression and had apparently never been presented before a Pennsylvania court. Second, the insurer’s position was supported by case law from other jurisdictions that had carved out similar exceptions for Title Insurance Companies.

Date of Decision: March 27, 2017

Lupu v. Loan City, LLC, No. 12-4556, 2017 U.S. Dist. LEXIS 45135 (E.D. Pa. Mar. 27, 2017) (Rufe, J.)


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The insured failed to allege a plausible bad faith claim in this case.

The insurer had defended the insured under a reservation of rights in two state actions. The insurer brought suit for declaratory relief in Pennsylvania on those two claims, seeking a ruling that it had no duty to defend or indemnify. It denied coverage in a third state (Vermont) action, apparently without any agreement to defend under a reservation of rights, and amended its Pennsylvania declaratory judgment action to cover this third case as well. The insured brought a counterclaim for bad faith for this last denial of coverage, focusing on the different treatment between the third action and the first two actions.

The Court first had to address a choice of law analysis. Although the states’ bad faith laws at issue were likely not in conflict, the court carried out the analysis to be thorough. The Court found that a key element was where the insurance benefit was denied, in cases where an insured is claiming breach of contract and bad faith. The denial is located at the insured’s place of business, since this is where the economic impact of the denial occurs. In this case, that was Pennsylvania. Further, there were other factors favoring application of Pennsylvania law.

The Court then addressed the insurer’s motion to dismiss the bad faith claim. The following allegations failed to set out a plausible claim under Pennsylvania bad faith law:

The insurer does not have a good faith basis for its denial of a defense to [the insured] in the Vermont Action.

The insurer agreed to defend the New York and Massachusetts Actions based on similar allegations as those contained in the Vermont Action and has at all times continued to defend the New York and Massachusetts Actions.

The insurer’s decision to deny a defense to [the insured] in the Vermont Action while agreeing to defend the New York and Massachusetts Actions is arbitrary, capricious and/or frivolous.

The Vermont Plaintiff’s claim for property damage and/or bodily injury falls within the Policy’s coverage and the products completed operations coverage and [the insured] is entitled to a defense for the claims asserted by the Vermont Plaintiff.

The insurer’s denial of coverage for the Vermont Plaintiff’s claim was made in bad faith.

The insured is entitled to recover damages for the insurer’s bad faith handling of the Vermont claim regardless of the law that applies.

The Court found that, even where claims are similar, denying some claims and covering others is not per se bad faith. The court gave the example that there could be 5 similar claims, none of which the insurer believed in good faith merited coverage. However, it might offer coverage for a subset of those cases “based upon a calculated business judgment, risk avoidance, litigation forecasts, etc.” Thus, “’similarity’ among claims is a poor predictor of bad faith denials in cases where either the claims’ alleged similarity or the claims’ coverage under the policy is not clearly established.”

The Court went on to observe that the insured “points out that coverage of the prior two claims to which [insured] compares the instant action was actually made under a reservation of rights. I consider it a poor use of judicial resources to create judicial rules that make it costlier for insurers to offer initial coverage under a reservation of rights letter. Were Defendant’s argument accepted, insurers would be less willing to offer coverage while a claim was initially being investigated for fear that one coverage decision might be viewed as an admission as to that claim or a comparable one in related litigation. Similar policy justifications underlie determinations by the Federal Rules of Evidence mandating that subsequent remedial measures and offers to pay initial medical or hospitalization costs be deemed irrelevant in associated legal proceedings.”

Finally, the Court found that “most damning for Defendant’s bad faith counterclaim, [the insurer] has provided the Court a copy of its coverage denial letter. Plaintiff has accurately characterized its declination letter as ‘detailed.’ The ten-page, single-spaced letter sets forth, from Plaintiff’s perspective, the applicable choice-of-law analysis, the pertinent policy definitions, the facts surrounding the claim, the justifications that it provides for why those facts do not trigger coverage, and various legal decisions that it suggests support its denial of the claim.”

The Court referenced the fairly debatable standard from other jurisdictions, in observing this was not a basis for bad faith. It looked at Pennsylvania case law on the existence of the insurer’s “reasonable basis” to deny a claim, to the same effect. As stated, it found that the insured had not met the Twombly/Iqbal pleading standards.

Unlike many dismissals for failure to plead a plausible action, however, this bad faith claim was dismissed with prejudice, the Court finding that amendment would be futile.

Date of Decision: August 29, 2016

Westfield Insurance Company v. Icon Legacy Custom Modular Homes, 2016 U.S. Dist. LEXIS 115214 (M.D. Pa. Aug. 29, 2016) (Brann, J.)

We also remind you of Judge Brann’s decision of the same date, as one of the relatively few cases in the last 9 years addressing the Supreme Court of Pennsylvania’s important bad faith decision in Toy v Metropolitan.


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In Babcock & Wilcox Co. v. American Nuclear Insurers, Pennsylvania’s Supreme Court had to determine under what circumstances an insured being defended under a reservation of rights could settle with a claimant, absent the insurer’s agreement, and later recover the settlement proceeds from the insurer. The Supreme Court ruled that: (1) where an insurer defends subject to a reservation of rights; (2) the policy is ultimately found to cover the relevant claims that were settled; (3) then the insured may accept a settlement over the insurer’s refusal; (4) where the settlement is fair, reasonable, and non-collusive.

As discussed below, the Court recognized that lower courts will have to look at the specific nature of the rights reserved in applying these principles.

Analytically, the insurer’s failure to settle within policy limits under these circumstances, i.e., rejecting a fair and reasonable settlement while maintaining a reservation of rights, is a breach of its contractual duty.  The burden of proof is on the insured to make this case, and factors to consider include “consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.”

The Supreme Court more generally stated the “risks of going to trial” had to be evaluated. The Court rejected two contrary possibilities.

First, it rejected the insurer’s arguments that the insured must prove bad faith, rather than the settlement’s fairness and reasonableness.

Second, the Supreme Court vacated the Superior Court’s ruling that had provided the insured with two options: (1) accept a defense subject to a reservation of rights, and be required to prove insurer bad faith to recover on any unilateral settlement; or (2) reject the insurer’s offer of a defense under a reservation of rights, hire counsel at the insured’s own expense, and then settle and recover from the insurer under a fair and reasonable standard if coverage is otherwise due.

As to defects in the Superior Court’s analysis, the Supreme Court accepted (1) the legal argument that the insured could breach the insurance contract by rejecting a defense offered by the insurer; and (2) the practical argument that many insureds could not even afford to hire private counsel to pursue this route.

In evaluating the insurer’s responsibility to reimburse the insured, the Court accepted a distinction between a “soft” reservation of rights and a “hard” reservation of rights.  A “soft” reservation of rights involves circumstances where an insured is reserving rights which are “unlikely to alter the interests of the parties”; whereas with a “hard” reservation of rights “the insurer views the claims as possibly covered, requiring a defense, but ultimately unlikely to be covered by the policy, such as when intentional actions are also pled in negligence.”

The Court agreed “that not all reservations of rights are equal…. [and] [t]he mere fact that an insurer restates that it will not cover what the insurance policy does not cover, where it arguably might be part of the damages sought, does not automatically result in allowing the insured to settle the entire suit. Parties and courts may need to consider whether a particular reservation of rights justifies diverging from the contract’s cooperation clause,” i.e., does the insurer’s specific reservation of rights in a particular case permit a court to allow the insured to unilaterally settle the entire case, contrary to the insured’s normal contractual duty to cooperate in any settlement with the insurer and to only settle with the insurer’s consent.

[Note: By way of one hypothetical, assume a case is brought in negligence, but the claimant is also seeking punitive damages, which is possible under Pennsylvania law.  The insurer issues a reservation of rights solely on the punitive damages claim.  The insurer refuses to settle at the underlying plaintiff’s demand number because it concludes that there is a reasonable chance for a defense verdict on the covered claim.  The insured later settles unilaterally at that same demand number because of the concern over punitive damages, which are clearly not covered under the policy.  Thus, there could be an issue under as to whether the fair and reasonable standard even applies because the claim motivating the settlement of the entire case was not a covered claim.]

Date of Decision:  July 21, 2015

Babcock & Wilcox Co. v. American Nuclear Insurers, No. 2 WAP 2014, 2015 Pa. LEXIS 1551 (Pa. 2015)

The dissent can be found here.


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In Charter Oak Insurance Company v. Maglio Fresh Foods, a primary and excess carrier sought declaratory judgments that they owed the insured no coverage duty under their policies.  The insured counterclaimed for bad faith.  The parties agreed to let the court decided the coverage issues before ruling on the bad faith issue.  The court found that neither insurer owed any coverage duty.  However, this, in itself, did not end the bad faith inquiry.


The insured subsequently amended its counterclaims for bad faith against each insurer. It alleged that the primary carrier acted in bad faith (1) by failing to acknowledge a conflict of interest between the insurer and insured; (2) by failing to advise the insured of its right to independent counsel as a result of that alleged conflict, and to provide that independent counsel; (3) by failing to intervene in the underlying litigation in a timely manner in order to submit jury interrogatories as means of clarifying whether the jury found against the insured based on a theory of liability that the insurance policies would cover or on an uncovered theory; and finally (4) by failing to consider settlement offers and attempt to settle the underlying lawsuit in good faith.

The insured alleged that the excess carrier acted in bad faith by (1) failing to conduct a reasonable investigation before disclaiming coverage and (2) failing to provide a defense to the insured and refusing to post an appeal bond upon the exhaustion of the primary carrier’s policy limits.

Opinion 1.  Winning coverage issue did no eliminate bad faith claims automatically and court found material issues of fact that would place these claims before a jury.

The carriers attempted to win the day on the argument that because they won on coverage, they must by necessity win on bad faith.  In rejecting that argument, the court first observed that the duty to defend was broader than the duty to indemnify.

Next, the court observed that defending under a reservation of rights does not eliminate the possibility of bad faith.  “As the Superior Court of Pennsylvania recently observed, ‘[t]his is not to say that, when an insured accepts the insurer’s defense, the insurer’s conduct of the litigation is subject to no further scrutiny.” Babcock & Wilcox Co. v. Am. Nuclear Insurers. “Rather, the insurer remains bound by its fiduciary obligation to represent the insured’s interests, and to settle the case when appropriate, in keeping with its obligation of good faith.’”

Then, on the issue of alleged bad faith by the primary insurer in not seeking to intervene in the litigation to request jury instructions that would determine whether the jury found against the insured on a covered or non-covered claim, the court appeared to place this in the context of a duty to settle.  The argument appears to be that doing so may have been advantageous to the insured at a time when itfaced potential liability based on certain claims, some of which were not covered by the policy and some of which may have been.

That the court later determined there was no coverage was not the relevant question; rather, it looked to the point in time when the decision could have been made to do so, and at which time the issue of coverage was “by no means certain”. The court framed the issue: “In order to determine whether [the insurer] acted in bad faith, the factfinder must evaluate [its] conduct vis-a-vis the factual landscape that existed at the time of the conduct in question, not based on this Court’s later determinations.”

Addressing this last issue on the facts, the court stated that: “To the extent that a trial involved potentially covered theories of liability, [the insured] had an interest, and indeed a right, to have [the primary carrier] take appropriate steps so that the jury could be instructed on, and if the evidence warranted under the law, return a verdict of liability on the [the potentially covered] claim.” The facts showed that by the time to case got to the jury, potentially covered claims were still on the table.

That being said, the court came very close to ruling in the insurer’s favor on this issue.  The insurer had retained coverage counsel as well as defense counsel at the time of trial, and coverage counsel had recommended submitting special interrogatories, which the insurer wanted to do.  However, the final decision was left up to defense counsel who did not do so, but who was given full leeway on this issue without the carrier’s making the call.

Because there was some remaining question on why he so chose, the court allowed the matter to go to trial; and further, because it would not be granting the motion for summary judgment in full for the carrier in any event.  Importantly, the court did find that there was no issue about defense counsel’s independence; and defense counsel’s decision not to submit the special interrogatories when the carrier wanted him to, evidenced his independence.

The court further found that there were issues concerning an alleged bad faith failure to settle.  There were two products at issue in the underlying unfair competition case.  One went to verdict in the original action, and the other was subject to a mistrial.

The first resulted in an excess verdict for the primary carrier, but there was no bad faith as the case had been consistently evaluated as worth less than policy limits.

As to the second, there were factual disputes about whether that case could then settle before retrial.  It did not settle, and on retrial, the second verdict was for less than policy limits ($1 Million), but was still a substantial $660,000.  The court found on the record various factual issues concerning whether the cases could have settled.

As to the excess carrier, the time period at issue was likewise that period between verdicts, and then even after the verdict.  The court framed the issue as whether the excess carrier met “its potential defense obligations to [the insured]?” Because the primary carrier tendered policy limits during this period, potential defense issues arose for the excess carrier, even though the primary still provided a defense for a time before the post-verdict settlement.  The insured argued that the excess carrier needed to reevaluate the case to meet its fiduciary responsibilities, and to pay towards defense and an appeal bond.

The court found issues remained open, and would not grant summary judgment.

Finally, the court rejected the argument that bad faith could not exist because there was no objective basis to find that the excess carrier’s position on coverage was unreasonable.  However, the court again focused on the claim as relating to the duty to defend, adding that even though the court found there was no duty to indemnify, “it did so because the underlying trial record was not sufficiently clear such that [the insured] would be able to meet its burden to show that the jury awarded … damages based on a covered, as opposed to a non-covered, claim.” Thus, the question remained as to whether the excess carrier’s  refusal to participate in the “defense was reasonable in light of (1) the principle that an insurer has a duty to defend the insured until it can confine the claim to a recovery excluded from the policy, and (2) the existence of a possible [covered] claim … in the [second] trial.”

After this decision, the insured and the primary carrier settled, but the case against the excess carrier went to trial 10 days after the decision.  The court issued factual findings on August 8, which will be the basis for its ultimate decision, not rendered as of this date.

Opinion 2.  Motions in limine on experts.

In between these two rulings, the court ruled on all three parties’ motions in limine concerning experts.

First, although finding that the insureds expert was qualified on insurance issues, the court had already found that the primary insurer “did not, as a matter of law, breach its duty to [the insured] or any provision of its insurance policy by appointing [defense counsel] to represent [the insured]….” Thus, there was no factual issue for a trial on this matter, and the expert would “not be allowed to give any opinion that [the primary carrier] breached its policy by not appointing counsel in addition, or as an alternative, to [the defense counsel it had appointed].”

Second, on the jury interrogatory issue, the insured’s expert report did not “adequately address this issue nor raise relevant facts with respect to it.” Instead, the analysis on this point was all premised on there being a failure to appoint different or additional counsel, which argument the court had already rejected.  Moreover, “even assuming that, following [appointed defense] counsel’s offer of proof at the beginning of trial, as required in the Court’s opinion on summary judgment motions, the interrogatory issue remains for the jury’s consideration, [the insured’s expert’s] opinion does not ‘fit’ with the issues in this case, and therefore, he will not be allowed to testify on this issue.”

Third, on the settlement issue, the insured’s expert did address that issue in his report. Thus,  subject to any rulings that the Court makes on interpreting the policy or concerning Pennsylvania law, [the expert] will be allowed to testify as to this issue.”

Next, the court addressed the insured’s motion to exclude the primary insurer’s expert.  This motion was denied.  This expert would be allowed to testify about the factors leading up to defense counsel’s decision not to submit jury interrogatories, if that were to be before the jury.  He could also testify “as to the issue of whether [the primary insurer] acted in bad faith with respect to settlement of the underlying litigation, subject to any forthcoming rulings from the Court.”

Lastly, as to the insured’s motion to preclude the expert testimony of the excess carrier’s expert, this was also denied.  He was qualified and his opinions related to the excess carrier’s duty to defend in the underlying litigation, which were relevant to key issues at trial and could potentially assist the jury in its consideration of those issues. Thus, his proposed testimony, subject to any rulings the Court makes in interpreting the contract or under Pennsylvania law, would be admitted.

Date of Decision:  July 18, 2014 (on legal issues)

Date of Decision:  July 21, 2014 (motions in limine)

Dated of Decision:  August 8, 2014 (factual findings in insured v. excess carrier)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 97795 (E.D. Pa. July 18, 2014) (Baylson, J.)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 98445 (E.D.Pa. July 21, 2014) (Baylson, J.) (motions in limine)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 109576 (E.D. Pa. August 8, 2014) (Baylson, J.) (factual findings)


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This case involves a coverage dispute between plaintiff, the primary insurer, the defendant-insured, and the excess and umbrella insurer.  Plaintiff filed a complaint alleging its policy did not provide coverage for the insured’s claim, and listing the excess insurer as a “nominal defendant,” although plaintiff and the excess insurer do not have adverse interests.

Both insurers sought a declaratory judgment holding insured’s claims were not covered by these policies. The insured then filed a counterclaim against plaintiff and cross claim against the excess insurer seeking coverage and alleging bad faith. Both insurers filed motions for summary judgment, which the court granted.

The insured and insurers both advanced arguments disputing coverage and applicability of exclusions in the policy. The insured also advanced an equitable argument, suggesting even if the court found the underlying claims were not covered by the policies, the insurers should still be barred from contesting coverage.

Considering the new case law handed down by the Superior Court in Babcock & Wilcox v. Am. Nuclear Insurers in July of 2013 (THE BABCOCK CASE WAS REVERSED BY THE PENNSYLVANIA SUPREME COURT ON JULY 21, 2015), the court found the insured’s argument without merit. Under Babcock, where an insured accepts a defense from the insurer, the insured is bound to its decision, granting the insurer sole authority to control the defense.

Although the insurer is still required to act in good faith in representing the insured’s interest and settling the case, if the insured has accepted the defense, its sole protection against any injuries arising from the insurer’s conduct of the defense is a claim for bad faith.

The court found the insured failed to present law or facts supporting a finding of waiver due to the plaintiff’s alleged failure to seek a timely intervention or to file a declaratory action while the underlying litigation advanced. Plaintiff had no obligation to intervene or file a declaratory action, nor did either party dispute that plaintiff effectively reserved its right to contest coverage. The insured also alleged plaintiff waived its coverage defense by initiating an interpleader action in state court (prior to the federal action).

The court stated that Charter had moved to deposit the policy limit plus post-judgment interest with the Court of Common Pleas in order to halt the accrual of post-judgment interest and demonstrate a good faith effort to settle.

However, existing case law demonstrates courts do not recognize the tender of funds for settlement purposes as a waiver of coverage contest where the insurer has properly reserved its right to do so.  Plaintiff paid the funds into the account to stop the accrual of post-judgment interest, and did not indicate in any way that it intended to reverse its previous reservation of its rights to contest coverage.

The insured also argued plaintiff should be estopped from asserting its coverage defense due to its unreasonable refusal to settle the underlying claims within the policy limits and its failure to provide the insured with independent counsel when a conflict of interest arose between plaintiff and the insured.

However, under Babcock, the insurer can simultaneously challenge whether a claim is covered under the policy while also assuming the duty to defend. Based on Babcock, plaintiff retained full control of the litigation when the insured accepted its defense, and plaintiff’s decisions with respect to settlement of the claim, or choice of counsel, did not affect its reservation of rights.

Therefore, the court found in the insurers’ favors, and granted the motion for summary judgment of non-coverage.

The bad faith claim was not before the Court, as the parties had submitted only the coverage issues.  The court observed that the insured’s protection for its contention that Charter Oak failed to appropriately settle the case within the policy limits or failed to appoint independent counsel – its sole protection – lies in its claim of bad faith.

Specifically, “Maglio asserts counterclaims against Charter Oak based on Charter Oak’s alleged bad faith in refusing to settle the underlying litigation within the policy limits and failing to appoint independent counsel to defend Maglio. The summary judgment motions presently before this Court do not address Maglio’s counterclaims, pursuant to the parties’ agreement to proceed with coverage issues first. The Court therefore makes no finding with respect to Maglio’s counterclaims at this time.”

Date of Decision: October 24, 2013

Charter Oak Ins. Co. v. Maglio Fresh Food, Civil Case No. 12-3967, 2013 U.S. Dist. LEXIS 152741 (E.D. Pa. Oct. 24, 2013) (Baylson, J.).


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The Pennsylvania Superior Court created new law by holding an insured may decline an insurer’s defense tendered under a reservation of rights and later seek to be indemnified for any settlement and defense costs deemed fair, reasonable, and non-collusive.

This case stems from over 300 underlying claims alleging personal injury and property damage from radioactive emissions at two nuclear fuel processing facilities owned by Babcock & Wilcox and its predecessor Atlantic Richfield Company (collectively “B&W”). Beginning in March 1958, American Nuclear Insurers and Mutual Atomic Energy Liability (collectively “ANI”) provided coverage to B&W, with limits beginning at $3 million and increasing to $160 million per facility as of February 1979.

In 1998, the district court tried eight “test cases,” with the jury returning verdicts in favor of all eight plaintiffs and an aggregate of over $36 million in damages. The trial court subsequently granted a motion for a new trial based on evidentiary errors made in the test case trials. While the new trials were pending, ANI filed a declaratory judgment action in the Court of Common Pleas in Allegheny County against B&W. Before the court ruled on the declaratory judgment action, B&W reached a settlement agreement with all 300-plus plaintiffs and provided the agreed upon $80 million in settlement funds. ANI opposed the settlement.

Following the settlement, B&W sought reimbursement for the $80 million paid in settlement funds as well as counsel fees. ANI resisted, claiming it had no obligation to make any payment because B&W violated the consent to settlement clauses in the insurance policies. In trying to resolve this dispute, an issue regarding the appropriate standard to apply in determining ANI’s insurance coverage obligations arose. The trial court determined the Cowden standard should apply, requiring B&W to plead and prove the four-part test to be entitled to reimbursement.

The litigation progressed as expected until two years later when the trial court issued a new memorandum and order instructing the standard described in Alfiero v. Berks Mutual Leasing Co., 500 A.2d 169 (Pa. Super. 1985) be used in the pending trial. Despite previously being reserved for cases where a defendant sought indemnification for settlement funds following a bad faith action by the insurer, under the Alfiero standard, B&W would be entitled to reimbursement “if the settlement was fair, reasonable, and non-collusive.”

The Babcock trial court chose to break precedent and apply the Alfiero standard because it felt “there was no principled distinction between a case in which an insurer provides a defense subject to a reservation of rights… and a case where the insurer denies both defense and coverage.” The trial court further opined, “the insurance company should not be the sole decision maker where there is a possibility that only the insured’s interests will be affected by the outcome of the underlying litigation,” as is the circumstance when a defense is tendered under a reservation of rights. Id. Following this determination, the court directed the parties to trial to determine whether the $80 million settlement entered into by B&W was “fair and reasonable.” The jury determined that the settlement was fair, reasonable, and non-collusive, and the trial court entered an order reflecting the same.

ANI appealed the order, presenting a single issue to the Superior Court:

“Whether ANI had the right to deny coverage for B&W’s unauthorized $80 million payments to settle the [underlying] Action where: (1) the ANI Policy, which had combined limits of $320 million, unambiguously afforded ANI the right to control settlement and exclude coverage for unauthorized payments; (2) ANI was fully performing its policy obligations by funding B&W’s $40 million-plus defense in the underlying Action; and (3) ANI’s decision to continue defending the [underlying] Action comported with the Pennsylvania Supreme Court’s decision in Cowden.”

On appeal, ANI contended that by adopting Alfiero as the appropriate standard, the trial court had effectively adopted the standard articulated in United Services Auto. Ass’n v. Morris, 741 P.2d 246 (Az. 1987), and its progeny. In Morris, the Arizona Supreme Court held when an insurer tenders a defense under a reservation of rights it “[does] not breach any of its policy obligations” but “neither [does] it accept full responsibility for the insured’s liability exposure.” As such, it held “the cooperation clause prohibition against settling without the insurer’s consent forbids an insured from settling only claims for which the insurer unconditionally assumes liability under the policy… The insurer’s reservation of the privilege to deny the duty to pay relinquishes to the insured control of the litigation, almost as if the insured had objected to being defended under a reservation.” The Superior Court felt this mischaracterized the trial court’s ruling. Furthermore, such a ruling would be incongruous with Pennsylvania’s contract law because the Morris court found “the insurer’s defense with a reservation did not constitute a breach of contract,” yet still “relieved the insured of its own corresponding contractual duty.” Instead, the Superior Court chose to rely on Taylor v. Safeco Insurance Company, 361 So.2d 743 (Fla. Ct. App. 1978). In Taylor, the insurer tendered its defense under a reservation of rights, then withdrew its defense, only to retender the defense at trial, again under a reservation of rights. The insured rejected the defense, and, without counsel, consented to “a substantial judgment, assigning its right to seek reimbursement from its insurer to the plaintiff in exchange for a release from all personal liability for the judgment.” When the plaintiff sought reimbursement, the trial court granted the insurer summary judgment based on the insured’s failure to comply with the consent to settlement clause of the policy. The appeals court reversed that holding, finding “because the insured had rejected the insurer’s defense… if coverage were established, the insurer would be obligated to indemnify the insured for the amount of settlement up to the policy limit if the settlement was “reasonable” and was not entered into “in bad faith, fraudulently, collusively, or without any effort to minimize his liability.”

Following the Taylor line of case law, Pennsylvania’s Superior Court held:

“When an insurer tenders a defense subject to a reservation, the insured may choose either of two options. It may accept the defense, in which event it remains unqualifiedly bound to the terms of the consent to settlement provision of the underlying policy. Should the insured choose this option, the insurer retains full control of the litigation, consistently with the policy’s terms. In that event, the insured’s sole protection against any injuries arising from the insurer’s conduct of the defense lies in the bad faith standard articulated in Cowden.

Alternatively, the insured may decline the insurer’s tender of a qualified defense and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense. In this event, the insured retains full control of its defense, including the option of settling the underlying claim under terms it believes best. Should the insured select this path, and should coverage be found, the insured may recover from the insurer and the insured’s defense costs and the costs of settlement, to the extent that these costs are deemed fair, reasonable, and non-collusive.”

After making this ruling, the Superior Court held that the trial court erred in constraining the trial to the question of whether B&W’s settlement was “fair and reasonable.” Rather, the questions presented to the jury should have been, “(1) whether B&W in fact rejected ANI’s defense; and, if so, (2) whether ANI acted in bad faith in declining to settle, or, as alleged by B&W, to participate in settlement negotiations with the [underlying] plaintiffs.”  Based on this finding, the court vacated the underlying jury verdict and judgment and remanded to allow the trial court to conduct a new trial in conformity with the new standard derived from Taylor.

Date of Decision:  July 12, 2013

Babcock & Wilcox Co. v. Am. Nuclear Insurers & Mut. Atomic Energy Liab. Underwriters, 2013 Pa. Super. LEXIS 1633 (Pa. Super. Ct. 2012) (Wecht, J.)



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The court denied plaintiff’s motion to dismiss defendants’ counter claim for bad faith. Plaintiff-insurer initially brought suit against its insured. Defendant-insureds then filed a counter-claim against their insurer, alleging bad faith for plaintiff-insurer’s denial of coverage after agreeing to provide coverage and a legal defense without issuing a reservation of rights letter.

Plaintiff-insurer initially agreed in writing on May 12, 2011, to defend defendant-insureds without issuing a reservation of rights letter, then, 165 days later, reversed its position and issued a reservation of rights letter. Defendant-insureds were forced to hire private counsel to avoid inherent conflicts of interest and identified the insurer-retained counsel in the underlying action as a fact witness in the current case.

Plaintiff-insurer’s actions also putatively threatened privileged attorney-client communications. Defendant-insureds claimed to have detrimentally relied on plaintiff’s initial assurance of coverage and to have been prejudiced by plaintiff-insurer’s reversal of position.

Relying on precedent from district courts in Ohio, Washington, Florida, and South Carolina, the Western District determined an insurer’s delay in issuing a reservation of rights letter could, under some circumstances, support a claim for bad faith or estoppel. On this basis, the court denied plaintiff-insurer’s motion to dismiss, determining the issue could not be appropriately resolved at that stage in the litigation.

While the court acknowledged some of defendant-insureds’ claims of bad faith might be susceptible to dismissal at the 12(b)(6) stage, the claims regarding plaintiff-insurer’s change in position, detrimental reliance and prejudice were not. Consistent with that finding, the court granted defendant-insured’s request for leave to amend their counterclaim.

The court declined to rule on which damages would potentially be available if the claims survived a motion to dismiss due to a complex choice-of-law issue that would need to be resolved.

Date of decision: June 4, 2013

Greenwich Ins. Co. v. BBU Servs., Civil Action No. 12-291, 2013 U.S. Dist. LEXIS 78070 (June 4, 2013 W.D. Pa.) (Bissoon, J.).