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PA Supreme Court Rules Insured May Enter Settlement Despite Insurer’s Objections

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On July 21, 2015, the Pennsylvania Supreme Court in The Babcock & Wilcox Company v. American Nuclear Insurers, No. 2 WAP 2014 adopted a variation of the test set forth in United Services Auto. Ass'n v. Morris, 741 P .2d 246 (Ariz. 1987), permitting an insured to settle over the objections of the insurer. The court was faced with an issue of first impression concerning whether insurance coverage is forfeited when an insured settles a tort claim without its insurer’s consent when the policy is subject to a reservation of rights and the insurer asserts that the claims may not be covered by the policy.

Before adopting Morris, the court considered different options, including the test in Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223 (Pa. 1957), which “held that an insurer must pay a judgment in excess of policy limits” when it acts “in bad faith in refusing to settle.” Instead, with the Morris decision, the court ruled that where an insurer asserts a reservation of rights and refuses to accept a settlement, the insured may, after showing that the settlement is fair and reasonable as well as covered by the policy, enter into the settlement. The insurer will then be liable for that settlement.

An analysis of the terms of the settlement as well as the “strength of the insured’s defense against the asserted claims” is necessary to determine whether a settlement is fair and reasonable. Also, whether the insured acted fraudulently or collusively should be considered. In light of this decision, questions over whether a reservation of rights is valuable to the insurer are raised.

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