On July 21, 2015, the Pennsylvania Supreme Court issued its much-anticipated decision in Babcock & Wilcox Company, et al. v. American Nuclear Insurers, et al., No. 2 WAP 2014 (Pa. July 21, 2015). The court resolved an issue of first impression that is critical for Pennsylvania policyholders: When an insurance carrier is defending its insured under a reservation of rights, can the insured enter into a reasonable settlement without the insurer’s consent and still preserve coverage for the settlement amount? Reed Smith filed an amicus brief in the case urging the court to adopt a “reasonable settlement” standard that would allow insureds to enter into a reasonable settlement without forfeiting coverage. The court adopted that standard.
Babcock’s holding balances the rights and interests of the parties in a way that is fair and favorable to Pennsylvania policyholders. Under Babcock, policyholders now can protect their interests in a settlement context where those interests may diverge from their insurers’ interests. When an insurer is defending under a reservation of rights, coverage is uncertain. The decision permits policyholders to enter into a reasonable settlement over the insurer’s objection, rather than risk a substantial and adverse verdict at trial, without forfeiting coverage. At the same time, it allows insurers to contest coverage for a settlement that is unreasonable or one that is not covered under the terms of the policy. The court’s “reasonable settlement” standard is a strong and fair statement of Pennsylvania law that protects and preserves policyholders’ rights and interests at the critical settlement stage of underlying litigation.