B&W v. ANI Appeal of: B&W ( 2015 )

[J-86-2014] [MO: Baer, J.]
IN THE SUPREME COURT OF PENNSYLVANIA
WESTERN DISTRICT
THE BABCOCK & WILCOX COMPANY : No. 2 WAP 2014
AND B&W NUCLEAR ENVIRONMENTAL :
SERVICES, INC. : Appeal from the Order of the Superior
: Court entered July 10, 2013 at No. 525
: WDA 2012, vacating the Judgment of the
v. : Court of Common Pleas of Allegheny
: County entered February 17, 2012 at
: GD99-11498 and GD99-16227 and
AMERICAN NUCLEAR INSURERS AND : remanding.
MUTUAL ATOMIC ENERGY LIABILITY :
UNDERWRITERS AND OTHER : ARGUED: October 7, 2014
INTERESTED PARTY: ATLANTIC :
RICHFIELD COMPANY :
-------------------------------------------------------- :
-------------------------------------------------- :
AMERICAN NUCLEAR INSURERS AND :
MUTUAL ATOMIC ENERGY LIABILITY :
UNDERWRITERS :
:
:
v. :
:
:
THE BABCOCK & WILCOX COMPANY :
AND B&W NUCLEAR ENVIRONMENTAL :
SERVICES, INC., AND ATLANTIC :
RICHFIELD COMPANY :
:
:
APPEAL OF: BABCOCK & WILCOX :
POWER GENERATION GROUP, INC. :
(F/K/A THE BABCOCK & WILCOX :
COMPANY) AND BABCOCK & WILCOX :
TECHNICAL SERVICES GROUP, INC. :
(F/K/A B&W NUCLEAR :
ENVIRONMENTAL SERVICES, INC.), :
AND ATLANTIC RICHFIELD COMPANY :
CONCURRING AND DISSENTING OPINION
MR. JUSTICE EAKIN DECIDED: July 21, 2015
I agree the Superior Court erred in applying the “insured’s choice” paradigm
described in Taylor v. Safeco Insurance Company, 361 So. 2d 743 (Fla. Dist. Ct. App.
1978). However, because I would affirm the Superior Court’s decision to vacate the trial
court’s judgment and remand for further proceedings, albeit on different grounds, I
respectfully dissent from the rest of the majority’s decision.
Appellees American Nuclear Insurers and Mutual Atomic Energy Liability
Underwriters (collectively, ANI) provided insurance coverage to appellants, The Babcock
& Wilcox Company, B&W Nuclear Environmental Services, and Atlantic Richfield
Company, for liability arising from a “nuclear energy hazard.”1 The terms of coverage
are contained in the applicable insurance contracts executed by the parties. During the
relevant coverage periods, appellants were sued by various claimants for damages
allegedly arising from exposure to radiation emission from the insured nuclear energy
facilities. Appellants sought coverage from ANI under the applicable policies, which
provide the insureds “shall not, except at [their] own cost, make any payment, assume
any obligation or incur any expense[,]” Nuclear Energy Liability Policy (Facility Form), at
3, Condition 6, and also, as a condition precedent to the insureds’ right to maintain a
coverage action against ANI for liability determined by settlement, any settlement must be
“by written agreement of the insured, the claimant and [ANI,]” id., Condition 7. The policy
expressly excludes coverage for “liability assumed by the insured[s] under contract[.]”
Id., at 2, Exclusion (c).
1 The insured hazard is defined as “the radioactive, toxic, explosive or other hazardous
properties of nuclear material, but only if (1) the nuclear material is at the facility or has
been discharged or dispersed therefrom without intent to relinquish possession or
custody thereof to any person or organization[.]” Nuclear Energy Liability Policy (Facility
Form), at 1, para. III.
[J-86-2014] [MO: Baer, J.] - 2
ANI agreed to defend the underlying litigation in its entirety, while simultaneously
informing appellants it would not waive its right to deny ultimate coverage on the basis of
various exclusions and conditions in the insurance policy. ANI Letter, 6/20/94, at 4.
Such “reservation of rights letters” are common in cases where causation and coverage
are uncertain. See, e.g., American and Foreign Insurance Company v. Jerry’s Sports
Center, Inc., 2 A.3d 526, 545-46 (Pa. 2010) (stating insurer uncertain about duty to
indemnify may offer defense under reservation of rights to avoid risks of potential bad
faith claim or inept defense of underlying action by insured exposing insurer to payment if
there is duty to indemnify); Whole Enchilada, Inc. v. Travelers Property Casualty
Company of America, 581 F. Supp. 2d 677, 685 n.6 (W.D. Pa. 2008) (finding reservation
of rights is unilateral, written notice from insurer to policyholder that insurer may disclaim
coverage based on terms in insurance policy, legal principles precluding coverage,
violation of policy provisions by insured, or some combination of those factors); see also
Perkoski v. Wilson, 92 A.2d 189, 191 (Pa. 1952) (holding insurer’s failure to reserve rights
while providing defense to underlying claim results in waiver of right to deny coverage of
judgment against insured).
ANI conducted its investigation into the underlying claims, engaged numerous
radiation experts, and considered appellants’ exposure in light of the strict causation
standard adopted in In re TMI Litigation, 193 F.3d 613, 643 (3d Cir. 1999), opinion
amended, 199 F.3d 158 (3d Cir. 2000) (“[C]ausation can only be established (if at all) from
epidemiological studies of populations exposed to ionizing radiation.”). ANI concluded
the claims in the underlying litigation lacked scientific and legal merit, and thus elected to
aggressively defend the claims. Appellees’ Brief, at 7 (citing N.T. Trial, 9/14/11, at
1317-18). During this period — which included delays arising from B&W’s bankruptcy,
test trial, and retrial, as well as settlement discussions — ANI apparently paid more than
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$40 million in defense costs before appellants entered into their unauthorized settlement
agreements. Id., at 13 (citing N.T. Trial, 9/14/11, at 1312-13).
It is well-established in Pennsylvania that an insurer exercising its right not to settle
may not be held liable for essentially guessing incorrectly about the ultimate result of
underlying litigation, as long as the insurer did not act in bad faith. Cowden v. Aetna
Casualty & Surety Company, 134 A.2d 223 (Pa. 1957). In cases such as this one, where
contractual terms vest in the insurer the right to control litigation falling within the policy’s
coverage, the insurer “must act with the utmost good faith toward the insured in disposing
of claims against the latter.” Id., at 228. There is no “absolute duty” on the part of the
insurer to settle a claim, even when a possible judgment against the insured might
exceed the amount of insurance coverage. Id. However,
the decision to expose the insured to personal pecuniary loss must be
based on a bona fide belief by the insurer, predicated upon all of the
circumstances of the case, that it has a good possibility of winning the
suit. ... Good faith requires that the chance of a finding of nonliability be
real and substantial and that the decision to litigate be made honestly.
Id.; see also Birth Center v. St. Paul Companies, 787 A.2d 376, 379 (Pa. 2001) (“Where
an insurer refuses to settle a claim that could have been resolved within policy limits
without ‘a bona fide belief ... that it has a good possibility of winning,’ it breaches its
contractual duty to act in good faith and its fiduciary duty to its insured.”).
The majority distinguishes Cowden on the basis it did not involve an unauthorized
settlement, Majority Slip Op., at 21, but in my view, this is a distinction without a
difference. The law is clear that the parties to an insurance contract must act in
accordance with the terms of that contract, and an insurer owes its insured a duty of “the
utmost good faith.” Cowden, at 228. In this case, there has been no determination
about whether ANI acted reasonably when it decided to defend the underlying litigation
rather than settle, but it is apparent — as long as ANI acted in good faith — it was within
[J-86-2014] [MO: Baer, J.] - 4
its rights to do so. The majority’s decision to reinstate the trial court’s judgment in favor
of appellants, based on out-of-state, non-precedential decisions is problematic, at best,
given the existence of binding case law from this Court. See Babcock & Wilcox
Company v. American Nuclear Insurers, 76 A.3d 1, 23 (Pa. Super. 2013) (Olson, J.,
concurring and dissenting) (“[E]stablished and controlling Pennsylvania law compels the
conclusion that since ANI tendered a defense subject to a reservation of its rights to
contest coverage, B&W remained committed to observe its obligations under the
consent-to-settlement clause in the parties’ insurance contract unless B&W could
establish bad faith on the part of ANI pursuant to [Cowden.]”).
The ANI policies expressly authorize ANI to maintain control over litigation by
rejecting settlement offers, as long as it acts in good faith. ANI’s reservation of its rights
under the same contract did not alter this fundamental principle. The Superior Court
majority treated ANI’s reservation of rights letter as a trigger for the “insured’s choice” of
rejecting coverage under the express terms of the contract, Babcock & Wilcox Company,
at 22, and the majority here interprets ANI’s reservation of rights as a pivotal action
“asserting that the claims may not be covered by the policy.” Majority Slip Op., at 2.
But, a typical reservation-of-rights letter is neither of these things; it simply puts the
insured on notice — reminds the insured, actually — of various existing contractual
provisions that might ultimately preclude coverage under the policy, depending upon
what discovery and litigation reveals about the claims and potential liability. A
reservation of rights — without more — does not change the terms of the contract, does
not constitute a refusal to defend or a breach of contract, and therefore should not
authorize the insured to take anticipatory action violating that contract. Thus, ANI’s
conduct in reserving its rights, in the absence of bad faith, was not a repudiation or breach
of the insurance contract allowing appellants to settle without permission. Moreover,
[J-86-2014] [MO: Baer, J.] - 5
under Cowden, an insured may recover payment from an insurer for an excess verdict or
to reimburse an unauthorized settlement — essentially, damages resulting from the
insurer’s breach of contract — but only if the insured can establish by clear and
convincing evidence that the insurer breached its duty to act in good faith. Cowden, at
229. The trial court and Superior Court majority did not apply these basic principles, but
instead imported unnecessary new standards from United Services Automobile
Association v. Morris, 741 P.2d 246 (Ariz. 1987), and Taylor, and the majority now applies
a third “hybrid” test purporting to combine Morris and Cowden. Although the majority’s
attempt to reconcile these standards is laudable and, at first blush, appealing, I
nevertheless must disagree.
The Cowden bad faith standard and the Morris “fair and reasonable settlement”
standard both present ways of balancing the interests of the contracting parties and
analyzing the questions of who breached the contract, and whether the breaching
conduct was somehow justified under the law. Under Cowden, the insurer may enforce
the language of the insurance contract both parties executed as long as the insurer does
not anticipatorily breach that contract by repudiating its obligations under the policy or
otherwise engaging in bad faith conduct. Cowden, at 227; see also Alfiero v. Berks
Mutual Leasing Co., 500 A.2d 169, 171-72 (Pa. Super. 1985) (stating despite policy
language requiring insurer’s permission to settle, insured could settle claim without
insurer’s consent where insurer repeatedly denied any and all obligation to defend or
indemnify insured); Vincent Soybean & Grain Co., Inc. v. Lloyd’s Underwriters of London,
246 F.3d 1129, 1132 (8th Cir. 2001) (holding insurer issued reservation of rights and
defended underlying claim but insured settled without permission, breaching policy terms;
insured may not recover amount it paid to settle claim in absence of bad faith by insurer).
The concept of relieving the insured of its obligations under an insurance policy when the
[J-86-2014] [MO: Baer, J.] - 6
insurer has violated its own duties under that policy comports with general contract
principles applied outside the insurance coverage context. See, e.g., LJL
Transportation, Inc., v. Pilot Air Freight Corporation, 962 A.2d 639, 641, 652 (Pa. 2009)
(finding material breach by one party terminates contract and relieves non-breaching
party from its own duties under contract). However, applicable Pennsylvania law does
not treat an insurer’s good-faith decision to defend a claim rather than settle it as a breach
of contract that triggers a free-for-all where the insured may take it upon itself to settle the
case without permission in violation of the policy terms.
The Morris “fair and reasonable” standard, by contrast, essentially allows an
insured to breach the contract’s requirement that the insurer must consent to any
settlement when the insured anticipates an excess future verdict and, as a practical
matter, permits the insured to determine for itself (in the first instance) that the insurer
acted unreasonably in refusing to settle. 2 There may be strong policy reasons for
endorsing this latter method of analysis, as recognized by the majority here and by Judge
Wettick at the trial court level, or even the “insured’s choice” Taylor rationale adopted sua
sponte by the Superior Court, but Cowden is the applicable law in Pennsylvania and
provides the approach that enforces the actual terms of the contract entered into by the
parties, rather than allowing one party to nullify those terms when it sees fit. See, e.g.,
AAA Mid-Atlantic Insurance Company v. Ryan, 84 A.3d 626, 632-33 (Pa. 2014) (holding
court must give plain meaning to clear and unambiguous terms of insurance contract
unless provision violates clearly expressed public policy); Jerry’s Sport Center, Inc., at
2 I recognize the Arizona court holds 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.” Morris, at 252 (emphasis
added). However, the cooperation requirement in the ANI policy is not limited in this
way.
[J-86-2014] [MO: Baer, J.] - 7
540 (stating rules of contract interpretation apply to insurance contracts; mutual intention
of parties at time they formed contract governs its interpretation). The majority’s
rationale allows an insured to alter the nature of the bargain it struck with its insurer.
Accordingly, I would affirm the Superior Court’s decision to vacate the trial court’s
judgment and remand for further proceedings. I would not, however, direct that those
proceedings consist of findings pursuant to Taylor, but instead would direct the trial court
to determine whether ANI acted in bad faith in refusing to settle the underlying litigation,
pursuant to this Court’s holding in Cowden.
Mr. Chief Justice Saylor joins this concurring and dissenting opinion.
[J-86-2014] [MO: Baer, J.] - 8