Insurance's Consent to Settle Clauses

In Babcock & Wilcox Co. v. American Nuclear Insurers, --- A.3d ----, 2013 WL 3456969 (Pa.Super. 2013), the Superior Court of Pennsylvania addressed whether an insured lacking its insurer's consent may settle a case without violating the insured’s duty to cooperate under an insurance policy's "Consent to Settlement Clauses".  

Like virtually all commercial insurance policies, the American Nuclear Insurers ("ANI") policy at issue in Babcock & Wilcox Co. contained a "consent to settle clause" providing that the insured Babcock & Wilcox Co. ("B&W") "shall not, except at its own cost, make any payment, assume any obligation or incur any expense".  

After ANI paid for independent defense counsel to defend B&W under a reservation of rights in radiation exposure claims, B&W entered into a $95 million settlement that was less than the insurance policy’s limits and to which ANI objected.  ANI then refused to reimburse B&W arguing that it had violated the policy's "consent to settle" clause.  

Although the trial court ruled - - and the jury found - - that the settlement was fair, reasonable, and non-collusive and that B&W was entitled to reimbursement, the Superior Court reversed adopting the Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. Ct. App. 1998) rule that an insured’s obligation to honor "consent to settlement clauses" depends on whether the insured accepts an insurer’s tender of a qualified defense. 2013 WL 3456969, pg. 22. 

If it accepts a defense subject to a reservation tendered by the insurer, the insured is bound to the consent to settlement clauses' terms and the insurer retains full control of the litigation.  Id.  Under these circumstances, if an insurer objects to settlement, the insurer is only responsible for the settlement costs if the insured can show that the insurer’s refusal to accept the settlement constituted "bad faith".  2013 WL 3456969, pg. 22. 

Conversely, if it declines an insurer’s tender of a qualified defense and furnishes its own defense, the insured retains full control of the litigation including control over a settlement decision, and the insured may recover its fair and reasonable defense and indemnity costs even when the insurer objects to settlement, if the settlement was entered into in good faith.  Id.