Insurance coverage counsel have been anxiously awaiting the Pennsylvania Supreme Court's decision in Babcock & Wilcox Co. v. Am. Nuclear Insurers, 2015 Pa. Lexis 1551 (July 21, 2015), since the high court agreed to hear the case in January 2014. 

The Court noted that the issue presented was one of first impression.  The decision is the first determination by the Pennsylvania Supreme Court as to whether, and under what circumstances, an insured may settle a case being defended under a reservation of rights without the insurance company's consent.  At issue was the "consent to settle" clause that appears in most commercial general liability policies.  In this case, the consent to settle provision provided:  "Assistance and cooperation of the insured.  The insured shall cooperate with the companies, and upon the company's request, attend hearings and trials and assist in making settlements, securing and giving evidence, obtaining the attendance of witnesses, and in the conduct of any legal proceedings in connection with the subject matter of this insurance.  The insured shall not, except at his own cost, make any payments, assume any obligations, or incur any expense."  The insurance companies argued that this standard provision meant that any settlement by the policy holders entered into on their own was at the policy holder's own expense.  The insurance companies therefore argued that they owed none of the $80 million settlement entered into on its own by Babcock & Wilcox. 

The Supreme Court rejected this argument.  Instead of applying a rigid contractual approach to the language, it instead considered the relevant competing interests involved when an insurance company agrees to defend a lawsuit, but only under a reservation of rights.  For instance, the Court recognized that the insurance company may, in fact, be motivated not to settle a case because, as long as the case remains active, it maintains its option of denying coverage at a later date.  It also recognized that the failure to settle a case could potentially expose the policy holder to a verdict in excess of coverage.  Weighing these interests against the specific language of the policy, the Court found that a policy holder may move outside of the technical requirements of the policy in order to accept a "fair and reasonable" settlement offer despite the insurer's objection.

The Court rejected the so-called "insured's choice test" adopted by the Pennsylvania Superior Court  in July, 2013.  Under the "insured's choice test," an insured could either accept the defense from an insurance company offered under a reservation of rights and accept full control of the defense by the insurance company or reject  the defense offered under a reservation of rights, defend the case itself or through its own counsel, and, if coverage was proven under the policy, recover defense fees and costs and any judgment or settlement later on. 

Nonetheless, the Supreme Court held that a policy holder may settle a case on its own, without the consent of its insurance company, "where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims."

This is a significant victory for policy holders in Pennsylvania.  It is the most recent instance where a Pennsylvania appellate court has gone beyond the plain language of an insurance policy to try to effectuate a reasonable, rather than a rigid, interpretation of insurance policy language.