Pennsylvania Supreme Court allows insured to settle without consent of insurer defending under reservation of rights

by Dentons

Bad faith claims can have major consequences for insurers. Stopping the Setup gets into the minds of plaintiffs' lawyers and addresses the ways they try to create bad-faith claims against insurance companies. This overview gives you gives you 10 tips for avoiding bad faith failure to settle claims in matters where exposure potentially may exceed policy limits. Over the course of the next few weeks, our insurance team will delve deeper into each of these steps, providing insights into ways insurers can identify the bad-faith "set up", stop it or challenge it in court.

Whether you are a claims professional or in-house or outside counsel, whether your focus is on cybersecurity, construction, professional liability, or anything in between, Dentons will provide you with the tools you need to stop the bad faith setup.

Finally, there is a ruling in an important Pennsylvania case that has been making its way up to that state’s highest court in the past year: the Pennsylvania Supreme Court held that an insured does not breach its insurance policy, and therefore forfeit its insurance coverage, by settling a tort claim without the consent of its insurer, when the insurer is defending subject to a reservation of rights—as long as the settlement is fair, reasonable, and non-collusive. Babcock & Wilcox Co. v. American Nuclear Insurers, No. 2 WAP 2014, 2015 WL 4430352 (July 21, 2015).

The Court in Babcock concluded that “the Superior Court erred by requiring an insured to demonstrate bad faith [on the part of the insurer] when the insured accepts a settlement offer in a reservation of rights case.” Id. at *16. The Court adopted a variation of the Arizona “fair and reasonable” standard set forth in United Services Automobile Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (Ariz. 1987) to hold insurers responsible for settlements within their policy limits made by insureds without consent in cases that meet the following conditions:

  1. The insurer is defending insured under a reservations of rights;
  2. The insurer breaches its duty to settle by refusing a fair and reasonable settlement;
  3. After the insurer breaches its duty by refusing to settle, insured accepts offer;
  4. The policy is ultimately deemed to cover the relevant claims; and
  5. The settlement is determined to be fair and reasonable.

Babcock, at *16. With this decision, Pennsylvania has joined a growing minority of states that allow insureds to settle without consent on the basis that the insurer breached its duty to defend by reserving its rights.

There are four lessons insurers can learn from the Babcock decision.

  • First, if an insurer is faced with a situation where the insured agrees to a settlement without the insurer’s consent, the insurer can still contest whether the settlement was fair and reasonable. This determination will entail consideration of: (a) the terms of the settlement; (b) the strength of the insured’s defense against the asserted claims; and (c) whether there is any evidence of fraud or collusion on the part of the insured.
  • Second, the insurer can still contest whether the settled claims are covered by the policy. Additionally, under Pennsylvania law, even if the insurer loses a declaratory judgment on coverage issues, it is unlikely that the insurer will have to reimburse the insured’s declaratory judgment fees.
  • Third, the court noted that on account of the protection afforded by this rule, insureds will have a more difficult time arguing that, by being provided with a defense under a reservation of rights, they are entitled to retain independent counsel at the insurer’s expense.
  • Fourth, when presented with a high settlement offer while defending under a reservation of rights, if the insurer does not wish to pursue its coverage defenses, then it can withdraw the reservation of rights and continue to defend the litigation if it believes based on totality of the circumstances that settlement is not warranted. This will protect the insurer from the insured being able to agree to a high settlement that the insurer could potentially be stuck having to reimburse.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:


Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.