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The Babcock & Wilcox Co. v. American Nuclear Insurers

Superior Court of Pennsylvania

July 10, 2013

THE BABCOCK & WILCOX COMPANY AND B&W NUCLEAR ENVIRONMENTAL SERVICES, INC. Appellees
v.
AMERICAN NUCLEAR INSURERS AND MUTUAL ATOMIC ENERGY LIABILITY UNDERWRITERS AND OTHER INTERESTED PARTY: ATLANTIC RICHFIELD COMPANY APPEAL OF: AMERICAN NUCLEAR INSURERS AND ATOMIC ENERGY LIABILITY UNDERWRITERS AMERICAN NUCLEAR INSURERS AND MUTUAL ATOMIC ENERGY LIABILITY UNDERWRITERS Appellant
v.
THE BABCOCK & WILCOX COMPANY AND B&W NUCLEAR ENVIRONMENTAL SERVICES, INC., AND ATLANTIC RICHFIELD COMPANY

Appeal from the Order Entered February 17, 2012 In the Court of Common Pleas of Allegheny County Civil Division at No(s): GD99-16227 & GD99-11498

BEFORE: MUSMANNO, J., OLSON, J., and WECHT, J.

OPINION

WECHT, J.

In this insurance coverage dispute, Appellants American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (collectively, "ANI") challenge the trial court's February 17, 2012 Amended Final Order and Judgment. In that order, the trial court ruled, inter alia, that ANI was obligated to provide insurance coverage to Appellees The Babcock & Wilcox Company and B&W Nuclear Environmental Services (collectively, "B&W") in the amount of $80 million plus pre-judgment interest. This constituted the aggregate amount that B&W, acting independently and over ANI's objections, paid hundreds of plaintiffs to settle federal damage claims arising from plaintiffs' exposure to radiation. We vacate the trial court's judgment and remand for further proceedings.

This is not the first time that this case has come before us. In 2002, we set forth the underlying facts and allegations as follows:

This case involves insurance coverage disputes for two nuclear fuel processing facilities: the "Apollo Facility" and the "Parks Facility." In 1957, the Atomic Energy Commission . . . licensed these facilities to possess nuclear material. . . .
Since March 1958, ANI (or its predecessor) provided insurance coverage for nuclear hazards at the Apollo and Parks [F]acilities[, presently owned and operated by B&W and previously owned and operated by Atlantic Richfield Company ("ARCO")]. Over the years, the limits on the coverage increased from $3 million to $160 million [per facility] as of February 1979.
In June 1994, five individuals and three purported class representatives filed an action against B&W and ARCO in federal district court ("the Hall case"). These plaintiffs alleged that they sustained bodily injury and property damage caused by radioactive emissions from the Apollo Facility and the Parks Facility. Subsequently, amended complaints were filed adding approximately 300 named plaintiffs to the Hall case, but not substantially changing the causes of action. B&W and ARCO denied that the facilities released radioactive or toxic materials into the environment that exceeded the levels permitted by federal regulation. They further denied that any of the plaintiffs' [damages were] attributable to releases from the facilities.
In 1998, the federal district court tried eight "test cases" from the Hall case in a single jury trial. The jury returned verdicts in favor of the eight plaintiffs totaling $33.7 million against B&W and ARCO, and an additional $2.8 million against only B&W. However, the federal trial court subsequently granted a new trial based upon evidentiary errors. After the grant of a new trial, a coverage dispute arose regarding the limits of coverage available to indemnify B&W and ARCO against claims made in the Hall action. Additionally, a dispute arose as to whether B&W and ARCO are each entitled to counsel in the new trial. . . .
While the new trial in the federal case was pending, ANI filed a declaratory judgment action in the Court of Common Pleas of Allegheny County against B&W and ARCO. ANI's Complaint sought declarations regarding[, inter alia, ] whether it had a duty to provide separate counsel to ARCO in the Hall case. In addition, ANI also alleged bad faith and breach of contract by B&W. B&W filed its own action . . . seeking declarations regarding the coverage issues, and alleging bad faith against ANI. These actions were consolidated . . . .
On August 10, 2000, the trial court entered an Order, which had been agreed to by the parties, setting forth the issues for preliminary determination. This Order provided, in relevant part, as follows:
Until further Order of Court, the Actions shall proceed for the limited purpose of resolving the following legal issues (the "Issues for Resolution"):
a. Whether ANI, having acknowledged a duty to defend ARCO in the Hall Action, is obligated to pay for supplemental and/or independent defense counsel to represent and defend ARCO's separate interests in the Hall Action[?]
b. Whether ANI, having acknowledged a duty to defend B&W in the Hall Action, is obligated to pay for supplemental and/or independent defense counsel to represent and defend B&W's separate interests in the Hall Action[?]

Trial Court Order, 8/10/00. The trial court stayed all further action on the bad faith claims until the resolution of these issues.

Subsequently, ANI, B&W and ARCO each filed motions for partial summary judgment with respect to the Issues for Resolution, seeking declarations regarding the available policy limits and the duty to provide separate counsel. On April 5, 2001, the trial court entered an Order, which provided, in relevant part, as follows:
(2) ANI has a duty to pay for independent defense counsel to represent and defend the separate interests of B&W and ARCO in the Hall [A]ction . . . .
Order, 4/25/01, at 2. ANI filed a Motion for reconsideration of the trial court's Order, which the trial court granted. On October 1, 2001, the trial court entered an Order again holding . . . that ANI has a duty to provide separate counsel for ARCO in the Hall [A]ction. Order, 10/1/01. The trial court's Order also certified these issues for immediate appeal.

Babcock & Wilcox Co. v. Amer. Nuclear Ins., 1916 WDA 2001, Slip. Op. at 2-5 (Pa. Super. Nov. 25, 2002) (unpublished). Following review, this Court affirmed the trial court's order.

The trial court, per the Honorable R. Stanton Wettick, [1] provides the following account of the events that followed our affirmance of the trial court's order:

[T]hrough negotiations with counsel retained by [B&W], the Hall plaintiffs settled their claims with [B&W] for less than the policy limits. The settlement funds were provided by [B&W]. ANI disagreed with the decision to settle.
At the request of the parties, I held a status conference following the settlement of the Hall [Action]. At the conference, there were no surprises. [B&W] is seeking reimbursement for the full amount paid to settle the Hall [Action], together with counsel fees. ANI is defending on the ground that it has no obligation to make any payment because [B&W violated] the consent to settlement clauses in the . . . policies issued to [B&W].[2]
At the status conference, the parties requested that I address their disagreement over the legal standard to be applied in determining ANI's insurance coverage obligations.
The standard proposed by [B&W] is as follows:
If an insurer breaches its duty to consent to a reasonable settlement within insurance limits, the insured may settle without the insurer's consent, without forfeiting its insurance coverage, provided the settlement is reasonable and entered into in good faith. [B&W's] Motion for Ruling on the Legal Standard, Proposed Court Order.
The standard proposed by ANI is as follows:
This articulation of the bad faith standard which follows from Cowden v. Aetna Casualty and Surety Co., 134 A.2d 223 (Pa. 1957), and its progeny should apply here. Accordingly, the Court should enforce ANI's Consent-to-Settlement Clauses and bar coverage for [B&W's] settlement[] unless [B&W] can show by clear and convincing evidence that: (a) there was no real chance of a defense verdict in the Hall Action; (b) there was little possibility of a verdict or settlement within policy limits;
(c) ANI's decision to proceed to trial rather than settle was not based on their bona fide belief, predicated upon all of the circumstances of the case, that there was a good possibility of winning; and (d) ANI's decision to litigate rather than settle was made dishonestly. ANI's Memorandum of Law Regarding the Legal Standard at 15-16.

Trial Court Opinion ("T.C.O."), 12/3/2009, at 1-3 (citations modified).

After reviewing the policies, the trial court agreed with ANI that, under the unambiguous language of the policies, ANI had "no obligation to reimburse [B&W] for any funds that [B&W] paid to settle the case. . . . [However, ] B&W contends that the courts will not enforce standard consent to settlement clauses where the insured, acting in good faith, enters into a reasonable settlement at or below the policy limits." Id. at 4. The learned trial court concluded that the Cowden standard provided the appropriate measure of ANI's obligation to fund B&W's negotiated settlement with the plaintiffs in the Hall litigation. Thus, only if B&W could plead and prove satisfaction of the four-part Cowden test would B&W be entitled to reimbursement for the $80 million it paid to settle the outstanding claims over ANI's objection.

Cowden is the seminal Pennsylvania precedent establishing an insurer's obligation to accept a settlement within the limits of the policy issued to the defendant "when there is little possibility of a verdict or settlement within the limits of the policy." 134 A.2d at 226. However, the duty to settle under those circumstances is not absolute; even when an excess award is imminent if the fact-finder returns a verdict for the plaintiff, the insurer may decline to settle within policy limits and proceed to trial when it has a "bona fide belief . . ., predicated upon all of the circumstances of the case, that it has a good possibility of winning the suit, " i.e., obtaining an unqualified defense verdict. Id. "[I]t is not a right of the insurer to hazard the insured's financial well-being. Good faith requires that the chance of a finding of non[-]liability be real and substantial and that the decision to litigate be made honestly." Id.

The principle driving this ruling was our Supreme Court's recognition that, in such situations, the interests of the insurer and the insured may be antagonistic: If an insurer is exposed only to liability up to the limit of its policy, and any settlement would be at or near that level, then even a modest chance of obtaining a defense verdict might be sufficient in a self-interested cost-benefit analysis to convince an insurer to litigate despite the prospect of a verdict in excess of the policy limits. Thus, "[w]hile it is the insurer's right under the policy to make the decision as to whether a claim against the insured should be litigated or settled, it is not a right of the insurer to hazard the insured's financial well-being." Id.

Returning to the instant matter, following further proceedings that need not be detailed herein, on July 5, 2011, the trial court issued a memorandum and order that added the following observations to the above-excerpted factual background:

This is not a case in which a verdict was likely to exceed the policy limits. In the Hall [Action], it is very questionable whether the plaintiffs, represented by competent counsel, would have settled the case for $80 million if there was a realistic possibility that the verdict would exceed $320 million if the case proceeded to trial.
This is not a case in which the terms of the settlement included a promise of the plaintiffs in the underlying litigation that they will look only to [B&W's] insurance company for payment of the settlement amount.[3] To the contrary, this case involves an insured who paid the amount of the settlement. Thus, in negotiating with the Hall plaintiffs, [B&W] had a strong interest to hold out for the best possible deal because of the likelihood that the [ANI Policies] will not cover the Hall [Action].

T.C.O., 7/6/2011, at 2 (typography modified for clarity).

The trial court then revisited what legal standard a jury should apply in the trial to follow, arriving at a significantly different answer than it had in its 2009 ruling. Indeed, instead of finding that ANI would be obliged to indemnify B&W for its settlement funds only if it declined to settle the case in bad faith under Cowden, the trial court ruled that there was no principled distinction between a case in which an insurer provides a defense subject to a reservation of rights, the circumstances before the trial court, and a case where the insurer denies both defense and coverage. Id. at 4. Thus, rejecting its 2009 indication that the Cowden standard would govern the question whether ANI would be bound to indemnify B&W for the settlement, the Court instead analogized the ...


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