Pennsylvania policyholders are entitled to coverage if they settle a case without their insurer's consent when the insurer is providing defense under a reservation of rights, the Pennsylvania Supreme Court has ruled.

And this is one of the few state high courts to rule on this issue, a Pittsburgh insurance recovery attorney noted.

The complex litigation began with the 1994 filing of a federal class action lawsuit U.S. District Court in Pittsburgh against New Orleans-based Babcock & Wilcox Co. and La Palma, California-based Atlantic Richfield Co., brought by plaintiffs claiming to have suffered bodily injury and property damage caused by emissions from nuclear facilities owned by the policyholders, according to the ruling in Babcock & Wilcox Co. et al. v. American Nuclear Insurers.

A 1998 trial resulted in an initial verdict totaling more than $36 million, but a federal court granted a new trial because of evidentiary issues, although it was never held because of a subsequent settlement, according to the ruling.

The defendants' insurers, including Hartford, Connecticut-based American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters, provided a defense subject to a reservation of rights.

During the course of the litigation, the insurers refused consent to any settlement offers. The case was settled however, by ARCO in 2008 and Babcock in 2009 for a total of $80 million, which was “substantially less than the $320 million of potential coverage,” according to the ruling.

The policyholders then sought reimbursement of the settlement amount, but were refused by the insurers on the basis of a “consent to settlement” clause in their policy.

The policyholders contended they were titled to reimbursement “so long as coverage applies and the settlement is fair and reasonable and entered in good faith,” according to the Pennsylvania Supreme Court, in describing their position.

The policyholders sued for coverage, and the Court of Common Pleas of Allegheny County in Pittsburgh ruled in their favor following a two-week trial, in which a jury concluded the settlement was fair and reasonable, but was overturned by an intermediary court, the Pennsylvania Superior Court. The Pennsylvania Supreme Court, however, agreed the policyholders were entitled to coverage, in a 3-2 ruling.

The jury had responsibly reached a “fair and reasonable” settlement, despite the insurers' continued refusal to settle, said the Supreme Court in stating it was adopting the same standard.

Traci S. Rea, a partner with law firm Reed Smith L.L.P. in Pittsburgh, who was not involved in the case, said situations where a policyholder wants to accept a settlement and the insurer does not consent, and where there has been a reservation of rights, put the insured in an “awkward position to be in because there could be substantial liability” if the matter goes to trial.

Under this ruling, if an insurer does not consent to a reasonable settlement, the policyholder can still recover the settlement amount if it can prove the settlement was reasonable, covered by the policy and not collusive. “This is really a good ruling that's fair to all parties,” said Ms. Rea.

Ms. Rea said although the case only applies to any policy that is governed by Pennsylvania law, it is important because “a lot of courts are struggling with this issue, and there are not a whole of cases,” particularly in state high courts, that “are squarely addressing it.”