[J-86-2014] [MO: Baer, J.] IN THE SUPREME COURT OF PENNSYLVANIA

WESTERN DISTRICT

**THE BABCOCK & WILCOX COMPANY AND B&W NUCLEAR ENVIRONMENTAL**  **SERVICES, INC.**

**v.**

**AMERICAN NUCLEAR INSURERS AND MUTUAL ATOMIC ENERGY LIABILITY**  **UNDERWRITERS AND OTHER INTERESTED PARTY: ATLANTIC**  **RICHFIELD COMPANY**

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**-------------------------------------------------- AMERICAN NUCLEAR INSURERS AND**  **MUTUAL ATOMIC ENERGY LIABILITY UNDERWRITERS** 

**v.**

**THE BABCOCK & WILCOX COMPANY AND B&W NUCLEAR ENVIRONMENTAL**  **SERVICES, INC., AND ATLANTIC RICHFIELD COMPANY** 

**APPEAL OF: BABCOCK & WILCOX POWER GENERATION GROUP, INC.**  **(F/K/A THE BABCOCK & WILCOX COMPANY) AND BABCOCK & WILCOX**  **TECHNICAL SERVICES GROUP, INC. (F/K/A B&W NUCLEAR**  **ENVIRONMENTAL SERVICES, INC.), AND ATLANTIC RICHFIELD COMPANY**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: :**  **: No. 2 WAP 2014**  **Appeal from the Order of the Superior Court entered July 10, 2013 at No. 525**  **WDA 2012, vacating the Judgment of the Court of Common Pleas of Allegheny**  **County entered February 17, 2012 at GD99-11498 and GD99-16227 and**  **remanding.**

**ARGUED: October 7, 2014**

CONCURRING AND DISSENTING OPINION**[J-86-2014] [MO: Baer, J.] - 2**

MR. JUSTICE EAKIN DECIDED: July 21, 2015 **I agree the Superior Court erred in applying the “i nsured’s choice” paradigm**  **described in Taylor v. Safeco Insurance Company, 361 S o. 2d 743 (Fla. Dist. Ct. App.**  **1978). However, because I would affirm the Superior Court’s decision to vacate the trial**  **court’s judgment and remand for further proceedings, al beit on different grounds, I**  **respectfully dissent from the rest of the majority’s decisi on.**  **Appellees American Nuclear Insurers and Mutual Atomic Ene rgy Liability**  **Underwriters (collectively, ANI) provided insurance cover age to appellants, The Babcock**  **& Wilcox Company, B&W Nuclear Environmental Services, a nd Atlantic Richfield**  **Company, for liability arising from a “nuclear energy hazard.”**  **1 The terms of coverage**  **are contained in the applicable insurance contracts execu ted by the parties. During the**  **relevant coverage periods, appellants were sued by vari ous claimants for damages**  **allegedly arising from exposure to radiation emission f rom the insured nuclear energy**  **facilities. Appellants sought coverage from ANI under the applicable policies, which**  **provide the insureds “shall not, except at [their] ow n cost, make any payment, assume**  **any obligation or incur any expense[,]” Nuclear Energy Liability Policy (Facility Form), at**  **3, Condition 6, and also, as a condition precedent to the insureds’ right to maintain a**  **coverage action against ANI for liability determined by settlement, any settlement must be**  **“by written agreement of the insured, the claimant an d [ANI,]” id., Condition 7. The policy**  **expressly excludes coverage for “liability assumed by the insured[s] under contract[.]”**  **Id., at 2, Exclusion (c).**

**1 The insured hazard is defined as “the radioactive, tox**  **ic, explosive or other hazardous properties of nuclear material, but only if (1) the**  **nuclear material is at the facility or has been discharged or dispersed therefrom without intent t**  **o relinquish possession or custody thereof to any person or organization[.]” Nucl**  **ear Energy Liability Policy (Facility Form), at 1, para. III.** **[J-86-2014] [MO: Baer, J.] - 3**

**ANI agreed to defend the underlying litigation in i ts entirety, while simultaneously**  **informing appellants it would not waive its right to deny ultimate coverage on the basis of**  **various exclusions and conditions in the insurance policy. ANI Letter, 6/20/94, at 4.**  **Such “reservation of rights letters” are common in cases w here causation and coverage**  **are uncertain. See, e.g., American and Foreign Insura nce Company v. Jerry’s Sports**  **Center, Inc., 2 A.3d 526, 545-46 (Pa. 2010) (stating insurer uncertain about duty to**  **indemnify may offer defense under reservation of ri ghts to avoid risks of potential bad**  **faith claim or inept defense of underlying action by i nsured exposing insurer to payment if**  **there is duty to indemnify); Whole Enchilada, Inc. v . Travelers Property Casualty**  **Company of America, 581 F. Supp. 2d 677, 685 n.6 (W. D. Pa. 2008) (finding reservation**  **of rights is unilateral, written notice from insurer to policyholder that insurer may disclaim**  **coverage based on terms in insurance policy, legal princip les precluding coverage,**  **violation of policy provisions by insured, or some combin ation of those factors); see also**  **Perkoski v. Wilson, 92 A.2d 189, 191 (Pa. 1952) (holdin g insurer’s failure to reserve rights**  **while providing defense to underlying claim results in waiver of right to deny coverage of**  **judgment against insured). ANI conducted its investigation into the underlying cla**  **ims, engaged numerous radiation experts, and considered appellants’ exposure i**  **n light of the strict causation standard adopted in In re TMI Litigation, 193 F.3d 6**  **13, 643 (3d Cir. 1999), opinion amended, 199 F.3d 158 (3d Cir. 2000) (“[C]ausation ca**  **n only be established (if at all) from epidemiological studies of populations exposed to ioniz**  **ing radiation.”). ANI concluded the claims in the underlying litigation lacked scientif**  **ic and legal merit, and thus elected to aggressively defend the claims. Appellees’ Brief, at 7**  **(citing N.T. Trial, 9/14/11, at 1317-18). During this period — which included delays a**  **rising from B&W’s bankruptcy, test trial, and retrial, as well as settlement discussion**  **s — ANI apparently paid more than [J-86-2014] [MO: Baer, J.] - 4** 

**$40 million in defense costs before appellants entered into their unauthorized settlement**  **agreements. Id., at 13 (citing N.T. Trial, 9/14/11, at 1312-13).**  **It is well-established in Pennsylvania that an insurer exercising its right not to settle**  **may not be held liable for essentially guessing incorre ctly about the ultimate result of**  **underlying litigation, as long as the insurer did not act in bad faith. Cowden v. Aetna**  **Casualty & Surety Company, 134 A.2d 223 (Pa. 1957). In cases such as this one, where**  **contractual terms vest in the insurer the right to contro l litigation falling within the policy’s**  **coverage, the insurer “must act with the utmost good fai th toward the insured in disposing**  **of claims against the latter.” Id., at 228. There is no “absolute duty” on the part of the**  **insurer to settle a claim, even when a possible judgmen t against the insured might**  **exceed the amount of insurance coverage. Id. However**

**, the decision to expose the insured to personal pecuniary**  **loss must be based on a bona fide belief by the insurer, predicated**  **upon all of the circumstances of the case, that it has a good possibility of**  **winning the suit. ... Good faith requires that the chance of a fi**  **nding of nonliability be real and substantial and that the decision to litigate**  **be made honestly.**

**Id.; see also Birth Center v. St. Paul Companies, 787 A.2d 376, 379 (Pa. 2001) (“Where** 

**an insurer refuses to settle a claim that could have bee n resolved within policy limits**  **without ‘a bona fide belief ... that it has a good p ossibility of winning,’ it breaches its**  **contractual duty to act in good faith and its fiduciary duty to its insured.”).**  **The majority distinguishes Cowden on the basis it did not involve an unauthorized**  **settlement, Majority Slip Op., at 21, but in my view , this is a distinction without a**  **difference. The law is clear that the parties to an i nsurance contract must act in**  **accordance with the terms of that contract, and an insure r owes its insured a duty of “the**  **utmost good faith.” Cowden, at 228. In this case, the re has been no determination**  **about whether ANI acted reasonably when it decided to defend the underlying litigation**  **rather than settle, but it is apparent — as long as ANI acted in good faith — it was within** **[J-86-2014] [MO: Baer, J.] - 5**

**its rights to do so. The majority’s decision to reinstat e the trial court’s judgment in favor**  **of appellants, based on out-of-state, non-precedential decisions is problematic, at best,**  **given the existence of binding case law from this Court. See Babcock & Wilcox**  **Company v. American Nuclear Insurers, 76 A.3d 1, 23 (Pa . Super. 2013) (Olson, J.,**  **concurring and dissenting) (“[E]stablished and controlling Pennsylvania law compels the**  **conclusion that since ANI tendered a defense subject to a reservation of its rights to**  **contest coverage, B&W remained committed to observe its obligations under the**  **consent-to-settlement clause in the parties’ insurance contr act unless B&W could**  **establish bad faith on the part of ANI pursuant to [Co wden.]”).**  **The ANI policies expressly authorize ANI to maintain co ntrol over litigation by**  **rejecting settlement offers, as long as it acts in good faith. ANI’s reservation of its rights** 

**under the same contract did not alter this fundamental principle. The Superior Court**  **majority treated ANI’s reservation of rights letter as a trigger for the “insured’s choice” of**  **rejecting coverage under the express terms of the contra ct, Babcock & Wilcox Company,**  **at 22, and the majority here interprets ANI’s reservat ion of rights as a pivotal action**  **“asserting that the claims may not be covered by the pol icy.” Majority Slip Op., at 2.**  **But, a typical reservation-of-rights letter is neither of these things; it simply puts the**  **insured on notice — reminds the insured, actually — of various existing contractual**  **provisions that might ultimately preclude coverage und er the policy, depending upon**  **what discovery and litigation reveals about the claims a nd potential liability. A**  **reservation of rights — without more — does not change th e terms of the contract, does** 

**not constitute a refusal to defend or a breach of contr act, and therefore should not**  **authorize the insured to take anticipatory action viola ting that contract. Thus, ANI’s**  **conduct in reserving its rights, in the absence of bad faith, was not a repudiation or breach**  **of the insurance contract allowing appellants to settle w ithout permission. Moreover,** **[J-86-2014] [MO: Baer, J.] - 6**

**under Cowden, an insured may recover payment from an insurer for an excess verdict or**  **to reimburse an unauthorized settlement — essentially, damages resulting from the**  **insurer’s breach of contract — but only if the insured ca n establish by clear and**  **convincing evidence that the insurer breached its duty t o act in good faith. Cowden, at**  **229. The trial court and Superior Court majority di d not apply these basic principles, but**  **instead imported unnecessary new standards from United S ervices Automobile**  **Association v. Morris, 741 P.2d 246 (Ariz. 1987), and T aylor, and the majority now applies**  **a third “hybrid” test purporting to combine Morris and Cowden. Although the majority’s**  **attempt to reconcile these standards is laudable and, at first blush, appealing, I**  **nevertheless must disagree.**

**The Cowden bad faith standard and the Morris “fair a nd reasonable settlement”**  **standard both present ways of balancing the interests of the contracting parties and**  **analyzing the questions of who breached the contract, a nd whether the breaching**  **conduct was somehow justified under the law. Under Cowd en, the insurer may enforce**  **the language of the insurance contract both parties e xecuted as long as the insurer does**  **not anticipatorily breach that contract by repudiating its obligations under the policy or**  **otherwise engaging in bad faith conduct. Cowden, at 2 27; see also Alfiero v. Berks**  **Mutual Leasing Co., 500 A.2d 169, 171-72 (Pa. Super. 1985) (stating despite policy**  **language requiring insurer’s permission to settle, insure d could settle claim without**  **insurer’s consent where insurer repeatedly denied any an d all obligation to defend or**  **indemnify insured); Vincent Soybean & Grain Co., Inc. v. Lloyd’s Underwriters of London,**  **246 F.3d 1129, 1132 (8th Cir. 2001) (holding insurer issued reservation of rights and**  **defended underlying claim but insured settled without permission, breaching policy terms;**  **insured may not recover amount it paid to settle clai m in absence of bad faith by insurer).**  **The concept of relieving the insured of its obligatio ns under an insurance policy when the** **[J-86-2014] [MO: Baer, J.] - 7**

**insurer has violated its own duties under that policy com ports with general contract**  **principles applied outside the insurance coverage context . See, e.g., LJL**  **Transportation, Inc., v. Pilot Air Freight Corporati on, 962 A.2d 639, 641, 652 (Pa. 2009)**  **(finding material breach by one party terminates cont ract and relieves non-breaching**  **party from its own duties under contract). However, ap plicable Pennsylvania law does**  **not treat an insurer’s good-faith decision to defend a claim rather than settle it as a breach**  **of contract that triggers a free-for-all where the in sured may take it upon itself to settle the**  **case without permission in violation of the policy terms**

**. The Morris “fair and reasonable” standard, by contrast,**  **essentially allows an insured to breach the contract’s requirement that the in**  **surer must consent to any settlement when the insured anticipates an excess future v**  **erdict and, as a practical matter, permits the insured to determine for itself (**  **in the first instance) that the insurer acted unreasonably in refusing to settle.**  **2 There may be strong policy reasons for**  **endorsing this latter method of analysis, as recognized b y the majority here and by Judge**  **Wettick at the trial court level, or even the “insured ’s choice” Taylor rationale adopted sua**  **sponte by the Superior Court, but Cowden is the appli cable law in Pennsylvania and**  **provides the approach that enforces the actual terms of the contract entered into by the**  **parties, rather than allowing one party to nullify t hose terms when it sees fit. See, e.g.,**  **AAA Mid-Atlantic Insurance Company v. Ryan, 84 A.3d 626, 632-33 (Pa. 2014) (holding**  **court must give plain meaning to clear and unambiguous terms of insurance contract**  **unless provision violates clearly expressed public policy); Jerry’s Sport Center, Inc., at** 

**2 I recognize the Arizona court holds the “cooperation**  **clause prohibition against settling without the insurer’s consent forbids an insured from s**  **ettling only claims for which the insurer unconditionally assumes liability under the pol**  **icy.” Morris, at 252 (emphasis added). However, the cooperation requirement in the**  **ANI policy is not limited in this way.** **[J-86-2014] [MO: Baer, J.] - 8**

**540 (stating rules of contract interpretation apply to insurance contracts; mutual intention**  **of parties at time they formed contract governs its inte rpretation). The majority’s** 

**rationale allows an insured to alter the nature of t he bargain it struck with its insurer.**  **Accordingly, I would affirm the Superior Court’s decisi on to vacate the trial court’s**  **judgment and remand for further proceedings. I would not, however, direct that those**  **proceedings consist of findings pursuant to Taylor, but in stead would direct the trial court** 

**to determine whether ANI acted in bad faith in refusi ng to settle the underlying litigation,**  **pursuant to this Court’s holding in Cowden. Mr. Chief Justice Saylor joins this concurring and dissenti**  **ng opinion.**