New York High Court Reconfirms That Pure Pro Rata Allocation Remains the Rule in Continuous Trigger Situations, Rejecting Attempt to Shift Allocation to Insurers for Periods Where Insurance Was Commercially Unavailable

By and on April 4, 2018

Rejecting policyholder arguments that losses during periods where pollution liability insurance was commercially unavailable should be allocated to insurers of other periods, the New York Court of Appeals recently confirmed that New York remains a pure pro rata/time on the risk allocation state. In Keyspan Gas East Corporation v. Munich Reinsurance America, Inc., the policyholder, Keyspan Gas East Corporation (Keyspan), sought coverage to clean up environmental contamination at a site that began in the 1890s and continued for decades. Century Indemnity Company (Century) issued eight excess insurance policies between 1953 and 1969, and the trial court found that environmental liability insurance was unavailable prior to 1925 and after 1970.

The Court of Appeals previously adopted the pro rata approach to allocating responsibility for coverage for progressive injury claims spanning across multiple policy periods in Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208 (2002). Keyspan, however, argued that an equitable exception should be created for periods where insurance was commercially unavailable, and that liability for such periods should be allocated to insurers of other time periods. Rejecting this so-called “unavailability rule,” the Court found Keyspan’s arguments irreconcilable with the unambiguous language of Century’s policies, which like nearly all general liability policies, limits the insurer’s liability to property damage that occurs “during the policy period.” Losses sustained outside that period – such as years insurance was unavailable – are not within the scope of coverage.

Importantly, the Court took pains to emphasize that its recent decision in Matter of Viking Pump, Inc., 27 NY3d 244 (2016), that “all sums” allocation is appropriately applied to policies containing “anti-stacking” or “noncumulation” clauses that collapse coverage across multiple policy periods into a single period, did not presage a retreat from the Court’s prior adoption of pro rata allocation. Instead, the Court emphasized that its fundamental rule is that policies must be enforced according to their contractual language and that so-called “public policy” or “equity” concerns cannot serve to permit New York’s Courts to rewrite the bargain between an insurer and its insured.

The Court’s holding is a significant win for insurers in New York involved in “long-tail” insurance claims, particularly those stretching across several decades. The holding reaffirms strict compliance with the pro-rata approach to allocation, and holds insurer’s liable only for their time on the risk. Emphasizing the importance of permitting insurers to select for themselves the risks they choose to underwrite, the Court rejected Keyspan’s bid to rewrite the policy for “public policy” reasons, and refused to find coverage that was never underwritten and never contemplated by the parties. While this case involved environmental contamination, it also can be expected to have important repercussions for long-tail personal injury claims such as asbestos, where coverage for asbestos claims has been commercially unavailable to most commercial insureds since the mid-1980s.

Filed under Environmental Liability Insurance

Pennsylvania High Court Allows Policyholder to Recover Voluntary Settlements Paid without Insurer Consent Even Absent Insurer Bad Faith

By on July 28, 2015
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On July 21, 2015 a sharply divided (and short-handed) Pennsylvania Supreme Court ruled 3-2 that an insurer defending an insured subject to a reservation of rights may be required to reimburse its insured for any “fair and reasonable” settlement its insured enters into even when the insurer does not consent to the settlement, and even where the insurer has not acted in bad faith. Babcock & Wilcox Co., et al. v. American Nuclear Insurers, et al., 2015 Pa. LEXIS 1551, No. 2 WAP 2014. The Court, however, did not give carte blanche to insureds to settle without insurer consent. Instead, the Court held that such a right is “limited to those cases 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.” In other words, the Court held that an insurer defending under a reservation of rights either must (1) consent to and pay a fair and reasonable settlement offer presented to its insured, (2) withdraw any reservation of rights, or (3) risk having to reimburse its insured who settles without consent if the claim is found to have been covered under the policy. As the dissent emphasized, the Court’s ruling represents a substantial abrogation of the contractual rights of insurers under Pennsylvania law, which previously permitted policyholders to circumvent the “voluntary payments” provisions of typical liability policies only where their insurers were guilty of having acted in bad faith conduct in failing to settle the underlying claim.

Babcock & Wilcox (“B&W”), along with ARCO, had been sued in a long-running class action involving over 500 plaintiffs claiming bodily injury and property damage from alleged emissions from the defendants’ nuclear faculties. B&W’s insurer, ANI, had provided an aggressive defense, subject to a reservation of rights, expending more than $40 million over the course of two decades, pursuant to a policy with $320 million in limits (which were eroded by defense costs). The policy contained a standard consent to settlement/cooperation clause that provided, inter alia, that “[t]he insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.”

Believing that there was a strong likelihood of a obtaining a complete defense judgment, and seeking to discourage potential “copycat” claims, ANI rejected all settlement offers presented. B&W, which for some time had been pressuring ANI to settle, entered into an $80 million settlement (well within the $280 million remaining policy limits) without ANI’s consent. B&W then sued ANI in state court for reimbursement of the settlement amount.

In the trial court, ANI contended that it had no obligation to reimburse Babcock & Wilcox because B&W breached the policy’s consent to settle requirement. Relying upon Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223 (Pa. 1957) (holding that “an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits”), ANI argued that, under Pennsylvania law, an insurer could only be required to reimburse its insured for a settlement reached without its consent if the insurer acted in bad faith in refusing to settle. By contrast, B&W, framing the argument as one of first impression in Pennsylvania, and relying on case authority from other states, argued that an insurer is obligated to reimburse its insured for any fair and reasonable settlement entered into in good faith, regardless of a cooperation clause.

The trial court eventually held that “an insurer, defending subject to a reservation of rights, is required to reimburse an insured for a settlement reached in violation of the consent to settle clause where coverage is found to exist and the settlement is ‘fair and reasonable’ and made in ‘good faith and without collusion.’” Applying this standard, a jury found that the settlement reached between B&W and the underlying plaintiffs was reasonable and, accordingly, ANI was obliged to reimburse B&W.

ANI appealed and the Pennsylvania Superior Court reversed and adopted Florida’s “insured’s choice” test where an insured can either: 1) accept a defense pursuant to a reservation of rights and be bound by a consent to settlement provision provided that the insurer does not act in bad faith; or 2) reject a defense pursuant to a reservation of rights and, if coverage is found, hold the insurer liable for defenses costs and the costs of any reasonable settlement.

The Supreme Court, in turn, reversed the Superior Court’s decision, holding that the “insured’s choice” test is irreconcilable with Pennsylvania law because an insured’s rejection of a defense under a reservation of rights relieves an insurer of its coverage obligation. Further, the Court criticized the “insured’s choice” as being largely illusory because many, if not most, insureds lack resources to fund an adequate defense. The Justices, however, diverged sharply as to what the applicable test should be for “determining whether an insurer is liable under its insurance policy for a settlement made by its insured without securing the insurer’s consent, when the insurer is defending the claim subject to a reservation of rights.” After reviewing the policy arguments proffered by the parties and their amici, and examining how courts in other jurisdictions have approached the issue, the Court held that “where an insurer defends subject to a reservation of rights and breaches its duty to settle . . . an insured may accept a settlement over the insurer’s refusal where the settlement is fair, reasonable, and non-collusive.” The Court’s holding was limited to situations when an insurer is defending under a reservation of rights and – because of the nature of the particular reservation of rights – its interests diverge from those of its insured. In such a situation, the “determination of whether the settlement is fair and reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.” Here, the Court held that its new standard had been satisfied and reinstated the trial court’s judgment requiring ANI to reimburse B&W for the $80 million settlement.

In dissent, Justice Eakin, joined by Chief Justice Saylor, vociferously criticized the majority’s adoption of the “fair and reasonable” standard.  In the dissenting Justices’ view, this was not a case of first impression at all. Rather, the dissenters insisted that the outcome of the case clearly was governed by the holding of Cowden, imposing liability for an excess verdict where the insurer’s failure to settle within policy limits was in bad faith. In the dissenters’ view, so long as ANI’s decision to continue defending rather than settling the underlying litigation was made in good faith, ANI was within its right to do so. The dissenting Justices criticized the new standard adopted by the Majority:

[The “fair and reasonable” standard] allows an insured to breach the contract’s requirement that the insurer must consent to any settlement when the insured anticipates an excess future verdict 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.

The majority repeatedly emphasized that not all reservations of rights are created equal, and that whether an insurers’ refusal to settle or give up its reservation of rights constitutes a policy breach must be examined on a case-by-case basis. The Court also admonished that settlements be closely vetted to ensure that they are in fact reasonable under the circumstances and non-collusive. Despite these cautionary notes, policyholders will doubtless argue that this decision gives them a broad license to settle over insurer objection, ultimately with an insurer’s money, whenever an insurer is defending subject to a reservation of rights that might defeat or limit coverage. Moreover, this decision, together with the Court’s ruling in December 2014 in Allstate Property and Cas. Ins. Co. v. Wolfe, 90 A.3d 699 (Pa. 2014), that statutory insurance bad faith claims are assignable, threaten to seriously undermine the insurer’s bargained-for rights to control the defense and settlement of claims against their policyholders.

Filed under Bad Faith, Commercial General Liability, Consent to Settle/Unreasonable Settlements, Duty to Cooperate, Duty to Defend, Reservation of Rights

Pennsylvania Supreme Court Holds that Statutory Insurance Bad Faith Claims Are Assignable

By on December 17, 2014
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Deciding a certified question from the United States Court of Appeals for the Third Circuit, Pennsylvania’s Supreme Court ruled on December 15, 2014 that insurance bad faith claims arising under 42 Pa. C. S. § 8371 (1990) are freely assignable.

In Allstate Property and Cas. Ins. Co. v. Wolfe, No. 39 MAP 2014, Allstate was alleged to have acted in bad faith when an insured motorist suffered a $50,000 punitive damages award after Allstate failed to settle the claim within policy limits. After Allstate refused to pay the punitive damages award, the insured assigned its putative insurance bad faith claim to the tort victim/judgment creditor in exchange for a covenant not to execute against the insured motorist. Allstate argued that statutory bad faith claims are unliquidated personal tort claims that are unassignable under Pennsylvania law as a matter of public policy. The district court disagreed, relying on a line of state Superior Court and federal district court cases holding that such claims were assignable. On appeal, the Third Circuit certified the question to the Pennsylvania Supreme Court.

While the Court recited the competing public policy arguments advanced by the parties and their amici, the Court ultimately treated the case as involving an issue of statutory interpretation. The Court noted that, prior to the enactment of Section 8371, Pennsylvania’s courts had viewed claims of insurance “bad faith” through the lens of contractual claims, which historically were freely assignable. From that, the Court concluded that in enacting the statute, which provided additional remedies of punitive damages, attorneys’ fee-shifting, and presumptively-enhanced prejudgment interest, the legislature intended to supplement the pre-existing contract-based claims, not transform them into non-assignable tort claims.

Centrally, we simply do not believe the General Assembly contemplated that the supplementation of the redress available for bad faith on the part of insurance carriers in relation to their insureds would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions. . . . Our fundamental conclusion here is, simply, that we discern no legislative intent to preclude assignability of damages claims under Section 8371 to the degree these have been reposited into a pre-existing liability scheme which permits assignments.

Chief Justice Castille dissented without opinion from the Court’s 5-1 decision.

Filed under Bad Faith