In what is certainly going to prove to be a significant decision that affects the landscape for insurers and insureds alike, the Pennsylvania Superior Court recently issued an opinion addressing the legal standard to be applied when evaluating an insurer's duty to indemnify an insured for an unauthorized settlement made by the insured while being defended under a reservation of rights. In Babcock & Wilcox Co. v. Am. Nuclear Insurers & Mut. Atomic Energy Liab. Underwriters, 2013 Pa. Super. LEXIS 1630 at *6-7 (Pa. Super. June 10, 2013), the court was called on to decide whether the settlement should be evaluated under the "bad faith" standard articulated in Cowden v. Aetna Casualty and Surety Co., 134 A.2d 223 (Pa. 1957), or the "fair and reasonable" standard formulated in Alfiero v. Berks Mutual Leasing Co., 500 A.2d 169 (Pa. Super. 1985).
In a case of first impression, Judge Mark Hornak of the U.S. District Court of the Western District of Pennsylvania has determined, in an "Erie guess" that the Pennsylvania Supreme Court would not allow a principal to sue its surety on a construction job for either breach of fiduciary duty or for bad faith. The full opinion can be found at Reginella Construction v. Travelers Casualty and Surety Co. of America, 2013 WL 2404140 (W.D.Pa. May 31, 2013).