Negotiating Bad Faith and Insurance Coverage Claims

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Damages Recoverable In Pennsylvania For Insurance Bad Faith

The damages recoverable for insurance bad faith committed in Pennsylvania depend on whether the plaintiff asserts statutory and/or common law claims.

In Pennsylvania, there is no common law[1] tort action for the bad faith handling of first party claims – and thus no damages recoverable therefrom.[2]

On the other hand, Pennsylvania Courts have long recognized that liability insurers have a fiduciary duty to act in good faith in their settlement or defense of third-party claims against their insureds and may be liable for excess verdicts beyond their policy limits in the event that duty is breached.  For common law third party bad faith actions, the measure of damages traditionally was the amount of an excess verdict over and above the policy’s liability limits.[3]

Possibly in response to the decision in D’Ambrosio, the Pennsylvania Legislature enacted the current bad faith statute, “Actions on insurance policies,” 42 Pa.C.S.A. §8371, which became effective on July 1, 1990. The statutory damages recoverable from an insurer for bad faith include interest on the amount of the claim or judgment, punitive damages, court costs and attorneys’ fees.  The bad faith statute, however, makes no references to allowance for compensatory or consequential damages.

The seminal case of, Birth Center v. St. Paul Companies provides a deep dive by our Supreme Court into the damages, statutory and common law, recoverable in a bad faith action.  727 A.2d 1144 (Pa.Super. 1999), affirmed, 787 A.2d 376 (Pa. 2001).  Birth Center, concerned common law and statutory bad faith claims brought by a maternal health center against its medical malpractice insurance company for damages caused due to the insurer’s failure to settle a professional malpractice claim against it within the policy limits. The plaintiff-insured claimed that it suffered lost profits, lost business opportunities, and damage to its reputation as a result of the insurer’s alleged bad faith conduct. A jury awarded $700,000 as compensatory damages. The insurer, which ultimately agreed to pay a multi-million-dollar excess verdict award, challenged the award of compensatory bad faith damages as being not allowed under either §8371 or common law bad faith. The Supreme Court disagreed with the insurer and upheld the verdict.

Applying principles of contract law, the court in Birth Center held that an insurer that acts in bad faith “is liable for the known and/or foreseeable compensatory damages of its insured that reasonably flow from the bad faith conduct of the insurer.”  Id.  According to the court, although §8371 did not provide for compensatory damages, pre-existing law allowed the recovery of reasonably foreseeable damages resulting from a breach of contract, and §8371 did not supplant the traditional contractual remedy.

It is important to note that the allowance of compensatory damages by the Court in Birth Center was premised upon the plaintiff’s common law third party bad faith claim—a cause of action based upon breach of contract—and not upon the §8371 statutory bad faith claim. Most courts considering the issue of damages under §8371 have held that a successful plaintiff may only obtain those “damages” expressly provided for by the statute: interest at prime plus 3 percent, court costs, punitive damages, and attorneys’ fees.[4] Thus, it is generally agreed that under §8371, an insured may not recover compensatory or consequential damages.[5] Similarly, courts have rejected claims for emotional distress damages under §8371.[6]

With respect to the common law cause of action for bad faith, however, numerous courts, purporting to follow Birth Center, have permitted an insured plaintiff to seek recovery for compensatory damages. Significantly, unlike in Birth Center, these court decisions have not arisen in the context of the traditional failure to settle third party claim. Rather, claims for bad faith-related compensatory damages have been allowed to proceed in the context of first party claims—such as claims for fire damage, property collapse, business property theft, underinsured motorist (UIM) benefits, title Insurance, and disability benefits.[7]

Additionally, Birth Center-like compensatory damages have been permitted in the context of an insurer’s denial of coverage under a liability policy.[8] In the context of a common law claim, some courts have permitted a plaintiff to assert claims for emotional distress and loss of consortium.[9] Summarizing the current state of the law, one district court recently opined, “It is clear to the Court that there is no basis for compensatory damages under §8371, but it is equally clear to the Court that, under a claim for a breach of the implied covenant of good faith and fair dealing, compensatory damages are available.”[10]

Since compensatory or consequential damages are not recoverable under §8371, several courts have held that such damage are not a prerequisite to bringing a §8371 bad faith action.[11] With respect to a common law claim, however, which sounds in contract, damages are likely required for a successful action.[12] However, one court recently held that even without compensatory damages, an insurer could be liable for nominal damages in a third party common law action, so the court permitted the action to proceed.[13]

Because the standard Pennsylvania civil jury instructions are less than instructive on the precise damages recoverable from first or third party bad faith, this author recommends pleading both statutory and common law bad faith (including breach of the implied covenant of good faith and fair dealing) with an intent to prove the elements of each at trial in order to recover for all potential damages.

[1] Common law is the part of English law that is derived from custom and judicial precedent rather than statutes.

[2] D’Ambrosio v. Pennsylvania National Mutual Cas. Ins. Co., 431 A.2d 966 (Pa. 1981).

[3] Cowden v. Aetna Cas. Ins. Co., 133 A. 233 (Pa. 1955)

[4] Bare v. State Auto Group, 2013 U.S. Dist. LEXIS 105335(E.D. Pa. July 26, 2013); Schmitt v. State Farm Ins. Co., 2010 U.S. Dist. LEXIS 45451, at *8(W.D. Pa. Apr. 16, 2010); Duffy v. Nationwide Mut. Ins. Co. 1993 U.S. Dist. LEXIS 16197(E.D. Pa. Nov. 10, 1993); DeWalt v. Ohio Cas. Ins. Co., 2007 U.S. Dist. LEXIS 26901(E.D. Pa. Apr. 10, 2007); Miller Pools, Inc. v. Nationwide Mut. Ins. Co., 2006 U.S. Dist. LEXIS 70859(W.D. Pa. Sept. 29, 2006).

[5] OneBeacon Am. Ins. Co. v. UBICS, Inc., 2010 U.S. Dist. LEXIS 136801, at *15-16(W.D. Pa. Dec. 28, 2010); Simmons v. Nationwide Mut. Fire Ins. Co., 2011 U.S. Dist. LEXIS 42724, at *15-16(W.D. Pa. Apr. 20, 2011); Schmitt v. State Farm Ins. Co., 2010 U.S. Dist. LEXIS 45451, at *8(W.D. Pa. Apr.16, 2010); Smalanskas v. Indian Harbor Ins. Co., 2008 Pa. Dist. & Cnty. Dec. LEXIS 233, at *20(Lackawanna Feb. 15, 2008), aff ’d without opinion, 970 A.2d 490 (Pa. Super. Feb. 10, 2009)

[6] LaPlante v. Provident Life & Accident Ins. Co., Civil Action No. 3:00-CV-1580(M.D. Pa. Jan. 11, 2001); Novick v. UNUMProvident Corp., 2001 U.S. Dist. LEXIS 9735(E.D. Pa. July 10, 2001); Viola v. Provident Life & Accident Ins. Co., Civil Action No. 00-1656(E.D. Pa. July 17, 2000); Duffy v. Nationwide Mut. Ins.Co., 1993 U.S. Dist. LEXIS 16197(E.D. Pa. Nov. 10, 1993); Amitia v. Nationwide Mut. Ins. Co., 2009 U.S. Dist. LEXIS 2840(M.D. Pa. Jan. 15, 2009).

[7] Corch Constr. Co. v. Assurance Co. of Am., 64 Pa. D. & C.4th 496(Luzerne 2003).; Simmons v. Nationwide Mut. Fire Ins. Co., 788 F. Supp. 2d 404(W.D. Pa. Apr. 20, 2011); Kakule v. Progressive Cas. Ins. Co., 2007 U.S. Dist. LEXIS 44942(E.D. Pa. June 20, 2007); Pavlick v. Encompass Indem. Ins. Co., 2011 U.S. Dist. LEXIS 76026 (W.D. Pa. July 14, 2011). Davis v. Fid. Nat’l Ins., 32 Pa. D. & C.5th 179 (Lackawanna 2013), new trial denied, 2014 Pa. Dist. & Cnty. Dec. LEXIS 225 (Lackawanna Mar. 28, 2014), aff ’d, 2015 Pa. Super. Unpub. LEXIS 550 (Pa. Super. Mar. 18, 2015), reargument denied, 2015 Pa. Super. LEXIS 317 (Pa. Super. Ct., May 28, 2015).

[8] Upright Material Handling, Inc. v. Ohio Cas. Grp., 74 Pa. D.  C.4th 305(Lackawanna 2005), aff ’d sub nom., Bombar v. W. Am. Ins. Co., 932 A.2d 78(Pa. Super 2007); Pa. Nat. Mut. Cas. Ins. Co. v. Johnson, 82 Pa. D. & C.4th 23(Del. 2007).

[9] Leporace v. N.Y. Life & Annuity Corp., 2014 U.S. Dist. LEXIS 62911(E.D. Pa. May 7, 2014), aff ’d, 619 F. App’x 172 (3d Cir. 2015); Kakule v. Progressive Cas. Ins. Co., 2007 U.S. Dist. LEXIS 44942(E.D. Pa. June 20, 2007); Harlan v. Erie Insurance Group, 80 Pa. D. & C.4th 61(Lawrence 2006); Amitia v. Nationwide Mut. Ins. Co., 2009 U.S. Dist. LEXIS 2840(M.D. Pa. Jan. 15, 2009); Echevarria v. UNITRIN Direct Ins. Co., 2003 U.S. Dist. LEXIS 4680(E.D. Pa. Mar. 17, 2003).

[10] Porter v. Safeco Ins. Co. of Ill., 2016 U.S. Dist. LEXIS 15877, at *23-24(M.D. Pa. Feb. 9, 2016).

[11] Ravindran v. Harleysville Mut. Ins. Co., memorandum op., 839 A.2d 1170(Pa. Super. 2003); Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487, 499(3d Cir. 2015).

[12] Charter Oak Ins. Co. v. Maglio Fresh Food, 45 F. Supp. 3d. 461, 467(E.D. Pa. 2014), aff ’d., 629 F. App’x 239 (3d Cir. 2015)

[13] Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487, 498(3d Cir. 2015).

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