c. The purpose of the bad faith statute was to cover both first party (non-liability insurance coverage cases) and third party (liability insurance coverage cases) bad faith actions. 

 

B. Case Law Prior To Enactment Of The Bad Faith Statute

 

1. Third party bad faith case law before enactment of the bad faith statute.

 

a. Prior to enactment of the statute, third parties could only pursue bad faith actions against a tortfeasor’s insured upon the policy holder’s assignment of the right to assert a bad faith action to that third party. Gray v. Nationwide Mutual Ins. Co., 422 Pa. 500, 223 A.2d 8 (1966).

 

b. Out of the original third party cases, the Pennsylvania Courts created standards which are still used today in both first party and third party cases, for example:

 

i.            The contractual relationship imposes a fiduciary duty upon the insurer to act in good faith and in due care in defending the underlying action.  Cowden v. Aetna Cas. Ins. Co., 286 Pa. 129, 133 A.2d 233 (1955); Gedeon v. State Farm Mutual Automobile Ins. Co., 410 Pa. 55, 188 A.2d 320 (1962). 

 

ii.            The good faith evaluation and decision not to settle requires consideration of: anticipated range of an adverse verdict; strengths and weaknesses of all evidence; history of the venue situs in similar cases; and the appeal, appearance and persuasiveness of all parties and witnesses.  Shearer v. Reed and State Farm Mutual Automobile Ins. Co., 286 Pa. Super. 188, 428 A.2d 635 (1981). 

 

2. First party bad faith case law before enactment of the statute.

 

a. The case of D’Ambrosio v. Pennsylvania National Mutual Cas. Ins. Co., 494 Pa. 501, 431 A.2d 966 (1981), is the seminal first party bad faith case.  In D’Ambrosio, the insured sought to bring a bad faith claim against his insurer for denying his first party claim for motor boat damages following a storm.  The insured sought to sue under Pennsylvania’s Unfair Insurance Practices Act (“UIPA” at 40 P.S. §1171 (.1-.15)) and cited violations of this statute in support of this claim. 

 

i.            The court in D’Ambrosio held that no independent cause of action for violations of the UIPA existed under Pennsylvania law.^[1]

 

ii.            The court in D’Ambrosio held that no independent cause of action in Pennsylvania existed for first party bad faith.

 

iii.            The court in D’Ambrosio cited numerous jurisdictions which recognized first party claims. 

 

iv.            The court in D’Ambrosio effectively left the decision to create an independent cause of action for first party bad faith to the legislature.

 

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II. The Parties To A Bad Faith Suit: Who Can Sue And Who Can Be Sued

 

A. Plaintiff: The Insured

 

1. Third party plaintiffs.

 

a. A third party plaintiff cannot sue an insurer absent an assignment from the policy holder because there is no contractual relationship between this individual and the insured which would give rise to a bad faith claim. Gray (above); Strutz v. State Farm Mut. Ins. Co., 415 Pa. Super. 371, 609 A.2d 569 (1992); Marks v. Nationwide Ins. Co., 2000 Pa. Super. 341, 762 A.2d 1098 (2000). 

 

i.            The Gray case involved an excess personal injury verdict.  The defendant assigned his right to sue his insurer to plaintiff in exchange for a release of all personal liability. 

 

ii.            The case of U.S. Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306 (3d. Cir. 1985), also involved an excess personal injury verdict in which the insured was permitted to assign his right to sue his primary insurer to his excess insurer. 

 

iii.            However, a non-assignment clause in the original insurance contract between the insured and insurer will bar the right to the assignment of the bad faith cause of action.  Smith v. All State Ins. Co. , 39 Pa. D.&C. 4^th 165 (Dauphin Co. 1998); Fran and John’s Doylestown Auto Center v. All State Ins. Co., 432 Pa. Super. 449, 638 A.2d 1023 (1994).

 

b. Passengers in an insured’s motor vehicle involved in an accident cannot bring a third party bad faith claim against the insurer because they are not considered insureds under the policy. Seasor v. Liberty Mut. Ins. Co., 941 F. Supp. 488 (E.D. Pa. 1996). 

 

c. A third party claimant who is a named insured and who is an injured passenger in the covered vehicle still cannot assert a bad faith claim against the tortfeasor’s insurer because the duty of good faith extends to the tortfeasor not to any third party claimants, even if they are named insureds. Gramburg v. Nationwide Mut. Ins. Co., 2000 U.S. Dist. LEXIS 20108 (E.D. Pa. February 24, 2000).

 

2. First party plaintiffs.

 

a. A passenger in a vehicle involved in an accident can bring a bad faith claim against the vehicle’s insurer for failure to pay first party benefits because the passenger is considered an insured under the language of the policy. Klinger v. State Farm Mut. Auto Ins. Co., 895 F. Supp. 709 (M.D. Pa. 1995). 

 

i. Comment: The courts are willing to analyze and broadly interpret policies for first party benefits, but not for third party benefits. 

 

b. A pedestrian who does not own a motor vehicle and who is not an insured under any policy, can assert a bad faith claim against a tortfeasor’s insurer for denial of first party benefits because the Motor Vehicle Code of Pennsylvania allows for victims to recover first party benefits and treats them as insureds. Evans v. Erie Ins. Co., 36 Pa. D.&C. 4^th 289 (Allegh. Co. 1998). 

 

i.            Comment:  Again, an analysis of a statute in this instance in order to find the right to sue for first party benefits.

 

c. Physicians cannot sue patient’s insurers for failure to pay first party benefits. Batoff v. State Farm Ins. Co., 1992 U.S. Dist. LEXIS 3501 (E.D. Pa. 1992); Taylor v. Nationwide Ins. Co., 35 Pa. D.& C. 4^th 101 (Allegh. Co. 1997). 

d. An occupant and spouse of an insured can bring a bad faith claim against the building loss insurer for spouse’s personal property and additional living expenses, but cannot do so on other grounds because she is not an owner or named insured under the policy.  Polselli v. Nationwide Mut. Fire Ins. Co., 1992 U.S. Dist. LEXIS 14494 (E.D. Pa. 1992). 

 

e. An executrix seeking to recover the proceeds of a life insurance policy of her deceased spouse can bring a bad faith claim against a life insurer.  Rottmund (above).

 

B. Defendant: The Insurer

 

1. Those who can be sued. 

 

a. The bad faith statute applies to all insurers and is not limited to motor vehicle insurance claims and carriers, even though the bad faith statute was enacted as part of the motor vehicle code. Boring (above).

 

b. Self-insured defendants are insurers under statute and can be sued in bad faith. Gavaghan v. Replacement Rent-A-Car, Inc., 811 F. Supp. 1077 (E.D. Pa. 1992).

 

2. Those who cannot be sued.

 

a. Individual insurance broker. Kerns v. Minnesota Mut. Life Ins. Co., 75 F. Supp. 2d 413 (E.D. Pa. 1999).

 

b. Individual insurance agent.Cardine v. Ohio Life Ins. Co., (C.C.P. Fayette County, June 26, 1996). 

 

c. Individual claim handler/adjuster. Beaver v. Kemper Nat. Ins. Cos., 1994 U.S. Dist. LEXIS 2793 (E.D. Pa. 1994).

 

d. Peer review organization. Dresdner v. State Farm Mut. Auto Ins. Co., 1995 U.S. Dist. LEXIS 11213 (E.D. Pa. 1995). 

 

e. Peer review physician. Dresdner (above).

 

f. Loss adjustment service.  Lockhart v. Federal Ins. Co., 1998 U.S. Dist. LEXIS 4046 (E.D. Pa. 1998).

 

i. Comment:  The above individuals and entities were found not to be viable defendants under the bad faith statute because they were (1) not responsible to pay claims; and (2) not in the real decision making process to deny the claim.

 

g. Sureties and matters covering surety bonds.Superior Precast, Inc. v. Safeco Ins. Co., 71 F. Supp. 2d 438 (E.D. Pa. 1999); M.A. Bruder & Sons, Inc. v. Williams, 47 Pa. D.&C. 4^th 234 (Monroe Co. 2000). 

 

h. The Pennsylvania Property and Casualty Insurance Guaranty Association (formerly “PIGA,” now “PP&CIGA”) is not an insurer under the bad faith statute because its liability is preempted by the PP&CIGA statute and since it does not issue any policies, does not collect any premiums and does not make any profits, it assures no contractual obligations to insureds upon insolvency.  T&N PLC v. Pennsylvania Ins. Guar. Ass’n, 800 F. Supp. 1259 (E.D. Pa. 1992).

 

i. The Medical Professional Liability Catastrophe Loss Fund (“CAT Fund”) was, by case law, generally exempt from bad faith actions.  Finkbiner v. Medical Professional Liability Catastrophe Loss Fund, 119 Pa. Cmwlth. 243, 546 A.2d 327 (1998). 

 

i.                     However, in Milton S. Hershey Medical Center  v.

Commonwealth of Pennsylvania Medical Professional Liability Catastrophe Loss Fund, 763 A.2d 945 (Pa. Commw. 2000), the Commonwealth Court recognized that the Finkbiner decision appeared to grant immunity for bad faith to the CAT Fund, however, it denied the preliminary objections of the CAT Fund and allowed the case to proceed noting that the directors of the fund owe a fiduciary duty to properly manage it.  As such, the Commonwealth Court found that the claim in this matter was “worth exploring in light of the allegations against the insurance commissioner and director of the fund.”  The case is still pending. 

 

j.            Worker’s compensation insurers have been uniformly held exempt from bad faith as such actions fundamentally challenge the statutory scheme of the worker’s compensation laws. Winterberg v. Transportation Ins. Co., 72 F.3d 318 (3d Cir. 1995). 

 

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III. What is Bad Faith?

 

A. Defining Bad Faith By The Statute And Case Law

 

1. The bad faith statute itself provides no definition or referral to any source for defining bad faith.                                                                                   

 

a.  The absence of legislative history relevant to the enactment of the statute also does not lend any insight into defining bad faith. 

 

2. Both the State and Federal Courts sitting in Pennsylvania have recognized this fact and have looked to other sources.

 

a. The definition of bad faith from the Black’s Law Dictionary definition, originally cited by the State Courts of Pennsylvania in Terletsky v. Prudential Property and Casualty Insurance Company, 437 Pa. Super. 108, 649 A.2d 680 (1994) and in the Federal Courts sitting in Pennsylvania in the matter of Polselli v. Nationwide Mut. Fire Ins. Co., 23 F. 3d 747 (C.A.3 Pa. 1994) is as follows:

 

“Bad faith” on part of the insurer is any frivolous or unfounded refusal to pay proceeds of the policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means and breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.

 

b. The D’Ambrosio case (above), which again refused to judicially create a cause of action for first party bad faith, noted that other jurisdictions found that bad faith was “the absence of a reasonable basis for the denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” 

 

3. Thereafter, both Pennsylvania State and Federal Courts used a hybrid bad faith definition which includes the entire Black’s Law Dictionary definition and incorporates the burden of proof language set forth in the the D’Ambrosio case (i.e. knowledge or reckless disregard).  

Klinger v. State Farm Mut. Automobile Ins. Co., 895 F. Supp. 709 (M.D. Pa. 1995); Ihnat v. Pover, et al., (35 Pa. D.&C. 4^th (Allegh. Co. 1997); Shoemaker v. State Farm Mut. Automobile Ins. Co., (C.C.P., Dauphin County, March 19, 1998, Slip. Op. No. 4498-S-1990).

 

B. The Burden Of Proof For Establishing Bad Faith

 

1. Bad faith must be proven by clear and convincing evidence and not merely insinuated.  Polselli (above); Younis (above); Klinger (above).           

 

2. Mere negligence or bad judgment is not enough to establish bad faith.  Polselli (above).

 

3. Plaintiff must show that the insured did not have a reasonable basis for denying benefits under the policy in that the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim. Terletsky (above).

 

a. Recklessness can be established by showing that the insured deliberately acted in conscious disregard and with indifference to the rights of the insured. Klinger (above).

 

i. Although Pennsylvania law basically adopted the Black’s Law Dictionary definition of bad faith, the court in Klinger noted that proof that the insurer was motivated by improper purpose such as ill will or self interest was not required to a bad faith claim.

 

C. Guidelines For Avoiding Bad Faith Conduct On Behalf Of The Insurer

 

1.  In evaluating an insurer’s conduct to determine bad faith, the courts in Pennsylvania may look to (1) other cases construing statute and law of bad faith in general; (2) plain meaning of the terms in the statute; and/or (3) other statutes addressing same or similar subjects. MGA Ins. Co. v. Bakos, 699 A.2d 751 (Pa. Super. 1997). 

 

2. The court can also consider provisions of Pennsylvania’s UIPA (above) to determine whether an insurer has acted in bad faith. MacFarland v. US Fidelity and Guar. Co., 818 F. Supp. 108 (E.D. Pa. 19930. 

 

a. Again, as set forth above, violations of the UIPA in and of themselves do not constitute bad faith acts per se. Parasco (above).

 

3. The court can also look to an insurer’s own internal policies and procedures in handling, investigating, managing and evaluating of claims.

a. There have been no state or federal Pennsylvania cases to date on this issue.

 

4.  The court can also look to experts in the field of insurance including former claim’s managers, handlers and investigators as well as attorneys handling claims. Klinger (above).

 

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IV. Specific Examples: What Is And What Is Not Bad Faith

 

A. Cases In Which Bad Faith Has Been Found Not to Occur

 

1. Proper interpretation of policy provisions by insurer. Santoro v. Allstate Ins. Co., 1991 U.S. Dist. LEXIS 13591 (E.D. Pa. 1991).

 

2. Wrongful but reasonable interpretation of policy provisions by insurer.  Kearns v. Minnesota Mut. Life Ins. Co., 75 F. Supp. 2d 413 (E.D. Pa. 1999).

 

3. Decision-making with regard to claim or litigation based upon reasonable investigation. Hyde v. Athletic Industries, Inc. v. Continental Cas. Co., 969 F. Supp. 289 (E.D. Pa. 1997).

 

4. Reasonable interpretation of policy and decision making based upon legal precedent.  Tereletsky (above).

 

5. Reasonable reliance upon an independent medical examination. Seidman v. Minnesota Mut. Life Ins. Co., 1997 U.S. Dist. LEXIS 14342 (E.D. Pa. 1997).

 

6. Reasonable delay in investigating a claim. O’Donnell v. Allstate Ins. Co., 1999 Pa. Super. 161, 734 A.2d 901 (1999).

 

7. Reasonable belief of misrepresentation or fraud by the insured. Jung v. Nationwide, 949 F. Supp. 353 (E.D. Pa. 1997).

 

8. Reasonable position regarding settlement. Williams v. Nationwide Mut. Ins. Co., 2000 Pa. Super. LEXIS 374 (April 12, 2000).

 

9. Lengthy and late running investigation necessary under the circumstances. Brown v. Liberty Mut. Ins. Group, 2001 U.S. Dist. LEXIS 781 (E.D. Pa. 2000).

 

10. Lack of cooperation on behalf of insured in providing information or documentation relevant to the claim. Smolinsky v. State Farm Ins. Co., 2000 U.S. Dist. LEXIS 12686 (E.D. Pa. 2000).

 

B. Cases In Which Bad Faith Has Been Found To Occur

 

1. Failure to objectively investigate claim.  Henderson v. Nationwide Mut. Ins. Co., 2001 U.S. Dist. LEXIS 18727 (M.D. Pa. 2000).

 

2. Raising of baseless or unmeritorious defenses to claim.  Henderson (above).

 

3. Unreasonable or total lack of investigation compelling litigation. Henderson (above); Klinger (above).

 

4. Relying on a policy exclusion without sufficient investigation. Giangreco v. U.S. Life Ins. Co., 20001 U.S. Dist. LEXIS 4752 (E.D. Pa. 2001).

 

5. Unreasonable delay in handling claims. Polselli (above).

 

6. Inadequate investigation or legal research. Thomas v. Massachusetts Cas. Ins. Co., 1997 U.S. Dist. LEXIS 8695 (E.D. Pa. 1997).

 

7. Unreasonable interpretation of policy provisions. Waldman v. Pediatric Services of America, Inc., 1999 U.S. Dist. LEXIS 6106 (E.D. Pa. 2000).

 

8. Failure to make reasonable offer of settlement. The Birth Center v. St. Paul Companies, Inc., 727 A.2d 1144 (Pa. Super. 1999).

 

9.  Misrepresentation of facts or policy provisions. Adams v. Allstate Ins. Co., 189 F.R.D. 331 (E.D. Pa. 1999).

 

 

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V. Procedural Issues In Bad Faith

 

A. The Statute Of Limitations for Bad Faith:
               Two or Six Years?

 

1. The bad faith statute itself is silent on the time limit for filing such a claim  and does not refer to any particular source on this issue.

 

2. There is still no definitive state or federal law decision regarding the statute of limitations.  However, there appears to be a spilt between the two year statute of limitations for tort claims or the six year “catch-all” statute of limitations for claims sounding in contract and tort.

 

a. Federal courts have actually ruled both ways. 

 

i.            In Donnelly v. State Farm Ins. Co., U.S. Dist. LEXIS 2156 (E.D. Pa. 2001), the Eastern District Court applied the two year statute of limitations. 

 

ii.            In Lochbaum v. U.S. Fid. & Guar. Co., 136 F. Supp. 2d 386 (W.D. Pa. 2000) the Western District Court applied the six year statute of limitations.

 

b. There has been no definitive Pennsylvania state case on the issue.

 

i.            Comment: The Superior Court in the case of Trujillo v. State Farm Mutual Automobile Ins. Co. had issued an opinion effectively holding that bad faith action sounded in tort and that a two year statute of limitations should apply.  However, that opinion was withdrawn without reason in August, 2002.

 

c. Suit litigation time limit provisions set forth in insurance contracts will not apply to bad faith claims as they have been held to apply only to underlying insurance claims arising out of the contract and not bad faith claims which are not anticipated at the time of the contract. March v. Paradise Mut. Ins. Co., 646 A.2d 1254 (Pa. Super. 1994).

 

B. The Right To A Jury Trial: Federal Court: Yes,
              State Court: No.

 

1. The bad faith statute itself does not specifically provide for the right to a jury trial.  In fact, the specific language of the statute provides, “if the court finds that an insurer has acted in bad faith...”

 

2. The Federal Courts sitting in Pennsylvania have held that in bad faith claims, there is a right to jury trial. 

 

a. The Klinger (above) case is the most recent Federal case on this subject.  The court in Klinger upheld the earlier Federal Court cases by finding that the punitive damage aspect of a bad faith claim triggers the Seventh Amendment right to a jury trial. The Klinger court also found that there was no harm in having a jury decide these bad faith issues as the court itself has the ultimate control over the jury verdict.

 

3. The State Courts of Pennsylvania have held that there is no guaranteed right to a jury trial.

 

a. The Superior Court in the case of Misho v. Erie Ins. Co., 762 A.2d 369 (Pa. Super. 2000), held that there is no right to a jury trial in a bad faith action under Pennsylvania law.  Interestingly, after first finding that there was such a right to a jury trial, the Superior Court in Misho reversed itself and held that there was no legislative intent in allowing for jury trials.  The Misho court also found that bad faith actions arose in Pennsylvania out of the statute and were not truly derived from common law. Thus, there was no Pennsylvania State constitutional right to a jury trial as these actions did not exist at the common law level.

 

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VI. Damages Recoverable In A Bad Faith Suit

 

A. Damages Outlined In The Statute

 

1. The statute provides that the court may award: interest, punitive damages, court costs and attorneys fees against the insurer.

 

1.                  There are no guidelines or reference source within the statute and no legislative history to help determine how damages are to be awarded or calculated.

 

B. Damages Solely Determined By The Judge             

 

1. Attorney’s fees, interest and costs are to be determined by the trial judge, not the jury. The Birth Center v. St. Paul Companies, Inc.,727 A.2d 1144 (Pa. Super. 1999).

 

a. An award of attorney’s fees is not mandatory and if awarded must be reasonable in time and effort asserted; magnitude and complexity of the case; and the quality of services rendered. The Birth Center (above).

 

C. Compensatory And Punitive Damages     

 

1. Compensatory damages that are known or reasonably foreseeable are compensable, including: damage to reputation; lost client revenues, profits and business opportunities in the underlying action. The Birth Center (above).

 

D. Punitive Damages

 

1. Although the statute itself allows for the award of punitive damages, again such damages are not statutorily mandatory.  If a jury fails to find that an insurer’s conduct is extreme and outrageous, and thus withholds punitive damages, such a verdict will be upheld. The Birth Center (above).  

 

a. After The Birth Center case, some commentators believe that a policy holder may be required to prove conduct beyond recklessness such as evil intent or maliciousness in order to be awarded punitive damages.