Klinger v. State Farm Mutual Automobile Insurance ( 1997 )

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
6-10-1997
Klinger v. State Farm Mutl Auto
Precedential or Non-Precedential:
Docket 96-7073,96-7102,96-7074,96-7101
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Recommended Citation
"Klinger v. State Farm Mutl Auto" (1997). 1997 Decisions. Paper 125.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/125
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Filed June 10, 1997
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 96-7073, 96-7102
MARK KLINGER,
Appellant in 96-7073
v.
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,*
Cross-Appellant in 96-7102
(*Amended by 2/20/96 Order)
(D.C. No. 94-cv-01393)
Nos. 96-7074, 96-7101
LINDA NEYER,
Appellant in 96-7074
v.
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,
Cross-Appellant in 96-7101
(D.C. No. 94-cv-01469)
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
Argued: January 23, 1997
Before: NYGAARD and LEWIS, Circuit Judges, and
COHILL, Senior District Judge.*
(Opinion filed June 10, 1997)
DAVID L. LUTZ, ESQUIRE
RICHARD C. ANGINO, ESQUIRE
(Argued)
Angino & Rovner
4503 North Front Street
Harrisburg, PA 17110
Attorneys for Appellants/
Cross-Appellees
ROBERT E. KELLY, JR., ESQUIRE
(Argued)
Duane, Morris & Heckscher
305 North Front Street
P.O. Box 1003
Harrisburg, PA 17108-1003
Attorney for Appellee/
Cross-Appellant
OPINION OF THE COURT
NYGAARD, Circuit Judge.
Mark Klinger and Linda Neyer appeal from the decision of
the district court denying them costs, attorney's fees and
the full amount of pre-judgment interest they sought in
their otherwise successful bad faith action against State
Farm Mutual Automobile Insurance Company. We conclude
that the district court erred only in one aspect--the reasons
_________________________________________________________________
*Honorable Maurice B. Cohill, Jr., United States District Court for the
Western District of Pennsylvania, sitting by designation.
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it gave for denying the request for attorney's fees--but that
its error was in its explanation, not in its application of
legal precepts and does not affect the amount to which
appellants are entitled. We will therefore affirm.
I.
A.
In August 1992, Klinger and Neyer were seriously injured
in a head-on collision while riding in Klinger's van, which
was one of two vehicles owned by him and insured by State
Farm. The other driver's insurance was inadequate to
compensate them for their injuries, so Klinger and Neyer
filed underinsured motorist claims against the two State
Farm policies.
State Farm disputed the amount of coverage available
under these insurance policies, and the parties agreed to
bifurcate the issues of coverage and damages and to
arbitrate them separately.1 Attorney Richard Wix
represented State Farm. Attorney David L. Lutz represented
Klinger and Neyer.
In October 1993, the arbitrators determined that the
coverage available under Klinger's two policies was
$115,000. That established, in November, Attorney Lutz
sent two letters to Wix demanding that State Farm tender
the policy limits to his clients. Wix, however, never apprised
State Farm of either of these letters. State Farm contends
that it did not know the results of the arbitration because
its attorney, Wix, did not answer his phone calls. A State
Farm claims representative, however, did not personally
visit Wix's office until March 1994. Nonetheless, in January
1994, Attorney Lutz told Timothy Spader, a State Farm
claims representative, the results of the arbitration and of
his demand letters, when Spader happened to be talking to
Lutz about another matter.
_________________________________________________________________
1. In April 1993, before the coverage arbitration was held, State Farm
offered each plaintiff $15,000, an amount representing the policy limits
as State Farm interpreted them. This offer was refused.
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Spader then contacted Attorney Wix, who promised him
a letter documenting the status of the case. After receiving
nothing, Spader finally visited Wix's office personally in
March 1994 and obtained some medical records and
documentary data. Only then did Spader contact Attorney
Lutz, who had earlier written that he was considering a bad
faith claim and stated that he would provide State Farm
with whatever information it needed to evaluate the extent
of damages.
Still State Farm did nothing. In March 1994, the
arbitrators scheduled the damages arbitration for June 28.
Again Lutz demanded that State Farm pay the policy limits.
Again, State Farm's attorney apparently failed to forward
this request to State Farm. In April, Lutz went around State
Farm's attorney, writing directly to Spader, and inquired
whether State Farm was interested in settling the case. Still
State Farm offered its insureds nothing.
In June, although the hearing was scheduled for less
than a week later, and even though Wix himself now
recommended that State Farm tender them the policy
limits, State Farm made no offer to pay the appellants
anything. Instead, State Farm sought a stay of the hearing.
Attorney Lutz refused, and they arbitrated damages. The
arbitrators awarded $115,000 to Klinger and $70,000 to
Neyer. Finally, on August 2, 1994, a full two years after the
accident, and months after State Farm had all the
information necessary to evaluate Klinger and Neyer's
claims, State Farm paid them.
B.
Klinger and Neyer filed suit in the Dauphin County Court
of Common Pleas, alleging that State Farm's delay in paying
their claims was a display of bad faith under 42 Pa. C.S.A.
§ 8371. State Farm removed the case to federal court based
on diversity of citizenship. The case was tried before a jury,
which awarded punitive damages to each plaintiffs in the
amount of $150,000. State Farm then filed a motion for
judgment as a matter of law, or, in the alternative, for a
new trial, under Fed. R. Civ. P. 50(b) and 59(a). The district
court denied this motion. Klinger and Neyer filed motions
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seeking interest, costs and attorney's fees under§ 8371.
The district court awarded interest, but denied the costs
and fees, opining that "State Farm ha[d] been adequately
punished by the punitive awards. . . ." These appeals
followed.
II.
A.
State Farm first argues that the evidence was insufficient
to support the jury's verdict of bad faith. It also asserts that
the jury was improperly instructed on the test to be applied
in determining the existence of bad faith under
Pennsylvania law. It is wrong on both points.
1.
The standard for bad faith claims under § 8371 is set
forth in Terletsky v. Prudential Property & Cas. Ins. Co., 649
A.2d 680, 688 (Pa. Super. Ct. 1994), appeal denied, 659
A.2d 560 (Pa. 1995). There, the Pennsylvania Superior
Court applied a two-part test, both elements of which must
be supported with clear and convincing evidence: (1) that
the insurer lacked a reasonable basis for denying benefits;
and (2) that the insurer knew or recklessly disregarded its
lack of reasonable basis. The district court instructed the
jury accordingly. The Terletsky court also stated, however,
that
"[b]ad faith" on part of insurer is any frivolous or
unfounded refusal to pay proceeds of a 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 a 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.
Id. (quoting Black's Law Dictionary 139 (6th ed. 1990)).
From this, State Farm argues that a third element must be
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satisfied, to wit, that the insurer was motivated by an
improper purpose such as ill will or self-interest.
We reject that reading of Terletsky. Although the
definition the court recited did advert to a "dishonest
purpose" such as "self-interest or ill will[,]" this is dictum.
Moreover, State Farm's self-interest is the only plausible
explanation for its delay. Nonetheless, we need not reach
that issue: A page later the court actually applied the two-
part test:
To recover under a claim of bad faith, the Terletskys
were required to show that Prudential lacked a
reasonable basis for partially denying payment . . . and
that Prudential recklessly disregarded a lack of
reasonable basis in denying the payment. Prudential's
actions, however, were reasonably based.
Id. at 689-90. In our prediction of how the Pennsylvania
Supreme Court would measure bad faith claims, we will
rely on the actual test that Terletsky applied and refrain
from creating a third part based only on dictum quoted
from Black's Law Dictionary. Accordingly, we conclude that
the district court did not err when it instructed the jury.
2.
We also believe that the evidence was sufficient for a jury
to conclude that State Farm lacked a reasonable basis for
refusing to pay the appellants, and knew or recklessly
disregarded that fact. State Farm acknowledged at oral
argument that it is chargeable with the actions of its
attorney. As such, it is also chargeable with his inactions.
Moreover, Mr. Spader testified that, as early as March
1994, he knew that liability was clear and that State Farm
had received a demand package indicating that both
Klinger and Neyer had sustained serious injuries. Next, Wix
himself testified that he advised State Farm to tender the
policy limits before the damages arbitration. Yet, State
Farm never offered to pay Klinger and Neyer anything
beyond the early and clearly inadequate offer it made before
the coverage arbitration. Finally, plaintiffs' expert testified
that State Farm acted recklessly and unreasonably. Hence
there is ample evidence from which a reasonable jury could
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have concluded that State Farm knew or recklessly
disregarded the fact that it had no reasonable basis for
refusing to pay its insureds' claims.2 We will not disturb its
verdict.
3.
State Farm challenges the bad faith award to Ms. Neyer
for yet another reason. Neyer demanded $115,000, but the
arbitrator ultimately awarded only $70,000. Thus, State
Farm argues, as a matter of law it could not have acted in
bad faith by refusing to offer the full $115,000.
State Farm relies on Kaufmann v. Aetna Cas. & Sur. Co.,
794 F. Supp. 137 (E.D. Pa. 1992). First, that is a district
court case and not precedential. Second, there, the issue
was whether the limits of multiple policies could be stacked
for a total of $1 million in coverage; if they could not, the
plaintiff 's recovery was limited to $500,000. Aetna offered
$500,000 to the plaintiffs without prejudice to its litigation
of the stacking issue, and they accepted the partial
settlement. The arbitrators then awarded $950,000, and
Aetna timely paid over the remaining $450,000. The court
opined:
Plaintiffs contend that Mr. Kaufmann's injuries were so
_________________________________________________________________
2. State Farm argues that it reasonably relied upon its counsel. We
would never opine to the contrary, at least for certain advice and
representation. Nonetheless, because this point is argued we find it
necessary to remark that representation is not an excuse for the
insurer's failure to perform its obligations under the policy it issued to
the insured. Here, State Farm's attorney would not even answer his
phone calls. With admittedly clear liability, serious injuries and Mr.
Klinger on welfare because he could no longer work, it was incumbent
upon State Farm to do more. And because counsel for the insureds
cannot simply make an "end-run" around the insurer's attorney to deal
directly with the insurer, the insurer may not hide behind this
relationship to argue that it reasonably ignored its obligations under the
insurance policy to its insureds, one of which is to pay them
compensation if injured. Otherwise, an insurer could simply hire
counsel, bury its head in the sand, pay when ordered to do so, retain the
use of the insured's money in the meantime, and escape without adverse
consequences.
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severe that Aetna should have waived its contractual
right to arbitration and simply tendered $1 million.. . .
The arbitrators then awarded less than the full $1
million stacked limit, albeit only $50,000 less. The
arbitrators' decision belies plaintiffs' contention that
they were plainly entitled to the full amount which
their policy provided as a limit. Under these
circumstances, no reasonable factfinder could conclude
that Aetna's decision to proceed to arbitration
constituted bad faith.
Id. at 141.
Finally, Kaufman is not persuasive. Aetna had at least
tendered the $500,000 in coverage that was not disputed,
whereas State Farm never made any offer to Neyer either
after the coverage arbitration was decided, or when the
extent of her injuries had become clear to it. A rational jury
could well have concluded that State Farm, by not making
an offer to Neyer based upon some objective criteria it
believed compensated adequately for her injuries,
knowingly or recklessly acted without reasonable basis. The
mere fact that the arbitrators ultimately decided that Neyer
was entitled to less compensation than the amount she
wanted is not a sufficient basis to relieve State Farm from
its responsibility to offer what was reasonably due her. Had
it done so, both the damages arbitration and this suit
might well have been avoided. We will not overturn the
jury's verdict.
B.
State Farm also takes issue with the jury's decision to
impose punitive damages. It argues that the evidence was
insufficient to support such an award and that, in any
event, the matter should have been decided by the court
rather than the jury. Again, we disagree.
1.
We will look to Pennsylvania law governing punitive
damages to determine whether the award was proper.
Pennsylvania has adopted section 908 of the Restatement
8
(Second) of Torts governing punitive damages. Delahanty v.
First Pa. Bank, N.A., 464 A.2d 1243, 1263 (Pa. Super. Ct.
1983). They are awarded to punish a defendant for
outrageous conduct, which is defined as an act which, in
addition to creating "actual damages, also imports insult or
outrage, and is committed with a view to oppress or is done
in contempt of plaintiffs' rights." Id. Both intent and
reckless indifference will constitute a sufficient mental
state. See id.Here, the district court concluded that the jury could
have reasonably found that State Farm's conduct, to wit,
relying on its counsel despite his non-performance and
never making an offer to pay its insureds before the
damages arbitration, was egregious enough to warrant
punitive damages. We agree. Insurance contracts create
affirmative duties: The insured must pay premiums; the
insurer must pay when its insured suffers an insured
event. There was testimony from plaintiffs' expert that State
Farm's conduct was in reckless disregard of plaintiffs'
rights because it "didn't have a good reason for not making
an offer[ ]" and because State Farm was not "considering
the interests of their -- of Klinger and Neyer who were their
insureds." He added that "[t]hey made them no offer when
there was no reason for not doing this. There was clear
liability and serious injuries." When asked how he would
characterize that type of conduct, he answered, "I think
that's disregarding, recklessly disregarding the rights of
their insured." He then stated that, in his opinion, this
conduct was outrageous. This testimony provided the jury
a sufficient basis to award punitive damages.
2.
State Farm also argues that the issue of punitive
damages was required by the terms of § 8371 to be decided
by the court and not placed before the jury because the
statute provides that "the court" may impose, inter alia,
punitive damages. Frankly, we fail to see the harm. Clearly,
the court can ask for an advisory verdict. Second, the court
could have rejected the verdict. Finally, it was the court
that entered judgment on the verdict. Hence, it had control
at all stages.
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Moreover, as State Farm acknowledges, the Seventh
Amendment itself provides the right to trial by jury in suits
at common law. See Curtis v. Loether, 415 U.S. 189, 192,
94 S. Ct. 1005, 1007 (1974). Arguing, however, that the
Seventh Amendment provides no right to a jury trial on
punitive damages in a § 8371 case, State Farm relies on
Tull v. United States, 481 U.S. 412, 107 S. Ct. 1831 (1987).
In that case, the Supreme Court held that the amount of a
statutory civil penalty under the Clean Water Act could be
decided by the trial court, id. at 427, 107 S. Ct. at 1840,
even though the issue of liability implicated the right to
trial by jury under the Seventh Amendment. Id. at 423, 107
S. Ct. at 1838. It reasoned that, because "Congress itself
may fix the civil penalties, it may delegate that
determination to trial judges[,]" id. at 427, 107 S. Ct. at
1840, noting that calculations of civil penalties involve
exercises of discretion "traditionally performed by judges."
Id.We find Tull inapposite. Rather, we believe that the
appropriate precedent is Curtis, in which the Court held
that a "damages action under [42 U.S.C. § 3612] . . . is
analogous to a number of tort actions recognized at
common law. More important, the relief sought here--
actual and punitive damages--is the traditional relief
offered in the courts of law." Id. at 195-96, 94 S. Ct. at
1009. Thus, we conclude that the punitive damages remedy
in a statutory bad faith action under § 8371 triggers the
Seventh Amendment jury trial right, a result consistent
with several cases that have decided the issue. See Fahy v.
Nationwide Mut. Fire Ins. Co., 885 F. Supp. 678, 679 (M.D.
Pa. 1995); Younis Bros. & Co. v. CIGNA Worldwide Ins. Co.,
882 F. Supp. 1468, 1470, 1476 (E.D. Pa. 1994);
MacFarland v. United States Fidelity & Guarantee Co., 818
F. Supp. 108, 112 (E.D. Pa. 1993); Thomson v. Prudential
Property & Cas. Ins. Co., No. 91-4073, 1992 WL 210088, *4
(E.D. Pa. Aug. 24, 1992).3
_________________________________________________________________
3. State Farm relies additionally on three district court cases in which
the courts held that the issue of punitive damages under § 8371 was for
the court rather than the jury. See Giampa v. State Farm Ins. Co., No.
93-4948, 1993 WL 505614 (E.D. Pa. Dec. 8, 1993); Gilderman v. State
Farm Ins. Cos., No. 91-6353, 1991 WL 276017 (E.D. Pa. Dec. 18, 1991);
Carson v. ITT Hartford Ins. Group, No. 91-3113, 1991 WL 147469 (E.D.
Pa. July 24, 1991). Notably, however, none of these cases analyzed the
issue in a Seventh Amendment context.
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Accordingly, we will affirm the jury's award of punitive
damages.
III.
Klinger and Neyer appeal from the district court's
decision not to award pre-judgment interest, costs and
attorney's fees. We have examined their arguments with
respect to the timing of pre-judgment interest and the
awarding of costs and find them to be without merit. The
fee issue requires a little more discussion.
The district court denied attorney's fees because it
believed that State Farm had been punished enough by the
punitive damages the jury had awarded. This reasoning is
problematic. Indeed at argument, counsel for State Farm
acknowledged that the statute provides "both punitive and
remedial" relief. In a general sense, punitive damages are
awarded to punish the defendant for its bad faith in failing
to do that which it was contractually obligated to do.
Attorney's fees, however, are awarded to compensate the
plaintiff for having to pay an attorney to get that to which
they were contractually entitled. Along with interest, costs
and delay damages, the object of an attorney fee award is
to make the successful plaintiff completely whole.
Appellants here were put to the unnecessary expense of
having to hire an attorney by State Farm's refusal to do for
them what it had contracted to do. Hence, appellants were
damaged economically as surely as if State Farm had
purposely or negligently rammed one of its automobiles into
appellants'. The obvious design of the Pennsylvania statute
is, first, to place Klinger and Neyer in the same economic
position they would have been in had the insurer performed
as it promised, by awarding attorney's fees as additional
damages; and second, to punish State Farm for giving
primacy to its own self-interest over that of the appellants
by awarding punitive damages. The separate provisions of
this statute answer both needs. Thus, it would appear that
in refusing to award attorney's fees because the defendant
had been "punished" enough, the court erred. Nonetheless,
we believe that the error was only in how the court
explained the award, but not in its application of the law.
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The district court obviously intended to both punish State
Farm and to make the appellants whole, and it believed
that the punitive damage award accomplished both. Hence,
we conclude that a remand is unnecessary.
IV.
Because the district court's rulings on the merits were
legally correct and the jury's verdicts supported by
sufficient evidence, we will affirm State Farm's cross-
appeals; and because the court's error is harmless and it is
unnecessary to remand, we will also affirm Klinger's and
Neyer's primary appeals.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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