Jared Wolfe v. Allstate Property & Casualty

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 12-4450
JARED WOLFE
v.
ALLSTATE PROPERTY &
CASUALTY INSURANCE COMPANY,
Appellant
On Appeal from the United States District Court
for the Middle District of Pennsylvania
(District Court No.: 4:10-cv-00800)
District Judge: Honorable John E. Jones, III
Argued on April 27, 2015
Before: RENDELL, JORDAN, and LIPEZ,* Circuit Judges
(Opinion filed: June 12, 2015)
*
The Honorable Kermit V. Lipez, of the United States Court
of Appeals for the First Circuit, sitting by designation.
William P. Carlucci, Esquire (ARGUED)
Robert B. Elion, Esquire
Elion Wayne Grieco Carlucci & Shipman
125 East Third Street
Williamsport, PA 17701
Michael A. Dinges, Esquire
Dinges, Dinges & Waltz
1307 Sheridan Street
Williamsport, PA 17701
Counsel for Appellee Jared Wolfe
Marshall J. Walthew, Esquire (ARGUED)
Sara B. Richman, Esquire
John L. Schweder, II, Esquire
Kristin Jones, Esquire
Pepper Hamilton
18th & Arch Streets
3000 Two Logan Square
Philadelphia, PA 19103
Counsel for Appellant Allstate Property &
Casualty Insurance Co.
OPINION
RENDELL, Circuit Judge
2
In this insurance dispute between appellant Allstate
Property & Casualty Insurance Co. (“Allstate”) and appellee
Jared Wolfe, we are presented with the question of whether
punitive damages awarded against an insured in a personal
injury suit are recoverable in a later breach of contract or bad
faith suit against the insurer. It is Pennsylvania’s public
policy that insurers cannot insure against punitive damages,
and we therefore predict that the Pennsylvania Supreme Court
will answer that question in the negative.
I. BACKGROUND
A. Underlying Personal Injury Lawsuit
On March 2, 2007, around 4:00 am, Karl Zierle
finished his fifteenth or sixteenth beer for the night. At 11:00
am, Zierle was driving and rear-ended Wolfe. Zierle’s blood
alcohol level tested at 0.25%. Zierle also had three prior
DUIs. Wolfe was injured in this accident, and he required
treatment at the emergency room.
Zierle was insured by Allstate. Zierle’s policy
provided liability coverage up to $50,000, and the policy
required Allstate to defend Zierle in suits by third parties
arising out of automobile accidents. The policy stated that
Allstate would “not defend an insured person sued for
damages which are not covered by this policy.” (App. 362.)
Zierle’s policy expressly excluded coverage for punitive
damages.
Wolfe made an initial settlement demand to Allstate of
$25,000, based on medical records provided to Allstate’s
3
adjuster. Allstate valued Wolfe’s claim at $1200 to $1400,
and Allstate responded with a counteroffer of $1200. Wolfe
rejected this offer, and neither party moved from those
numbers.
Wolfe then filed suit against Zierle. Allstate informed
Zierle that, because Wolfe’s complaint did not indicate the
extent of the damages he was claiming, the possibility
remained that Zierle could face damages in excess of the
$50,000 protection afforded by his policy. If the verdict did
exceed the policy limit, Zierle was warned that he would be
personally liable for the excess. Zierle was advised that he
could hire an attorney at his own expense to cooperate with
Allstate’s counsel. Zierle did hire his own counsel, but that
attorney was not actively involved in the case.
During discovery, Wolfe learned of the extent of
Zierle’s intoxication and amended the complaint to add a
claim for punitive damages. Allstate wrote to Zierle about the
potential for punitive damages and reminded him that those
damages were not covered under his policy. Allstate advised
Zierle that if a verdict was rendered against him on the
punitive damages claim, Allstate would not pay that portion
of the verdict, and he would be held responsible for it.
During pretrial settlement conferences, two separate
Court of Common Pleas judges placed a settlement value of
$7500 on the compensatory damage portion of the case.
Wolfe now indicates that he would have settled the case for
$7500, although he had never communicated this willingness
to Allstate. Prior to trial, Wolfe reiterated the $25,000
demand and emphasized that Allstate’s $1200 offer was too
low. Allstate stated that it would not increase its $1200 offer
4
(despite having authority to offer $1400) unless Wolfe
reduced his $25,000 demand. No further efforts at settlement
were made by either party.
The case went to trial, and the jury awarded Wolfe
$15,000 in compensatory damages and $50,000 in punitive
damages. Allstate paid the $15,000 compensatory damages
award, but not the $50,000 punitive damages award.
Following the trial, in return for Wolfe’s agreement not to
enforce the punitive damages judgment against him
personally, Zierle assigned his rights against Allstate to
Wolfe.
B. Procedural History
Wolfe, in Zierle’s shoes, sued Allstate in the
Pennsylvania Court of Common Pleas for Lycoming County,
alleging breach of contract; bad faith conduct under
Pennsylvania’s bad faith statute, 42 Pa. Cons. Stat. § 8371;
and violation of Pennsylvania’s Unfair Trade Practices and
Consumer Protection Law (“UTPCPL”), 73 Pa. Stat. Ann. §§
201-1 et seq.1 Under the breach of contract claim, Wolfe
sought to recover the $50,000 in punitive damages awarded
against Zierle, interest on that award, and attorney’s fees and
costs for his later suit. Under section 8371, Wolfe sought an
award of statutory interest, punitive damages, and an
assessment of court costs. Allstate removed the case to the
United States District Court for the Middle District of
Pennsylvania under 28 U.S.C. § 1441(b).
1
The UTPCPL claim is not at issue before us on appeal.
5
Allstate filed two pretrial motions that are the subject
of this appeal. The District Court denied both motions.
Those orders are now before us for review. First, Allstate
moved for summary judgment, characterizing Wolfe’s claim
as attacking Allstate’s failure to settle because settlement
would have avoided the potential for the punitive damages
award. Allstate urged that, since it had no duty to indemnify
for punitive damages, it could not be required to consider the
potential for punitive damages when deciding whether to
settle the compensatory claim. Allstate also argued that it
should be granted summary judgment based on the fact that
the jury’s compensatory damages award was within the
policy limits and Allstate paid that portion of the verdict. The
District Court concluded that—separate and apart from the
punitive damages aspect—Allstate had a fiduciary duty to
negotiate a settlement in good faith on behalf of Zierle, and
Allstate refused to increase its settlement offer over a period
of years. Accordingly, a reasonable jury could find that
Allstate was reckless and acted unreasonably during the
settlement negotiations, amounting to bad faith. For the same
reasons, the District Court denied summary judgment on the
breach of contract claim.
Second, Allstate filed a motion in limine to exclude
evidence related to the punitive damages awarded in the
underlying trial. Allstate argued that Wolfe was barred as a
matter of public policy from claiming the $50,000 punitive
damages award as an item of damages, because
indemnification for punitive damages was impermissible
under Pennsylvania law. Allstate also argued that the
evidence relating to the punitive damages award was
irrelevant. The District Court denied the motion, because if a
jury concluded that Allstate had failed to negotiate a
6
settlement of the compensatory damages portion of Wolfe’s
claim in good faith, then the $50,000 would be relevant as
flowing from that failure. If Allstate had settled the claim,
then punitive damages would not have been awarded.
Therefore, the District Court reasoned, the $50,000 was
relevant because it constituted damages resulting from
Allstate’s bad faith and breach of contract.
After trial, the jury returned a verdict in favor of
Wolfe. The jury found that Allstate had violated
Pennsylvania’s bad faith statute and breached its contract
with Zierle. The jury awarded no compensatory damages and
$50,000 in punitive damages.
Allstate appealed from these orders and also claimed
on appeal that Wolfe lacked standing because Wolfe’s claim
was based on an impermissible assignment of Zierle’s rights.
Because there were conflicting decisions in Pennsylvania and
federal courts concerning the assignability of a bad faith
claim brought under section 8371, we certified that question
to the Pennsylvania Supreme Court, which granted our
petition for certification. The Pennsylvania Supreme Court
concluded that “the entitlement to assert damages under
Section 8371 may be assigned by an insured to an injured
plaintiff and judgment creditor such as Wolfe.” Allstate
Prop. & Cas. Ins. Co. v. Wolfe, 105 A.3d 1181, 1188 (Pa.
2014). Given the Pennsylvania Supreme Court’s decision
that Zierle’s assignment was permissible, we now turn to our
analysis of Allstate’s remaining claims.
7
II. DISCUSSION2
Two issues are before us on appeal: First, did the
District Court err by permitting Wolfe to introduce the
punitive damages award from the underlying suit as evidence
of damages? Second, did the District Court err by denying
Allstate’s motion for summary judgment and holding that
Allstate had no duty to consider the potential for punitive
damages when valuing the compensatory claim, since the
compensatory damages award was within the policy limits,
which Allstate paid to Wolfe in full?
It is undisputed that the substantive law of
Pennsylvania applies here. In the absence of a controlling
decision by the Pennsylvania Supreme Court, we must predict
how it would decide the questions of law presented in this
case. Berrier v. Simplicity Mfg., Inc., 563 F.3d 38, 45-46 (3d
Cir. 2009). “In predicting how the highest court of the state
would resolve the issue, we must consider ‘relevant state
precedents, analogous decisions, considered dicta, scholarly
works, and any other reliable data tending convincingly to
show how the highest court in the state would decide the issue
at hand.’” Id. at 46 (quoting Nationwide Mut. Ins. Co. v.
Buffetta, 230 F.3d 634, 637 (3d Cir. 2000)).3
2
The District Court had jurisdiction under 28 U.S.C. §
1332(a)(1); we have jurisdiction pursuant to 28 U.S.C. §
1291.
3
The District Court did not conduct a prediction analysis.
However, we can do a prediction analysis because, had it
conducted such an analysis, our review of that analysis would
be plenary. Berrier, 563 F.3d at 46 n.12.
8
A. Motion in Limine
First, we address Allstate’s arguments regarding
whether the District Court committed error in denying the
motion in limine. Wolfe persuaded the District Court to
admit evidence of the punitive damages award because, if
Allstate had acted in accordance with its contractual duty and
negotiated in good faith to settle Wolfe’s claim against Zierle,
the case never would have gone to trial, and the jury never
would have awarded punitive damages against Zierle.
Allstate argues that, by allowing Wolfe to present to the jury
evidence of the punitive damages award in the underlying
trial as damages in his current suit against Allstate, the
District Court circumvented Pennsylvania’s public policy
against insuring punitive damages.
“We review a district court’s evidentiary decisions for
abuse of discretion. To the extent the challenge involves a
legal inquiry, . . . our review is plenary.” Mulholland v. Gov’t
Cnty. of Berks, Pa., 706 F.3d 227, 244 n.25 (3d Cir. 2013)
(citation omitted). We must determine whether the earlier
punitive damages award was properly considered an item of
compensable damages in the later breach of contract action
and, in so doing, determine the relevance of the earlier
punitive damages award. We predict that the Pennsylvania
Supreme Court would conclude that, in an action by an
insured against his insurer for bad faith, the insured may not
collect as compensatory damages the punitive damages
awarded against it in the underlying lawsuit. Therefore, the
punitive damages award was not relevant in the later suit and
should not have been admitted.
9
Our prediction is a logical extension of Pennsylvania’s
policy regarding the uninsurability of punitive damages. It is
Pennsylvania’s longstanding rule that a claim for punitive
damages against a tortfeasor who is personally guilty of
outrageous and wanton misconduct is excluded from
insurance coverage as a matter of law. See Butterfield v.
Giuntoli, 670 A.2d 646, 654 (Pa. Super. Ct. 1995). The
Pennsylvania Superior Court, in Esmond v. Liscio, 224 A.2d
793, 799 (Pa. Super. Ct. 1966), held that “public policy does
not permit a tortfeasor . . . to shift the burden of punitive
damages to his insurer.” This rule is based on the view that
punitive damages are not intended as compensation. “They
are, rather, a penalty, imposed to punish the defendant and to
deter him and others from similar ‘outrageous’ conduct.” Id.4
“[S]ocially irresponsible drivers” who are “guilty of reckless
and grossly offensive conduct on the highways” should not be
allowed to escape the “personal punishment” of punitive
damages. Id. “To permit insurance against the sanction of
punitive damages would be to permit such offenders to
purchase a freedom of misconduct altogether inconsistent
with the theory of civil punishment which such damages
represent.” Id.
Furthermore, shifting punitive damages to insurers
would result in insurers pricing up policies to factor in drivers
who behave egregiously. “[T]he delinquent driver must not
be allowed to receive a windfall at the expense of purchasers
4
Esmond has been cited with approval by the Pennsylvania
Supreme Court for the proposition that “it is clear that
punitive damages are not intended to compensate the plaintiff
for his injuries.” Colodonato v. Consol. Rail Corp., 470 A.2d
475, 479 (Pa. 1983).
10
of insurance, transferring his responsibility for punitive
damages to the very people—the driving public—to whom he
is a menace.” Id. (quoting Nw. Nat’l Cas. Co. v. McNulty,
307 F.2d 432, 442 (5th Cir. 1962)). Because Pennsylvania
law prohibits insurers from providing coverage for punitive
damages in order to ensure that tortfeasors are directly
punished, we hold that Allstate cannot be responsible for
punitive damages incurred in the underlying lawsuit. To hold
otherwise would shift the burden of the punitive damages to
the insurer, in clear contradiction of Pennsylvania public
policy.
California, Colorado, and New York have similar
prohibitions on the indemnification of punitive damages, and
those states’ highest courts have similarly held that an insured
cannot shift to the insurance company its responsibility for
the punitive damages in a later case alleging a bad faith
failure to settle by the insurer. See PPG Indus., Inc. v.
Transamerica Ins. Co., 975 P.2d 652 (Cal. 1999); Lira v.
Shelter Ins. Co., 913 P.2d 514 (Colo. 1996); Soto v. State
Farm Ins. Co., 635 N.E.2d 1222 (N.Y. 1994).
In Lira, the Supreme Court of Colorado held that “in
an action by an insured against his insurer for bad faith failure
to settle, the insured may not collect as compensatory
damages the punitive damages awarded against him in the
underlying lawsuit.” 913 P.2d at 516. Colorado’s public
policy prohibited an insurance carrier from providing
coverage for punitive damages, and “[t]o allow the petitioner
in this case to recover compensatory damages which derive
from his own wrongful conduct undercuts the public policy of
this state against the insurability of punitive damages.” Id. at
517. The court noted:
11
The damages which are claimed to be
“compensatory” in the instant case are none
other than the punitive damages from the
underlying case. The contract between the
parties expressly precluded recovery for
punitive damages incurred by the insured. The
insured may not later utilize the tort of bad faith
to effectively shift the cost of punitive damages
to his insurer when such damages are expressly
precluded by the underlying insurance contract.
Id. at 517.
The Lira court also concluded that “[a]n insurer who
has not contracted to insure against its insured’s liability for
punitive damages had no duty to settle the compensatory part
of an action in order to minimize the insured’s exposure to
punitive damages.” Id. at 516.5 “Thus, if the insurer has no
5
The Lira court cites Magnum Foods, Inc. v. Continental
Casualty Co., 36 F.3d 1491, 1506 (10th Cir. 1994), as support
for this proposition. The cited portion of Magnum Foods
focuses on the insurer’s duty of good faith where uninsured
punitive damages are present, rather than on whether those
punitive damages are compensable in a later bad faith lawsuit
against the insurer. Magnum Foods as a whole, however,
supports our view on the question of whether punitive
damages are appropriately considered in calculating the
compensatory damages. The United States Court of Appeals
for the Tenth Circuit concluded that “there was error in the
compensatory damages award ($750,000) on the bad faith
claim because it was based . . . on consideration of the
$600,000 amount that Magnum paid to settle the punitive
12
contractual duty to indemnify the insured for punitive
damages, the insurer has no tort duty to settle in good faith
with regard to punitive damages.” Id. at 517.
In PPG Industries, the California Supreme Court held
that an insurer’s breach of the covenant of good faith and fair
dealing in failing to accept a settlement offer within policy
limits was not the proximate cause of a punitive damages
award. Instead, the punitive damages award proximately
resulted from the insured’s own intentional misconduct—
failing to follow industry safety standards in installing
windshields—and so punitive damages were not recoverable
from the insurer. The court was convinced that there were
two causes of the punitive damages award: the insurance
company’s alleged negligence in failing to settle the third
party lawsuit, and “the insured’s own intentional and
egregious misconduct in installing the windshield.” 975 P.2d
at 655. Only the former involved the insurer.
The court was persuaded that California public policy
precluded an insured from shifting the obligation to pay
punitive damages to its insurer. “To require [the insurer] to
make good the loss [the insured] incurred as punitive
damages in the third party lawsuit would impose on [the
insurer] an obligation to indemnify, a violation of the public
damage award entered against it in the state court suit. This
in effect shifted Magnum’s punitive liability to the insurer
which, in the circumstances of this case, violated Oklahoma
public policy.” Id. at 1507. The Tenth Circuit required a new
trial on the bad faith claim, where Magnum could seek
compensatory damages based on injury other than the
$600,000 payment. This is the same result we reach here.
13
policy against indemnification for punitive damages.” Id. at
658. The California Supreme Court also explained that “the
purposes of punitive damages . . . are to punish the defendant
and to deter future misconduct by making an example of the
defendant.” Id. at 656. Allowing the insured to shift
responsibility for its wrongdoing to the insurance company,
which “surely will pass to the public its higher cost of doing
business,” would “defeat the public policies of punishing the
intentional wrongdoer for its own outrageous conduct and
deterring it and others from engaging in such conduct in the
future.” Id. at 657.
In agreement with Colorado and California, the New
York Court of Appeals in Soto held that “the punitive
damages awarded against an insured in a civil suit are not a
proper element of the compensatory damages recoverable in a
suit against an insurer for a bad-faith refusal to settle.” 635
N.E.2d at 1225. Although the insureds’ cause of action in
Soto was based on bad faith liability due to an excess
judgment, the court’s rationale aligns with Lira and PPG
Industries. New York’s public policy precluded
indemnification for punitive damages, so the Soto court
concluded that permitting recovery for excess civil judgments
attributable to punitive damages awards would be unsound
public policy. Such a recovery would improperly focus on
the insurer’s allegedly wrongful act in refusing to settle and
would minimize the insured’s own blameworthy conduct.
“Regardless of how egregious the insurer’s conduct has been,
. . . any award of punitive damages that might ensue is still
directly attributable to the insured’s immoral and
blameworthy behavior.” Id. The Soto court precluded the
recovery of punitive damages in order to preserve the
“condemnatory and retributive character of punitive damage
14
awards.” Id. These three cases, all from states that prohibit
insuring punitive damages, buttress our conclusion that
Allstate cannot be held responsible for the punitive damages
award against Zierle.
Wolfe argues that Allstate breached its duty of good
faith by unreasonably refusing to negotiate. Because Allstate
breached its duty of good faith and fair dealing, under
Wolfe’s theory, Allstate would become liable for all the
consequential damages of that breach—including the punitive
damages award of $50,000. Wolfe relies on the logic of this
argument, but does not cite any relevant case law to support
his assertions. Although not cited by Wolfe, Carpenter v.
Automobile Club Interinsurance Exchange, 58 F.3d 1296 (8th
Cir. 1995), appears to support his position. The United States
Court of Appeals for the Eighth Circuit rejected the insurer’s
argument that due to the exclusion of punitive damages, the
plaintiff should be barred from recovering those damages:
We acknowledge that the policy excluded
coverage for punitive damages, yet we hold that
Carpenter is entitled to be made whole, which
necessarily requires her to recover the amount
of the punitive damages awarded . . . in the
underlying state court action. Those damages
are part of the consequential damages flowing
from AAA’s alleged bad faith and negligence in
handling Carpenter’s insurance claims.
Id. at 1302. The Eighth Circuit reached this conclusion by
interpreting Arkansas law, which stated that “[w]here an
insurer, either through negligence or bad faith, fails to settle a
claim against its insured within the policy limits, when it is
possible to do so, such insurer is liable to the insured for any
15
judgment recovered against him (or her) in excess of such
policy limits.” Id. at 1303 (quoting McChristian v. State
Farm Mut. Auto. Ins. Co., 304 F. Supp. 748, 750 (W.D. Ark.
1969)) (alteration in original). Without referencing public
policy, the Eighth Circuit reasoned that the plaintiff could not
be made whole without recovery of the entire amount of the
judgments obtained in the underlying state court action,
including punitive damages. Id. Because the Eighth Circuit
did not consider Arkansas’s public policy regarding punitive
damages in making this determination, we do not find the
Carpenter court’s literal reading of Arkansas law to be
persuasive as to what the Pennsylvania Supreme Court would
conclude.
In light of Pennsylvania’s public policy against
insuring punitive damages, which emphasizes personal
responsibility and deterrence, we conclude that the insured
cannot shift the punitive damages to its insurer. Because the
$50,000 punitive damages award is not a compensable item
of damages in this case, the District Court erred in allowing
evidence of that award to be presented to the jury. The
District Court here concluded that the $50,000 punitive
damages award flowed from Allstate’s failure to negotiate a
settlement in good faith.6 Accordingly, the District Court
6
Wolfe argues that the federal jury’s award of $50,000 in
punitive damages had no relationship to the $50,000 punitive
damages award in the state personal injury suit. Rather, he
asserts, the fact that both awards are $50,000 is a
“coincidence.” Although we cannot speak for the federal jury
as to why it chose to award $50,000 in punitive damages, we
are persuaded that the record shows more than mere
16
viewed Wolfe as seeking compensation, not indemnification.
However, we conclude that punitive damages awarded in the
underlying case are not properly considered compensable
damages in Wolfe’s breach of contract claim against
Allstate.7 The District Court’s ruling effectively shifted
Zierle’s liability for punitive damages to Allstate, which
violated Pennsylvania’s public policy. Because the punitive
damages award is not a compensable item of damages as a
matter of law, and because no other reason has been
suggested for why the earlier punitive award would be
relevant in a case like this, it is not relevant evidence under
Federal Rules of Evidence 401 and 402.
It follows from our reasoning that an insurer has no
duty to consider the potential for the jury to return a verdict
for punitive damages when it is negotiating a settlement of
the case. To impose that duty would be tantamount to
coincidence for why the jury awarded the same amount here
as the earlier punitive damages award.
7
Because we exclude this evidence as a matter of
Pennsylvania’s public policy, we need not reach Allstate’s
argument that the District Court erred in concluding that the
punitive damages flowed from Allstate’s failure to settle,
rather than from Zierle’s egregious conduct and the jury’s
verdict punishing him for that conduct. This question of
proximate cause is not necessary to our holding because,
regardless of whether the punitive damages in the underlying
case are “caused” by the insured’s egregious conduct or the
insurer’s failure to settle, it makes no difference to the
outcome. Those punitive damages are not recoverable in a
later suit against the insurer, as a matter of public policy.
17
making the insurer responsible for those damages, which, as
we have discussed, is against public policy. See Zieman Mfg.
Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1346
(9th Cir. 1983) (affirming the conclusion by the district court
that “[t]he proposition that an insurer must settle, at any
figure demanded within the policy limits, an action in which
punitive damages are sought is nothing short of absurd. The
practical effect of such a rule would be to pass on to the
insurer the burden of punitive damages in clear violation of
California statutes and public policy”); see also Wardrip v.
Hart, 28 F. Supp. 2d 1213, 1215-16 (D. Kan. 1998) (same).
As a result, Allstate is entitled to a new trial, at which Wolfe
may not introduce evidence relating to $50,000 in punitive
damages, although he may seek compensatory damages based
on injury other than the $50,000 punitive damages award.
B. Summary Judgment8
We now turn to Allstate’s other argument on appeal—
namely, that the District Court erred by denying Allstate’s
motion for summary judgment on the breach of contract and
statutory bad faith claims. Under Pennsylvania law, bad faith
by an insurance company can give rise to two separate causes
8
We apply a plenary standard of review to our review of a
denial of summary judgment. In doing so, we assess the
record using the same summary judgment standard that
guided the District Court. Rivas v. City of Passaic, 365 F.3d
181, 193 (3d Cir. 2004). To prevail on a motion for summary
judgment, the moving party must demonstrate “that there is
no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a).
18
of action: a breach of contract action for violation of an
insurance contract’s implied duty of good faith, and a
statutory action under the terms of Pennsylvania’s bad faith
statute, 42 Pa. Cons. Stat. § 8371. Wolfe pursued both claims
before the District Court.
Allstate urges that, once the punitive damages award is
removed from the equation, the District Court should have
granted summary judgment in its favor, so that a new trial is
unnecessary. It urges that an insurer does not breach its duty
or act in bad faith, as a matter of law, if it does not settle and
the jury awards a compensatory judgment within the policy
limits, because there is no harm to the insured.9 We do not
believe that Allstate’s argument, even if successful in its
entirety, would necessarily result in a judgment for Allstate.
We conclude that the District Court correctly denied the
summary judgment motion on both claims—for breach of
contract and statutory bad faith—because removing the
$50,000 punitive damages award from the damages sought
for these claims does not require entry of judgment in favor of
Allstate.
9
Counsel for Allstate urged at oral argument that an excess
verdict was necessary in order to have a contractual or bad
faith claim. We know of no case that so holds. And we note
that the District Court for the Western District of
Pennsylvania has predicted that the Pennsylvania Supreme
Court would hold that entry of an excess verdict is not
necessary for a third party bad faith claim under Pennsylvania
common law. See McMahon v. Med. Protective Co., No. 13-
911, --- F. Supp. 3d ----, 2015 WL 1285790, at *12 (W.D. Pa.
Mar. 20, 2015).
19
1. Breach of Contract Claim
Pennsylvania law recognizes a claim in contract for an
insurer’s breach of its fiduciary obligations to its insured, and
an insured’s right to recover compensatory damages under
that claim for injuries sustained as a result of that breach.
Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 227 (Pa.
1957). In defining what this duty of good faith entails, the
Pennsylvania Supreme Court held that the insurer must
“consider in good faith the interest of the insured as a factor”
in deciding whether to settle a claim. Id. at 228. Evidence
showing only “bad judgment” is insufficient for liability and
“bad faith, and bad faith alone was the requisite to render the
defendant liable.” Id. at 229. An insurer’s bad faith must be
proven by “clear and convincing evidence.” Id. Under
Cowden and its progeny, if an insurer breaches the
contractual duty of good faith, the insured is entitled to
recover “the known and/or foreseeable compensatory
damages of its insured that reasonably flow from the bad faith
conduct of the insurer.” Birth Ctr. v. St. Paul Cos., 787 A.2d
376, 379 (Pa. 2001). This cause of action is also known as a
common law bad faith action.
Wolfe’s breach of contract claim sought recovery of
the $50,000 punitive damages award; interest on the $50,000
punitive damages award; and attorney’s fees and costs. By
removing the $50,000 award from consideration, we remove
all compensatory damages that Wolfe seeks, based on the
statements in his complaint. However, this does not require
summary judgment in favor of Allstate on this claim.
Under Pennsylvania law, if a plaintiff is able to prove a
breach of contract but can show no damages flowing from the
20
breach, the plaintiff is nonetheless entitled to recover nominal
damages. Thorsen v. Iron & Glass Bank, 476 A.2d 928, 931
(Pa. Super. Ct. 1984); see also Scobell Inc. v. Schade, 688
A.2d 715, 719 (Pa. Super. Ct. 1997). “A grant of summary
judgment on the sole basis of absence of provable damages,
therefore, is generally improper.” Thorsen, 476 A.2d at 931.
Federal courts applying Pennsylvania law have agreed with
the impropriety of summary judgment in such a situation. See
Haywood v. Univ. of Pittsburgh, 976 F. Supp. 2d 606, 645
(W.D. Pa. 2013) (“Haywood’s motion for summary judgment
must, therefore, be denied because the University, if it proves
the other elements of a claim for breach of contract, may be
entitled to nominal damages.”). Therefore, even without
compensatory damages, an insurer can be liable for nominal
damages for violating its contractual duty of good faith by
failing to settle. Accordingly, we affirm the District Court’s
denial of the motion for summary judgment as to the breach
of contract claim.
2. Bad Faith Claim Under Section 8371
Pennsylvania also provides a statutory remedy for bad
faith in section 8371. If an insurer has “acted in bad faith
toward the insured,” a court may:
(1) Award interest on the amount of the claim
from the date the claim was made by the
insured in an amount equal to the prime rate of
interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against
the insurer.
21
42 Pa. Cons. Stat. § 8371. Section 8371 does not provide for
the award of compensatory damages, which, if sought, must
be recovered based on other theories. See Birth Ctr., 787
A.2d at 386.
This statute was enacted in response to a 1981
Pennsylvania Supreme Court decision holding that there was
no common law “bad faith” cause of action for a plaintiff
whose insurance company wrongfully refused to pay a claim
under an insurance policy. See generally D’Ambrosio v. Pa.
Nat’l Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981). In 1990,
the Pennsylvania legislature enacted section 8371, which
created a new cause of action for bad faith on the part of the
insurer. See Polselli v. Nationwide Mut. Fire Ins. Co., 126
F.3d 524, 529 (3d Cir. 1997) (describing history).
Section 8371 does not define “bad faith,” but we have
predicted that the Pennsylvania Supreme Court would follow
the definition of bad faith, and test for liability, set out by the
Pennsylvania Superior Court in Terletsky v. Prudential
Property & Casualty Insurance Co., 649 A.2d 680 (Pa.
Super. Ct. 1994). See Nw. Mut. Life Ins. Co. v. Babayan, 430
F.3d 121, 137 (3d Cir. 2005). Terletsky defined “bad faith” as
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.
22
649 A.2d at 688 (quoting Black’s Law Dictionary 139 (6th
ed. 1990)). To recover under section 8371, a plaintiff must
show by clear and convincing evidence that the insurer did
not have a reasonable basis for denying benefits under the
policy and that the insurer knew or recklessly disregarded its
lack of reasonable basis in denying the claim. Id.
The removal of the $50,000 as compensatory damages
does not require summary judgment in favor of Allstate on
the bad faith claim under section 8371. Section 8371 “sets
forth no . . . requirement to be entitled to damages for the
insurer’s bad faith.” Berg v. Nationwide Mut. Ins. Co., 44
A.3d 1164, 1177 (Pa. Super. Ct. 2012). In Berg, the court
stated:
[T]he focus in section 8371 claims cannot be on
whether the insurer ultimately fulfilled its policy
obligations, since if that were the case then
insurers could act in bad faith throughout the
entire pendency of the claim process, but avoid
any liability under section 8371 by paying the
claim at the end. . . . [T]he issue in connection
with section 8371 claims is the manner in
which insurers discharge their duties of good
faith and fair dealing during the pendency of an
insurance claim, not whether the claim is
eventually paid.
Id. at 1178 (citing Toy v. Metro. Life Ins. Co., 928 A.2d 186,
199 (Pa. 2007)). The policy behind section 8371—deterring
insurance companies from engaging in bad faith practices—is
furthered by allowing a statutory bad faith claim to proceed
even where the insured has alleged no compensatory damages
resulting from that conduct. See March v. Paradise Mut. Ins.
23
Co., 646 A.2d 1254, 1256 (Pa. Super. Ct. 1994) (explaining
that section 8371 “was promulgated to provide additional
relief to insureds and to discourage bad faith practices of
insurance companies”). Accordingly, removal of the $50,000
punitive damages award as damages in this suit has no
bearing on the damages that can be awarded under the
statutory bad faith claim.10
Therefore, Wolfe does not need compensatory
damages to succeed on his statutory bad faith claim, which
only permits recovery of punitive damages, interest, and
costs. Accordingly, we affirm the District Court’s denial of
the motion for summary judgment as to the bad faith claim,
10
Recovery on Wolfe’s breach of contract claim and his
statutory bad faith claim are entirely independent of one
another. Section 8371 allows punitive damages awards even
without any other successful claim. See Willow Inn, Inc. v.
Pub. Serv. Mut. Ins. Co., 399 F.3d 224, 235 (3d Cir. 2005);
see also March, 646 A.2d at 1256 (“[Because] claims under
section 8371 are separate and distinct causes of action and as
the language of section 8371 does not indicate that success on
the contract claim is a prerequisite to success on the bad faith
claim, . . . an insured’s claim for bad faith brought pursuant to
section 8371 is independent of the resolution of the
underlying contract claim.”); accord Margolies v. State Farm
Fire & Cas. Co., 810 F. Supp. 637, 642 (E.D. Pa. 1992).
Furthermore, Wolfe’s claim under section 8371 does not
affect his ability to obtain compensatory damages, if they
exist, under a breach of contract claim. “The statute does not
prohibit the award of compensatory damages. It merely
provides an additional remedy and authorizes the award of
additional damages.” Birth Ctr., 787 A.2d at 386.
24
because Wolfe’s inability to collect the $50,000 as
compensatory damages does not preclude recovery on that
claim as a matter of law.
III. CONCLUSION
We will vacate the District Court’s judgment resulting
from the jury’s verdict as to the breach of contract claim and
the bad faith claim under section 8371. We will reverse the
District Court’s ruling denying the motion in limine and
remand for a new trial on both these claims, at which Wolfe
will be barred from introducing evidence of the $50,000
punitive damages award. We will affirm the District Court’s
denial of summary judgment on both the breach of contract
and statutory bad faith claims.
25