Polselli v. Nationwide Mutual Fire Insurance

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
5-5-1994
Polselli v. Nationwide Mutual Fire Insurance
Precedential or Non-Precedential:
Docket 93-1499
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Recommended Citation
"Polselli v. Nationwide Mutual Fire Insurance" (1994). 1994 Decisions. Paper 10.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
NO. 93-1499
____________
REGINA POLSELLI;
RUDOLPH T. POLSELLI,
Plaintiff-Intervenor
v.
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY,
Appellant
____________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. No. 91-01365
____________
Argued March 10, 1994
Before: GREENBERG, ROTH, and ROSENN, Circuit Judges
Opinion Filed May 10, l994
____________
R. BRUCE MORRISON, ESQUIRE (Argued)
Marshall, Dennehey, Warner, Coleman and Goggin
1845 Walnut Street
Philadelphia, PA 19103
Attorney for Appellant
HARRY P. BEGIER, JR., ESQUIRE (Argued)
Harry P. Begier, Jr., Ltd.
1735 Market Street, 30th Floor
Philadelphia, PA 19103-7592
Attorney for Appellee
____________
OPINION OF THE COURT
ROSENN, Circuit Judge.
1
Regina Polselli brought a diversity action in the
United States District Court for the Eastern District of
Pennsylvania alleging, inter alia, bad faith on the part of the
insurer, Nationwide Mutual Fire Insurance Company (Nationwide),
in its handling of her fire loss claim. Following a bench trial,
the district court concluded that Nationwide did act in bad faith
and awarded Polselli $90,000 in punitive damages pursuant to
Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. Ann. § 8371
(Supp. 1993).1 Nationwide filed a motion for reconsideration,
which the district court denied. Nationwide appeals. We
reverse.
I.
On January 1, 1991, a fire occurred at the Polselli
home causing considerable damage. Regina's husband Rudolph was
the sole titled owner of the premises and the sole named insured
on a homeowner's insurance policy entered into with Nationwide.
Under the policy, Nationwide had the responsibility to reimburse
the insured for damage to the building (Building claim), its
contents (Contents claim), along with additional living expenses
(ALE claim). Rudolph moved out of the Polselli home in April
1988 and currently resides in Florida. In May 1988 he filed a
divorce action, described as bitter, which was still pending at
the time of the fire. When the fire happened, Regina, along with
1
The insured lived in Pennsylvania where the damages to her
property and the negotiations occurred. The district court and
the parties applied substantive Pennsylvania law, as do we.
2
her daughter, solely occupied the Polselli property. The fire
forced them to vacate the home.
Immediately upon being notified of the fire, Nationwide
assigned Joseph DiDonato to handle the adjustment for it.
DiDonato's supervisor instructed him to deal only with Rudolph.
Regina retained Steven H. Smith as her public adjuster to prepare
and adjust her claims. In the aftermath of the fire,
considerable confusion reigned among the parties as to their
rights and responsibilities due to the title ownership of the
premises, the pending divorce action between Regina and Rudolph,
the mutual distrust and dislike between Regina and Rudolph and
questions of Regina's insurable interest and right to possession
of the property.
On January 3, 1991, Smith sent DiDonato a letter which
set forth the basis for Regina's insurable interest and requested
immediate funds to alleviate Regina's desperate living conditions
and to satisfy Regina's claim. On January 14, 1991, DiDonato
replied that Nationwide was still in the process of
investigating. DiDonato also wrote to Rudolph and his attorney
asking for information necessary for the investigation, and for
permission to enter the premises. In the meantime, Harry P.
Begier, Jr., Regina's attorney, wrote three letters to Nationwide
in January 1991, requesting that it proceed to process and adjust
Regina's ALE claim.
On January 28, 1991, Smith filed a proof of loss of
$120,642 for the Building claim, $64,385 for the Contents claim,
and $960 per month to rent an unfurnished home, to which Regina
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later admitted that she had no intention of moving, for the ALE
claim. Smith later revised the ALE claim to $1,666.66 monthly,
based on the rental of an apartment on the New Jersey shore.
Rudolph also asserted claims for the building and a portion of
the contents. In response to the letters sent and claims made in
behalf of Regina, DiDonato reiterated Nationwide's position that
no funds would be forthcoming until it completed inspecting,
investigating and evaluating the loss. After entering the
Polselli home on February 7, 1991, and discovering evidence
suggesting that the fire had been deliberately set, DiDonato, on
February 11, requested a cause and origin investigation by an
outside investigator. Although the Fire Marshall had previously
opined, on the day of the fire, that the fire was accidental,
Nationwide's policy is not to talk to the Fire Marshal until its
own investigation is complete.
Begier claims that on February 8, John R. Riddell,
Nationwide's attorney, orally agreed to adjust Regina's ALE claim
without further delay. Begier telecopied a letter to Riddell
confirming this information. On February 13, Nationwide engaged
INS Investigations Bureau, Inc. to investigate the cause and
origin of the fire. After making a number of additional requests
for an advance payment on her ALE and Contents claims, Regina
filed suit against Nationwide on March 4, 61 days after the fire,
alleging, among other things, bad faith in Nationwide's handling
of her claims. Two days after the suit was filed, Begier wrote
to Riddell to confirm their agreement that Riddell would meet
with Smith on the following week to review Regina's Contents
4
claim, and that the ALE claim would be adjusted promptly so that
it could be paid the following week.
On March 12, 1991, Nationwide received a written report
that determined that the origin of the fire was accidental.
DiDonato testified that the ALE claim could have been paid
immediately upon receipt of the fire report. He did not know why
an advance payment was not made until July 17, 1991. He
testified, however, that once Regina filed suit, he transferred
the file to the insurer's attorney and no longer had control over
the adjustment of the claim. Begier notified Riddell on March
12, that the deposition of Regina scheduled for March 15, 1991
would be cancelled if an advance payment on the ALE claim was not
made as promised. No payment was made and the deposition was
cancelled.
On April 16, after a month of inaction, Riddell advised
Begier of Nationwide's offer to settle the ALE claim for $11,130.
On the same day, Riddell also advised Begier that Rudolph had
made an oral claim on the contents of the home, and that
Nationwide intended to interplead the Contents claim. In light
of Begier's contention that Nationwide reneged on an earlier
promise to make a payment on the ALE claim, he requested
confirmation in writing of Nationwide's offer. On May 9, Begier,
not having received confirmation from Nationwide, requested that
settlement of Regina's claim be expedited and that an advance
payment be made. Riddell expressed surprise at Begier's letter,
inasmuch as Nationwide was awaiting a reply on its $11,130 offer
made to Begier for the ALE claim.
5
On March 16, Begier rejected the offer and notified
Nationwide that due to a judgment lien in excess of $600,000 on
the property, Regina was no longer interested in rebuilding the
Polselli home. On May 17, and 23, 1991, Begier advised Riddell
that Regina would be evicted from her temporary housing, unless
Nationwide made an advance payment. In light of Begier's
disclosure that Regina would not rebuild her house, and in
accordance with its policy that an insured who permanently
relocates is entitled to less money, Nationwide advised Begier on
May 23, that it was revising its offer to $5,000 in settlement of
the ALE claim. On March 31, Begier requested information
relating to the basis of the settlement offer. Riddell responded
with the information almost three weeks later. On June 24,
without accepting the offer, Begier asked for $3,880 as an
advance on the ALE claim pending settlement. Nationwide agreed
and made the payment on July 17, 1991.
Regina was deposed on August 28, and September 5, 1991.
DiDonato testified that he could not accurately evaluate Regina's
Contents claim because, at the deposition, Regina could not
identify most of the damaged items or give additional information
concerning their date of purchase and price. On September 12,
Begier notified Riddell that Regina was evicted from her
temporary housing for non-payment of rent. Nationwide promptly
made arrangements, at its expense, for Regina to stay at an
apartment complex. Prior to these arrangements, Regina stayed at
five different places because she did not have the funds to rent
suitable housing. On October 24, 1991, Nationwide issued a check
6
for $7,250 to pay for the ALE claim. The parties eventually
settled all claims before trial except for Regina's bad faith
claim against Nationwide.
The district court found that Nationwide acted in bad
faith in its handling of the ALE and Contents claim. The court
awarded Regina $75,000 and $15,000, respectively, in punitive
damages. Damages for bad faith were not awarded on the Building
claim as Regina had no claim on the building. The court found
that Nationwide knew that Regina had an insurable interest with
respect to the ALE claim, and that after the fire was labelled
accidental it had absolutely no reason or justification for not
making timely payments on the claim, especially in view of
Regina's virtually destitute condition. The court also found
that, considering that it was clear that Regina was virtually
destitute and had a substantial Contents claim, Nationwide should
have proceeded with more dispatch in evaluating and settling the
claim, from the date the fire was labelled accidental.
II.
On appeal, Nationwide's primary contention is that the
district court erred in determining that bad faith need only be
proven by a preponderance of the evidence rather than by clear
and convincing evidence. Additionally, Nationwide asserts that
the court erroneously defined bad faith too broadly. Finally, it
argues that the district court's factual findings are clearly
erroneous.
Whether the trial court applied the proper
standard is a question of law subject to plenary review. See
7
Tudor Dev. Group v. United States Fidelity & Guar. Co., 968 F.2d
357, 359 (3d Cir. 1992). Because Nationwide contends that the
court failed to apply the proper standards with respect to the
burden of proof for bad faith and the legal construction of the
phrase bad faith, our review is plenary. The district court's
findings of fact are reviewed under a clearly erroneous standard.
Ezold v. Wolf, Block, Schorr and Solis-Cohen, 983 F.2d 509, 525
(3d Cir. 1992), cert. denied, 114 S. Ct. 88 (1993). Alleged
errors in applying the law to the facts, however, are subject to
plenary review. Id.
In D'Ambrosio v. Pennsylvania National Mutual Casualty
Insurance Company, 431 A.2d 966 (Pa. 1981), The Supreme Court of
Pennsylvania held that there is no common law remedy under
Pennsylvania law for bad faith on the part of insurers. In
response, the Pennsylvania legislature enacted 42 Pa.C.S.A. §8371
which creates a statutory remedy for bad faith conduct. The
statute provides:
In an action arising under an insurance
policy, if the court finds that the insurer
has acted in bad faith toward the insured,
the court may take all of the following
actions:
(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's fees
against the insurer.
42 Pa.C.S.A. § 8371.
8
In determining whether bad faith existed, the district
court held, contrary to Nationwide's assertion, that the clear
and convincing standard is not applicable. It noted that the
clear and convincing standard would not apply in every instance
where punitive damages are imposed, but only in specific types of
cases, such as defamation actions. The district court correctly
held that, generally, under Pennsylvania law, punitive damages
may be imposed even without demonstrating with clear and
convincing evidence that the claim is met. See Martin v. Johns-
Manville Corp., 494 A.2d 1088, 1098 (Pa. 1985) (holding that
preponderance of the evidence sufficient to support punitive
damages claim). In the context of bad faith, however, the court
erred in proclaiming that a heightened standard is unnecessary.
In the seminal decision of Cowden v. Aetna Casualty and
Surety Co., 134 A.2d 223, 229 (Pa. 1957), the Supreme Court of
Pennsylvania pronounced that, under Pennsylvania law, bad faith
on the part of an insurer must be proven by clear and convincing
evidence. See also Hall v. Brown, 526 A.2d 413, 416 (Pa. Super.
1987). We too have reaffirmed this holding. See United States
Fire Insurance Co. v. Royal Insurance Co., 759 F.2d 306, 309 (3d
Cir. 1985). There being no change in Pennsylvania law, we once
again iterate that, under Pennsylvania law, clear and convincing
evidence is necessary to prove bad faith.
Although the district court did state that it "clearly"
found Nationwide's conduct outrageous, that language is an
insufficient indication that the court used the correct standard
in finding bad faith, especially in light of the court's
9
rejection of Nationwide's arguments that a heightened standard of
proof is appropriate.
That the bad faith claim advanced by Polselli is
predicated on a recently enacted statutory provision does not, in
any way, undermine our conclusion. In enacting a statute, the
legislature is presumed to have been familiar with the law as it
then existed and the judicial decisions construing it. See
Raymond v. School Dist., 142 A.2d 749 (Pa.Super. 1958). Had the
legislature intended to make changes in the law with respect to
the burden of persuasion necessary to prove bad faith, it could
have done so expressly. See Harka v. Nabati, 487 A.2d 432, 435
(Pa.Super. 1985). By failing to articulate any changes, the
legislature implicitly acknowledged that the existing standards
remain applicable.
Nationwide next asserts that the district court
incorrectly defined bad faith. The court stated that "Nationwide
knew or recklessly disregarded the lack of a reasonable basis for
denying the claims." Nationwide contends that a reckless
standard is insufficient to constitute bad faith. Section 8371
does not define the term "bad faith." The Pennsylvania rules of
statutory construction provide that words and phrases that "have
acquired a peculiar and appropriate meaning. . . shall be
construed according to such peculiar and appropriate meaning. . .
." 1 Pa. Con. Stat. Ann. § 1903 (Supp. 1992). In the insurance
context, the term "bad faith" has acquired a peculiar and
universally acknowledged meaning:
10
Insurance. "Bad 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.
Black's Law Dictionary 139 (6th ed. 1990) (citations omitted).
See also Seeger by Seeger v. Allstate Ins. Co. 776 F. Supp. 986,
989 (M.D. Pa. 1991); Coyne v. Allstate Ins. Co., 771 F. Supp.
673, 677 (E.D.Pa. 1991). Thus, only mere negligence on the part
of the insurer is insufficient to constitute bad faith;
recklessness, however, can support a finding of bad faith.
Contrary to Nationwide's assertion, Martin does not
hold otherwise. In analyzing Section 908(2) of the Restatement
of Torts (Second) dealing with punitive damages, Martin
distinguished between two distinct types of reckless conduct. The
court held that punitive damages are appropriate where a
defendant knows, or has reason to know, of facts which create a
high degree of risk of physical harm to another, and deliberately
proceeds to act in conscious disregard of, or indifference to
that risk. Martin, 494 A.2d at 1097. However, where the
defendant does not realize or appreciate the high degree of risk,
even though a reasonable person would, punitive damages are
inappropriate. Id. Thus, Nationwide contends that Martin stands
for the proposition that reckless behavior cannot support a
finding of bad faith. Martin, however, is inapposite.
11
First, the discussion in Martin dealing with
recklessness was in the context of the tort of outrageous
behavior not in the context of bad faith. Martin does not define
bad faith. In any event, Martin does not hold that a finding of
recklessness is insufficient for a court to impose punitive
damages. In fact, the court stated that "punitive damages are
awarded . . . for acts done with a bad motive or with a reckless
indifference to the interests of others." Id. (citation
omitted). Martin merely held that the recklessness had to rise
to a more culpable level beyond gross negligence. Id. at 1098.
Therefore, the court in the instant case did not err in
concluding that reckless behavior can constitute bad faith.
However, this in no way minimizes the plaintiff's duty to prove
bad faith by the clear and convincing standard.
Finally, Nationwide contends that the district court
clearly erred in attributing virtually sole responsibility to it
for the delayed settlement payments for Regina's ALE and Contents
claims. Specifically, Nationwide claims that, contrary to the
district court's findings, it had no obligation to make partial
or advance payments, and it had no knowledge of Regina's personal
circumstances. Nationwide also claims that the court erroneously
concluded that it had no reasonable basis to contest Regina's
claims.
In light of our disposition of this case, reversing
the district court's decision for failure to apply the correct
burden of proof, we do not reach this issue. On remand, the
district court should examine the evidence to ascertain whether
12
it is so "clear, direct, weighty and convincing" so as to enable
the court to make its decision with "a clear conviction." United
States Fire, 759 F.2d at 309 (quoting In re Estate of Fickert,
337 A.2d 592, 594 (Pa. 1975)). Without expressing an opinion as
to the result the district court should reach, we emphasize that
in making its determination the court should consider the unique
circumstances of this case. Specifically, the court should
consider whether the early filing of the bad faith suit against
Nationwide, even before it completed it investigation, and the
cancellation of Regina Polselli's deposition by her attorney,
which would have aided Nationwide in computing the amount of the
claims, contributed to an atmosphere unconducive to settlement.
The court may want to consider whether once suit had been filed,
did it have a deterrent effect on the negotiations between the
adjusters or counsel for the parties. Moreover, although it was
not unusual for Nationwide to make advances on pending insurance
claims, the court should ascertain whether failure to make an
advance in this case is evidence of bad faith, when the insurance
agreement did not require it.
On the other hand, the court should consider whether
Nationwide's delay in responding to communications from Polselli,
its poor response time in engaging an investigator and in
conducting the investigation and its handling of the settlement
negotiations suggest that Nationwide did not "accord the interest
of its insured the same faithful consideration it gives its own
interest." Cowden, 134 A.2d at 228. On remand, the court should
13
ascertain whether any of these factors militate for or against a
finding that Nationwide acted in bad faith.
Accordingly, we hold that the district court erred
insofar as it held that under Pennsylvania law a preponderance of
the evidence standard is sufficient to prove bad faith on the
part of an insurer. The judgment of the district court will be
reversed and the case remanded for further proceedings consistent
with this opinion.
14