Defense Digest

The Terms - Vexatious, Oburate, Bad Faith, And Insured - Bring You To The Latest Case Awarding Attorney Fees to - Get This - An Insurance Company

While it does not happen frequently, a decision does come out every once in a while where the facts are so compelling that an insurer can make out a case for attorney fees under 42 Pa.C.S.A. § 2503, et seq. This is exactly what happened in the Pennsylvania Superior Court's decision in Scalia v. Erie Insurance Exchange, 878 A.2d 114 (2005).

After a fire caused extensive damage to Richard and Serena Scalia's home, they submitted a claim to their homeowners' insurer, Erie Insurance Exchange, for the property damage caused and for living expenses due to their displacement. Erie conducted an analysis of the fire scene and an investigation of the circumstances surrounding the cause of the fire. Based on the analysis and investigation, Erie declined the Scalias' claim. In doing so, Erie contended that arson was involved in the fire and, more particularly, that the fire was set by or at the direction of the Scalias. Erie also contended that the Scalias had misrepresented facts about the fire and the repair costs they had incurred in their claim and during Erie's investigation.

Erie's contentions notwithstanding, the Scalias filed a breach of contract action seeking coverage. Prior to the trial beginning, the Scalias stipulated that the fire had resulted from arson, but they denied any knowledge or involvement in the fire. During trial, Erie presented the jury with evidence to support their denial of coverage, including the results of their analysis and investigation of the fire, circumstantial evidence of the Scalias' involvement in the fire, Mr. Scalia's admission of previously setting fire to insulation in his home, and the Scalias' admission of submitting bills to Erie for property damage unrelated to the fire. Erie also presented evidence of the Scalias' dismal financial situation as a possible motive for setting the fire. At the conclusion of the trial in June 2003, the jury returned a verdict in favor of Erie.

After the trial, and by agreement of the parties, Erie petitioned the trial court for attorney fees of $48,455 incurred in defending the lawsuit. In its petition, Erie contended that the Scalias' civil action was arbitrary, vexatious. and in bad faith and, thus, fell within subsections (7) and (9) of Pennsylvania's attorney fee statute, 42 Pa.C.S.A. § 2503. While the petition was pending, Erie was permitted to supplement the record to include Mrs. Scalia's guilty plea to insurance fraud. It turns out that during the pendency of the civil action, a criminal action had been commenced against Mrs. Scalia arising from her submission of $14,000 in home repair bills that were unrelated to the fire. In February 2004, Mrs. Scalia pled guilty to one count of insurance fraud for overbilling Erie. Based on the evidentiary record developed by Erie, which also included the burden of having to analyze 400 pages of billing documents submitted by the Scalias, the trial court granted Erie's petition. The Scalias appealed, contending that the trial court abused its discretion in awarding attorney fees.

On appeal, the Scalias argued that they had a reasonable basis to commence their action against Erie and that the jury did not make any specific findings of fraud, misrepresentation, or dishonesty committed by them. The Superior Court disagreed. With respect to the role of the jury, the Superior Court pointed out that the trial judge, and not the jury, awarded attorney fees to Erie. Indeed, the parties had agreed to allow the judge to decide the issues raised by Erie's petition. According to the Superior Court, therefore, the judge, as the fact finder, was not limited to the jury's findings of fact and, thus, could, and did, properly consider Mrs. Scalia's guilty plea to insurance fraud.

As for determining whether the Scalias had a reasonable basis for bringing the suit against Erie, the Superior Court recognized that subsection (7) and (9) of 42 Pa.C.S.A. § 2503 allow a trial court to award attorney fees to a party when another party to the lawsuit engages in dilatory, obdurate, or vexatious conduct during the pendency of a matter or when a party was arbitrary, vexatious, or in bad faith in commencing an action. According to the Superior Court, bad faith occurs when one files a lawsuit for purposes of fraud, dishonesty or corruption; conduct is vexatious if a party files or continues an action to annoy another party, or without a legal or factual basis; and obdurate conduct is conduct that is unyielding or stubborn. Such conduct can support an award of attorney fees, but only upon specific findings of fact made by the finder of fact.

In view of the statute, the Superior Court concluded that the trial court did not abuse its discretion in awarding the attorney fees because it properly considered the evidence Erie presented at trial, as well as Mrs. Scalia's guilty plea. Moreover, the Superior Court, while unable to discern the jury's exact rationale for finding that Erie did not breach the contract, reasoned that the jury must have accepted one or both of Erie's contentions that the Scalias caused the fire or that they intentionally concealed or misrepresented facts concerning their claim. Finally, the Superior Court noted that the Scalias could not claim ignorance of their insurance policy or of the frivolity of their suit against Erie because Erie set forth the terms of its policy and the bases for its denial of coverage in a letter sent to them prior to the lawsuit.

Based on the evidence presented and the inferences drawn from the jury's verdict, the Superior Court concluded that the Scalias knew that they had no factual or legal basis to bring their suit against Erie and, therefore, their conduct was vexatious. The Superior Court, moreover, found the Scalias' conduct of persisting through rounds of discovery and seven days of trial, while knowing that Erie was justified in denying their claims, to be obdurate. Accordingly, the Superior Court affirmed the trial court's award of attorney fees to Erie.

The importance in this case lies in the factual record compiled and presented by Erie in support of its petition for attorney fees, which made it easy for the court to apply the facts to the law.

*Robert is an associate in our Philadelphia, PA office and can be reached at (215) 597-1845 or rjozwik@mdwcg.com.