A Not So Scary Wolf(e)

By Cristin A. Cavanaugh, Esq.*

In the recent decision of Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487 (3d Cir. 2015), the Third Circuit held that punitive damages awarded against an insured in a personal injury suit are not recoverable in a later breach of contract or bad faith suit against the insurer. The Wolfe case arose out of a motor vehicle accident where the intoxicated tortfeasor rear-ended the plaintiff. The tortfeasor was insured by Allstate. The policy provided liability coverage up to $50,000 and required Allstate to provide the tortfeasor a defense. However, the policy expressly excluded coverage for punitive damages.

The plaintiff made an initial settlement demand to Allstate of $25,000. Allstate responded with a counteroffer of $1,200. Neither party moved from those numbers. The plaintiff filed suit against the tortfeasor. As the original underlying personal injury complaint did not indicate the extent of damages in excess of $50,000, Allstate notified the tortfeasor of the possibility of personal liability in excess of the policy limits. Subsequently, the plaintiff learned of the tortfeasor’s intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to the tortfeasor about the potential for punitive damages and indicated that those damages were not covered under his policy.

During pretrial settlement conferences, two separate judges placed a settlement value of $7,500 on the compensatory damages portion of the case. Following trial, the plaintiff indicated that he would have settled the case for $7,500, although he never communicated this willingness to Allstate. Prior to trial, the plaintiff did not move from $25,000, and Allstate did not move from $1,200. The case went to trial, and the jury awarded the plaintiff $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.

The tortfeasor assigned his rights against Allstate to the plaintiff, who, in the tortfeasor’s shoes, sued Allstate 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. Allstate filed two pretrial motions. The District Court denied both motions and returned a verdict in favor of the plaintiff. Allstate appealed.

There were two issues before the Third Circuit on appeal. First, did the District Court err by permitting the plaintiff to introduce the punitive damages award from the underlying lawsuit 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 the plaintiff in full?

The Third Circuit held that, since “Pennsylvania law prohibits insurers from providing coverage for punitive damages in order to ensure that tortfeasors are directly punished, the court held that Allstate cannot be held responsible for punitive damages incurred in the underlying lawsuit.” The court held, “To hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy.” The court looked for support from the highest courts in California, Colorado and New York, which had also similarly held that an insured cannot shift to the insurance company its responsibility for punitive damages in a later case alleging bad faith for failure to settle by the insurer.

According to the Third Circuit, since the $50,000 punitive damages award was not a compensable item of damages in the case, the District Court erred in allowing evidence of the award to be presented to the jury. The court concluded that punitive damages awarded in the underlying case were not properly considered compensable damages in the plaintiff’s breach of contract claim.

The Third Circuit found that an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating settlement of a case. To impose that duty would be tantamount to making the insurer responsible for those damages, which is against public policy. That court also held that Allstate was entitled to a new trial, at which the plaintiff would not be allowed to introduce evidence relating to the $50,000 in punitive damages award, although the plaintiff would be allowed to seek compensatory damages based on injury other than the $50,000 punitive damages award.

The Third Circuit also held that the District Court correctly denied Allstate’s summary judgment motion on both the breach of contract and statutory bad faith counts, finding that removing the $50,000 punitive damages award from the damages sought for these claims did not require entry of judgment in favor of Allstate. Under Pennsylvania law, “if a plaintiff is able to prove a breach of contract but can show no damages flowing from the breach, the plaintiff is nonetheless entitled to recover nominal damages.” The court held that, “[e]ven without compensatory damages, an insurer can be liable for nominal damages for violating its contractual duty of good faith by failing to settle.”

To recover under statutory bad faith, 42 Pa.C.S.A. §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 is lack of reasonable basis in denying the claim. The Third Circuit held that the removal of the $50,000 as “compensatory damages” did not require summary judgment in favor of Allstate on the bad faith claim under Section 8371. 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.” The court further held that “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. 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.”

Apparently, no party to the case raised the question of whether §8371 statutory bad faith should apply to an excess verdict bad faith claim. A very good argument can be made that §8371 statutory bad faith should not be applicable to this type of bad faith claim essentially because there was already a remedy created by the Pennsylvania Supreme Court in Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 227 (Pa. 1957). But trust that this will be a topic for another article.

*Cristin is an associate in our Philadelphia, Pennsylvania office. She can be reached at 215.575.2597 or cacavanaugh@mdwcg.com.

_{Defense Digest, Vol 21, No. 4, December 2015}

_{Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2015 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}