Major Bad Faith Decision from Third Circuit: It is NOT Bad Faith for a Liability Carrier To Not Include Potential Punitives in Settlement Evaluation

In the case of Wolfe v. Allstate Prop. & Cas. Ins. Co., No. 12-4450 (3d Cir. 2015 Rendell, J., Jordan, J., Lipez, J.)(Op. by Rendell, J.), the Third Circuit Court of Appeals remanded an excess verdict bad faith case back for a new trial after ruling that punitive damages could not be awarded by a jury against the third party liability carrier.

According to the Opinion, this case arose out of a rear end accident caused by an allegedly intoxicated third party tortfeasor who was insured by Allstate.

The case proceeded to trial at which the jury awarded the Plaintiff $15,000 in compensatory damages along with a $50,000 award in punitive damages based upon the allegations of intoxication/driving under the influence.  Allstate, the tortfeasor's liability carrier paid the compensatory damages but not the punitive damages as the punitive damages were not covered under the liability policy.

The tortfeasor assigned his rights to assert an alleged bad faith claim against Allstate to the Plaintiff who filed a bad faith suit.

Tort Talkers may recall that this Wolfe v. Allstate case was previously certified by the Third Circuit to the Pennsylvania Supreme Court for a ruling on whether or not a tortfeasor could assign a right to bring a bad faith suit against a liability carrier to a Plaintiff--the Pennsylvania Supreme Court ruled that such rights could indeed be assigned. [Click HERE to view that Tort Talk post, which also contains a Link to the Pennsylvania Supreme Court's decision].

Relative to the current issue before the Third Circuit, the federal district trial court had previously denied Allstate's motion for summary judgment which asserted that, since Allstate had no duty to indemnify for punitive damages under the terms of the liability insurance policy, (1) it was not required to consider potential punitive damages when deciding whether to settle the underlying matter and (2) that indemnification for punitive damages under the liability policy was impermissible under Pennsylvania law in any event.

In the trial of the bad faith matter, the federal court jury in this matter found a violation of the bad faith statute as well as a breach of contract.  The jury awarded no compensatory damages, but included $50,000 in punitive damages in its verdict.

On appeal, the Third Circuit Court of Appeals noted that it was required to predict how the Pennsylvania Supreme Court would rule on the wider issue of whether insurers could insure against punitive damages which decision would guide the Third Circuit on how to rule on the more specific question presented of whether the existence of punitive damages should have been admitted into evidence in the trial of this bad-faith case.

In her Opinion, Judge Marjorie O. Rendell wrote, "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 [bad faith] suit and should not have been admitted." [bracket inserted here].

The Third Circuit's decision in this regard was based, in part, on the long-standing principle of Pennsylvania law that liability insurers are not responsible for covering punitive damages arising out of an insured's conduct as well as the public policy of cost containment when it comes to automobile insurance (i.e., the court noted that if it ruled otherwise, the public at large would have to bear the brunt of increased premiums to account for drivers who act egregiously).

Notably, the plaintiff in this bad faith case had also asserted that Allstate breached its duty of good faith by failing to negotiate and that as a result, Allstate should be deemed to be accountable for all damages arising out of that breach, including the punitive damages that were awarded in the underlying matter.

The Third Circuit disagreed, finding that the public policy against allowing insurance coverage for punitive damages defeated the plaintiff's argument in this regard.  Judge Rendell wrote, "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 [entered in the underlying matter] is not a compensable item of damages in this [later bad faith] case, the district court erred in allowing evidence of that award to be presented to the jury."

The Third Circuit Court also disagreed with the plaintiff's contention that the $50,000 award for punitive damages in the bad faith jury's verdict arose out of the findings by the jury of bad faith conduct on the part of the carrier, as opposed to simply being an award based on the presentation of the evidence that the underlying jury had awarded $50,000 in punitive damages against the tortfeasor defendant relative to his DUI driving.  The Court could not agree that this was simply a coincidence that the amount was the same.

The Third Circuit remanded the matter back to the trial for court for a retrial at which no evidence of the punitive damages would be allowed.

Anyone wishing to review the Third Circuit's Opinion in Wolfe v. Allstate online may click this LINK.  

Source:  Article by P.J. D'Annunzio entitled "Third Circuit Rejects Punitive Damages in Bad Faith Cases." The Legal Intelligencer (June 15, 2015).


Commentary:  This case could have a major impact on the common tactic of Plaintiffs including a punitive damages claim against a tortfeasor defendant as a "hammer" in the underlying personal injury lawsuit to assist in securing an amicable resolution of that third party liability case by arguing to the liability carrier that the failure to settle the matter and thereby expose its insured defendant tortfeasor to a potential punitive damages verdict amounts to bad faith and/or may expose the liability carrier to having to later pay for any punitive damages award in a subsequent bad faith claim.

In this regard, the Third Circuit in Wolfe stated that "[i]t follows from our reasoning that an insurer has no duty to consider the potential for a jury to return a verdict for punitive damages when it is negotiating a settlement of a case.  To impose that duty would be tantamount to making the insurer responsible for those damages, which, as we have discussed, is against public policy."  Op. at p. 17-18.