Pennsylvania does not recognize a common law tort claim for bad faith. D’Ambrosio v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 431 A.2d 966, 970 (Pa. 1981). However, a contractual claim for bad faith does exist. Birth Center v. St. Paul Cos., 787 A.2d 376 (Pa. 2001).
A statutory bad faith cause of action may be brought under Pennsylvania’s bad faith statute, 42 Pa. C.S. § 8371. However, it only applies to insureds; thus, a third party does not have a direct action against the insurer absent an express written assignment from the insured. Brown v. Candelora, 708 A.2d 104 (Pa. Super. 1998). Pennsylvania has a direct action statute for claimants who cannot collect on a judgment against a bankrupt or insolvent insured, but recovery is limited to the limits of the policy. 40 P.S. § 117. It is also worth noting that policy provisions prohibiting the transfer or assignment of rights under insurance policies are generally enforced in Pennsylvania.
Pennsylvania’s bad faith statute, 42 Pa. C.S. § 8371, 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 fees against the insurer.
Pennsylvania’s Unfair Insurance Practices Act, 40 P.S. §§ 1171.1, et seq. does not permit a private cause of action. While, some courts have considered violations of its provisions as evidence of bad faith, this approach has not yet been adopted by the Pennsylvania Supreme Court.
The Pennsylvania legislature did not provide a definition of bad faith, as that term is used in section 8371, nor did it set forth the manner in which an insured must prove bad faith. While our Supreme Court has not yet addressed these issues, this Court has ruled that, to succeed on a bad faith claim, the insured must present clear and convincing evidence to satisfy a two part test: (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim. Rancosky v. Wash. Nat'l Ins. Co., 130 A.3d 79, 92 (Pa. Super. 2015). citing Terletsky v. Prudential Prop. and Cas. Ins. Co., 437 Pa. Super. 108, 649 A.2d 680, 688 (Pa. Super. 1994). Merely negligent conduct, however harmful to the interests of the insured, is recognized by Pennsylvania courts to be categorically below the threshold required for a showing of bad faith. Greene v. United Servs. Auto. Ass'n, 2007 PA Super 344, 936 A.2d 1178, 1190-91 (Pa. Super. 2007).
Under Pennsylvania’s bad faith statute, an insured may recover interest (prime rate) plus 3%, punitive damages and court costs and attorney’s fees. Compensatory damages are recoverable for contractual bad faith.
While a finding of bad faith does not compel an award of punitive damages, it does allow for the award without additional proof, subject to the trial court's exercise of discretion. Hollock v. Erie Ins. Exch., 2004 PA Super 13, P26, 842 A.2d 409, 419 (2004). In other words, it is left to the trial court’s discretion to determine if an award of punitive damages is warranted. The same factors apply as those in determining if the insurer acted in bad faith.
"[T]he standard under which punitive damages are measured in Pennsylvania requires analysis of the following factors: (1) the character of the act; (2) the nature and extent of the harm; and (3) the wealth of the defendant." Pioneer Comm. Funding Corp. v. Am. Fin. Mortg. Corp., 2002 PA Super 68, 797 A.2d 269, 290 (Pa. Super. 2002).
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.