Pennsylvania Supreme Court Declares Insurance Bad Faith Claims Assignable

01.19.15

Can an insured assign the right to sue his or her insurer for bad faith under Pennsylvania's insurance bad faith statute, 42 Pa.C.S. §8371?  In Allstate Prop. & Cas. Ins. Co. v. Wolfe, (Pa. Dec. 15, 2014) the Pennsylvania Supreme Court accepted certification from the U.S. Court of Appeals for the Third Circuit to answer that question.

The case arose from an auto accident in which plaintiff, Wolfe, was rear-ended by the insured. Prior to suit, Wolfe demanded $25,000 to settleand the insurer offered $1,200 of the $50,000 policy limit. Wolfe rejected the offer and filed suit.  Discovery revealed that the insured had been intoxicated at the time of the accident and Wolfe amended his complaint to include a punitive damages claim. The insurer advised the insured that punitive damages weren't covered under the policy.

No further settlement discussions ensued and Wolfe’s case went to trial. The trial resulted in a judgment in Wolfe’s favor for $15,000 in compensatory damages and $50,000 in punitive damages. The insurer paid the compensatory award only. Wolfe and the insured then entered into an agreement whereby Wolfe agreed not to execute against the insured in exchange for an assignment of the insured’s claims against the insurer.

Wolfe then brought suit for statutory and common law bad faith against the insurer as the insured’s assignee. The insurer brought a motion for summary judgment, arguing that the insured’s claim under Pennsylvania’s insurance “bad faith” statute is not assignable. The District Court denied the motion and the bad faith case went to trial, resulting in a verdict in favor of the insured. The insurer appealed to the Third Circuit Court of Appeals which lodged a petition for certification with the Supreme Court.

The insurer’s position derived from the common law principle of champerty, the involvement of intermeddlers who pursue litigation for profit-making purposes. Champerty traditionally precludes assignment of tort claims. The insurer argued that the cause of action under Section 8371 is an unliquidated tort claim and thus not assignable.

The damages awardable under Section 8371 do not compensate the plaintiff’s loss, but instead compensate the insured’s loss resulting from the insurer’s conduct. Permitting assignment of the claim under Section 8371 to the plaintiff, the insurer argued, would give the plaintiff a speculator’s interest in the litigation.

Finally, the insurer contended that allowing assignment of Section 8371 claims is bad policy because it would create a perverse incentive for plaintiffs to pursue unreasonable settlement demands, thus undermining the court favored policy of settling cases.

The Supreme Court eschewed determination and instead relied on principles of statutory construction. Therefore, the Court considered the occasion and necessity for the statute, the object to be attained by the statute’s adoption, review of the previous legal landscape and appreciation of the consequences of the particular interpretation in an effort to determine the Legislature’s intent. The Court noted that Section 8371 did not create a new cause of action, but instead provided remedies not usually available for a breach of contract onto the existing contractual action. Since the contract action is assignable, this militated in favor of assignability of the Section 8371 claim. The Court, however, also recognized that the remedies provided under Section 8371 are those associated with tort law, which implicated the champerty argument raised by the insurer.

Considering these factors the Court stated:

On balance, however, we find that consideration of the occasion and necessity for Section 8371, the object to be attained, the previous legal landscape, as well as the consequences of our interpretation, favor Wolfe's position. Centrally, we simply do not believe the General Assembly contemplated that the supplementation of the redress available for bad faith on the part of insurance carriers in relation to their insureds would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions.

The Court betrayed its uncertainty about its own interpretation by inviting the Legislature to correct it, if it was wrong.

For more information, please contact Kenneth M. Portner at kportner@wglaw.com or 215.972.7921.

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Sara L. De Long
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