Are Damages for Emotional Distress Recoverable in a Pennsylvania Bad Faith Lawsuit Even Though the Bad Faith Statute Does Not Provide for Such Damages?

Pennsylvania - Bad Faith

The Pennsylvania Supreme Court has permitted recovery of compensatory damages in a bad faith lawsuit arising out of a carrier's defense of an insured in a third party claim against the insured. Birth Ctr. v. The St. Paul Cos. Inc., 787 A.2d 376 (Pa. 2001). In Birth Center, Lindsey Norris' parents filed a lawsuit against St. Paul's insured for negligence during Lindsey's birth that caused her to suffer severe physical injuries and brain damage. A verdict was entered against the insured in the amount of $4,317,743, which was in excess of the insured's $1 million policy limits. In spite of St. Paul's payment of the excess verdict, the Pennsylvania Supreme Court upheld a $700,000 bad faith verdict against St. Paul, representing compensation for damage to the Birth Center's business, reputation, and credit. Although compensatory damages are not one of the enumerated types of damages in 42 Pa.C.S. Section 8371, the Supreme Court in Birth Center recognized a common law contractual cause of action for breach of the implied covenant of good faith and fair dealing. It recognized such a common law cause of action despite its prior landmark decision in D'Ambrosio v. Pennsylvania National Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981), that no common law cause of action for bad faith existed. Birth Center limited the D'Ambrosio holding to common law bad faith actions sounding in tort. It noted that D'Ambrosio did not preclude the possibility that emotional distress damages may be recoverable in a contract action where the breach was of such a kind that serious emotional distress was a particularly likely result. Birth Center at 385. The Court did not offer any example of what type of a breach of what kind of a contract it had in mind when it made its observation.

Since Birth Center, no reported Pennsylvania appellate court has addressed whether emotional distress damages are recoverable in a breach of contractual duty of good faith and fair dealing arising out of a first party claim against a carrier, as opposed to a third party cause of action like Birth Center. Even the verdict that was the subject of the Birth Center decision did not involve damages for emotional distress. See, Kakule v. Progressive Casualty Ins., 2007 U.S. Dist. LEXIS 44942. In that case, the Honorable Robert R. Kelly, writing for the Eastern District of Pennsylvania, observed the oddity that the Birth Center opinion states that damages for emotional distress could be recoverable pursuant to the theory of breach of the contractual duty of good faith and fair dealing since emotional distress damages were not involved in Birth Center, and the insured plaintiff in that case was a corporation.

Nevertheless, several recent federal court decisions have permitted plaintiffs to plead damages for emotional distress in claims against their carriers for breach of the contractual duty of good faith and fair dealing, over and above the statutory damages recoverable under 42 Pa.C.S. Section 8371. In Kakule, Judge Kelly noted that the Pennsylvania courts have not yet ruled on whether the Birth Center holding applies to all insurance claims or whether it is limited to those bad faith claims arising out of the carrier's breach of fiduciary duty in defending an insured in a third party claim. Judge Kelly predicted that the Pennsylvania Supreme Court would apply Birth Center to all insurance claims, whether or not they arose out of the first or third party context. Also see, Amitia v. Nationwide Mut. Ins. Co., 2009 U.S. Dist. LEXIS 2840, CRS Auto Parts, Inc. v. National Grange Mut. Ins. Co., 2009 U.S. Dist. LEXIS 7763, and Millwood v. State Farm Mut. Automobile Ins. Co., 2009 U.S. Dist. LEXIS 8415. Accordingly, at least through the pleadings, a Section 8371 claimant may be able to circumvent the fact that compensatory damages are not recoverable under the statute. See Millwood, where the court struck a claim for compensatory damages under Section 8371 but noted that would have little practical effect on damages awarded at trial since compensatory damages, including those for emotional distress, are available under a breach of contract theory.

The potential consequences of this new line of cases that seem to ignore the Supreme Court's decision in D'Ambrosio are multi-faceted. Not only can a bad faith plaintiff plead around the fact that compensatory damages are not available under the statute, but this alleged contractual theory of bad faith could also put at risk the two-year statue of limitations and clear and convincing burden of proof that have been solidified in Section 8371 claims. The Honorable Ronald L. Buckwalter recently discussed in CRS that a four-year statute of limitations generally applies to contract claims and that negligence or unreasonable conduct may be all that will be required to prove a common law contractual bad faith claim. Additionally, given that emotional distress can possibly be awarded if a plaintiff proves that it was reasonably foreseeable at the time of the contract, it is unlikely that a plaintiff will have to prove said damages with expert testimony. There are no parameters or guidelines on the amount of an award for damages for emotional distress, other than the customary requirement that a verdict must be supported by the evidence and it must not shock the conscience. Of course, a common law breach of contract theory cannot be used to recover punitive damages. The statutory elements will still have to be met to support any award for punitive damages.

Our opinion is that the Birth Center holding is and should be limited to bad faith claims arising out of a carrier's defense of an insured in a third party action. Pennsylvania courts have consistently held that common law remedies are not available to bad faith claimants in a first party setting. See, Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881 (Pa. Super. 2000). In cases where the insurer assumes the defense of an insured in a third party claim, a fiduciary duty is owed; in first party claims, a fiduciary duty is not owed. Condio v. Erie Ins. Exch., 899 A.2d 1136 (Pa. Super. 2006). There is no separate breach of the contractual duty of good faith and fair dealing where a plaintiff alleges that he or she was denied benefits under an insurance policy. In that situation, the claim is subsumed by the plaintiff's breach of contract claim premised upon the same conduct. Smith v. Lincoln Benefit Life Co., 2009 U.S. Dist. LEXIS 24941. Recognition of a contractual bad faith cause of action in a third party context (i.e. bad faith failure or refusal to settle a liability claim within the insured's policy limits, leading to an excess verdict) pre-existed the enactment of Section 8371. See, Cowden v. Aetna Cas. And Sur. Co., 134 A.2d 223 (Pa. 1951). Pennsylvania courts have yet to recognize a contractual bad faith cause of action in a first party context. The Supreme Court of Pennsylvania in D'Ambrosio expressly declined the opportunity to do so. Our cases have evolved accordingly, and, to date, no state appellate court has recognized a first party bad faith claimant's recovery of damages for emotional distress. The potential for punitive damages is obviously the most prominent concern in defending an insurer from a bad faith claim. However, the opportunity exists for us to present cogent arguments to our courts that well-established precedent and the history behind Section 8371 would seem to compel the conclusion that there is no statutory of common law remedy of emotional distress damages for a first party bad faith claimant.

* Patricia is a shareholder in our Pittsburgh, Pennsylvania, office and can be reached at (412) 803-1151 or pamonahan@mdwcg.com.

Defense Digest, Vol. 16, No. 1, March 2010