In Atiyeh v. National Fire Insurance Company, the Court stated that a statutory bad faith claim can exist even if there were no viable breach of insurance contract claim, as an independent cause of action.  This is a questionable proposition in light of recent Supreme Court case law, Toy v. Metropolitan Life Insurance Company, 928 A.2d 186 (Pa. 2007), but in the context alleged here, where the contract claim is not viable because of a contractual limitations period expiring, the result is less controversial.
It is arguable that Toy means that a viable bad faith claim can only exist when a basic contractual obligation has been violated, i.e. a failure to pay a claim in the first party context or a failure to indemnify or defend in a third party claim.  There may be other forms of bad conduct that are evidence of a bad faith claim, but which by themselves cannot create a bad faith claim. If that is the case, then the proposition that a bad faith claim can exist independently of the underlying breach of the insurance contract loses its force; except maybe in unusual procedural circumstances like the Atiyeh case.
In Toy v. Metropolitan Life Insurance Company, 928 A.2d 186 (Pa. 2007), the factual issue centered on the allegedly improper solicitation to purchase an insurance policy, which solicitation was a purported violation of the Unfair Insurance Practices Act. Writing for himself and two other Justices (on a panel consisting of five, rather than seven, Justices), Chief Justice Cappy looked to the Statutory Construction Act and found that: the term “bad faith” had acquired a specific meaning in the insurance context at the time the legislation was enacted; that under the Bad Faith Statute the cause of action arose “under an insurance policy”; and that the statutory damages permitted were “based on the ‘amount of the claim from the date the claim was made by the insured.’” Expounding on this analysis, the majority concluded that the statute did not permit claims for unfair practices involving the solicitation of a policy.
As to the specific meaning acquired by the statute’s 1990 enactment, “the term ‘bad faith’ concerned the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first-party claim context.”  Justice Cappy then wrote:  In other words, the term captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing  implied in the parties’ insurance contract. Thus, when § 8371, which provides a remedy in an action “arising under an insurance policy” as to a claim an insured has made of his insurer, is read with this meaning of bad faith in mind, we can only conclude on the question before us, that the words of the statute are clear and explicit, and that the Legislature intended not to give relief under the bad faith statute to an insured who alleges that his insurer engaged in unfair or deceptive practices in soliciting the purchase a policy.
Justice Cappy dropped some significant footnotes in this part of his Opinion, in large part to address Justice Eakin’s concurrence. In this context, it is important to observe that the majority identified two uses of the phrase “bad faith” in connection with section 8371:  (1) going to the nature of the claim; and (2) going to the actions that constitute bad faith conduct. Thus, the majority found that this phrase had two different and distinct meanings, depending on the context in which it is being used.
As phrased by the Chief Justice: “It bears repeating that in this case, we determine the essence of the claim given to an insured under the bad faith statute.” This is distinguished from “what actions amount to bad faith, what actions of an insurer may be admitted as proof of its bad faith, whether an insurer’s violations of the UIPA are relevant to proving a bad faith claim or whether the standard of conduct the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is the correct one.”  In this case, the Chief Justice’s Opinion is only addressing the nature of the claim permitted, i.e., whether there is a “cognizable” claim within the statute’s “purview”, and not the conduct that might establish a viably pleaded claim.
In his concurrence, Justice Eakin rejected the majority’s reasoning stating that a section 8371 claim “is not limited to actions for an insurer’s wrongful failure to pay an insurance claim or disposal of its obligations of defense and indemnification.”  If that were the case, he contends, the statute would include actions arising out of an insurance claim, rather than arising under an insurance policy.  This concurrence shows that, at least in Justice Eakin’s view, just what the Supreme Court has now concluded is not covered under a statutory bad faith claim.  However, as stated above, the Chief Justice thought some of this conflict resulted from confusion over the context in which the same phrase – “bad faith” – is used, i.e., that it is a single phrase that has two different uses/meanings.
In sum, it would appear that a cognizable bad faith claim involves either duties to pay a claim in the first-party context or obligations to defend and indemnify in a third-party claim context.
Date of Decision: September 30, 2008
Atiyeh v. Nat’l Fire Ins. Co., Civil Action No. 07-cv-04798, 2008 U.S. Dist. LEXIS 76770 (E.D. Pa. Sept. 30, 2008) ( Gardner, J.)