SEPTEMBER 2006 BAD FAITH CASES SUPREME COURT LETS LOWER COURT RULING STAND, PERMITTING BAD FAITH CLAIMS FOR CONDUCT DURING BAD FAITH LITIGATION, & 10 to 1 PUNITIVE DAMAGES AWARD (Supreme Court)

In Hollock v. Erie Insurance Exchange, the Supreme Court had granted an appeal to address two important issues:  (1) whether Pennsylvania’s Bad Faith statute encompasses conduct that occurs during the bad faith litigation itself; and (2) whether an award of punitive damages 10 times those of the compensatory damages is permissible.  Along with the punitive damages award 10 times compensatory damages, in Hollock, the trial court included a substantial sum in attorneys’ fees incurred during the bad faith litigation within plaintiff’s compensatory damages; finding that bad faith can continue into the bad faith litigation itself.  An en banc Superior Court panel upheld the trial court’s rulings.  More than two and one-half years after Pennsylvania’s Supreme Court accepted the appeal on this highly significant and controversial ruling, however, it dismissed the carrier’s appeal as improvidently granted.

The legal effect of this decision is to allow the Superior Court’s decision to stand, without giving a definitive ruling on whether that decision will ultimately become the law in Pennsylvania (if the Supreme Court ever permits an appeal on the subject in the future).  The practical effect is that the Superior Court’s decision will bind all Pennsylvania state trial courts, and will be highly influential on all Pennsylvania federal courts, until the Pennsylvania Supreme Court says otherwise.

In a non-jury trial, the trial Judge had found that, “most of the testimony of [the carrier’s] employees [during the bad faith litigation] was an intentional attempt to conceal, hide or otherwise cover-up the conduct of [its] employees in the handling of the [insured’s] claim.”  In affirming the Court of Common Pleas, the Superior Court made two important rulings.  First, the Court ruled that a carrier could be liable for bad faith conduct during the bad faith litigation, even though the carrier paid the benefits due on the underlying claim before the current bad faith action was tried.  Second, the Superior Court affirmed the trial court’s award of punitive damages, which was based in part on the conduct of the insurer during the bad faith litigation itself.  The Trial Court had awarded punitive damages of $2.8 million, approximately ten times the compensatory damages award. 

The Supreme Court Majority’s Order dismissing the appeal did not address these  issues nor state why the appeal was dismissed.  In dissenting from the dismissal, Chief Justice Cappy, joined by Justice Castille, wrote a lengthy dissenting statement, laying out the nature and significance of the Superior Court’s decision; that this decision would effectively continue as the law in the Commonwealth; and that, in his view, the Superior Court was incorrect in finding that the Legislature intended to include bad faith conduct during the bad faith litigation as part of the claim.  Justice Cappy stated: “In my opinion, once the insurer is asked to defend an action under the [bad faith] statute, there can no longer be a relationship with its insured subject to a duty to act in good faith; adequate means exist to control the behavior of the insurer, or any party, during the litigation.”  He further noted his belief that the Court’s decision not to hear the appeal would only, “delay the task and allow the lower courts to continue to follow, what I believe is, an incorrect application of this statutory claim.”

Date of Decision: August 22, 2006

Hollock v. Erie Ins. Exch., 2006 Pa. LEXIS 1544, No. 67 MAP 2005 (Pa. 2006) (Per Curiam) (order of dismissal) (dissenting statement)