Third Circuit Seeks Guidance from Pennsylvania Supreme Court Regarding Whether Insured Tortfeasor May Assign Bad Faith Claim to Injured Third Party

by Saul Ewing LLP
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Allstate Prop. & Cas. Ins. Co. v. Wolfe, No. 12-4450 (3d Cir. Feb. 20., 2014)

Third Circuit petitions Supreme Court of Pennsylvania to decide whether an insured tortfeasor can assign his or her statutory bad faith claim against an insurer to an injured third party.

On February 20, 2014, the U.S. Court of Appeals for the Third Circuit petitioned the Supreme Court of Pennsylvania to provide guidance on an important and unsettled issue of Pennsylvania law:  whether an insured tortfeasor may assign a bad faith claim against an insurer under Pennsylvania’s insurance bad faith statute, 42 Pa. Cons. Stat. § 8371, to an injured third party. 

The underlying litigation arose out of an automobile accident in which Wolfe was injured.  The defendant, Zierle, had an insurance policy with Allstate, which required Allstate to indemnify Zierle for bodily injury up to the policy limit of $50,000, but did not require Allstate to “defend an insured person sued for damages which are not covered by this policy.” 

Wolfe requested $25,000 in damages, and based on what Allstate perceived as Wolfe’s “minimal medical treatment, the lack of out of pocket losses, and [Wolfe’s] pre-existing injury,” Allstate made a counteroffer of only $1,200-$1,400.  Wolfe rejected the counteroffer and brought suit in state court.  Thereafter, Wolfe learned that Zierle was intoxicated at the time of the accident.  Wolfe amended his complaint to add a claim for punitive damages.  Before trial, the court granted a motion in limine to admit evidence of Zierle’s three prior DUI convictions and/or arrests.  The attorney Allstate retained to defend Zierle asked Allstate if an increased settlement offer should be made, but Allstate refused to authorize a higher offer.  The case went to trial, and Wolfe was awarded $15,000 in compensatory damages and $50,000 in punitive damages.  Allstate paid the compensatory damages but refused to indemnify Zierle for any punitive damages.

In exchange for Wolfe’s agreeing not to collect punitive damages from Zierle, Zierle assigned whatever rights he had against Allstate to Wolfe.  Wolfe then brought suit against Allstate in state court alleging violation of Pennsylvania’s bad faith statute, violation of Pennsylvania’s Uniform Trade Practices and Consumer Protection Law (“UTPCPL”), and breach of the duty of good faith.  Allstate removed the case to the U.S. District Court for the Middle District of Pennsylvania, and thereafter filed a motion for summary judgment, a motion in limine to exclude evidence of the punitive damages award, and a motion to dismiss the bad faith and UTPCPL claims.  The district court denied each motion, and a jury found Allstate in violation of Pennsylvania’s bad faith statute--awarding Wolfe $50,000 in punitive damages.  Allstate appealed this award and the denial of its motions to the Third Circuit.

The Supreme Court of Pennsylvania has not yet decided whether a claim under Pennsylvania’s bad faith statute is assignable, and there is conflicting precedent on the issue in both the courts of Pennsylvania and the federal courts within the Third Circuit.  Pennsylvania law has long held that tort claims are not assignable.  Yet, following enactment of Pennsylvania’s bad faith insurance statute, one intermediate Pennsylvania court explicitly held that bad faith claims brought under the statute are assignable.  See Brown v. Candelora, 708 A.2d 104 (Pa. Super. Ct. 1998).  Nine years later, the Supreme Court of Pennsylvania held that an action under the bad faith insurance statute is a tort action subject to the ordinary two-year statute of limitations.  Since then, federal district courts have rejected Candelora and held that claims under the bad faith insurance statute are not assignable since such claims sound in tort and in the nature of a penalty.  Courts have explained the public policy against permitting assignment as preventing speculation or profiteering in litigation by individuals who otherwise have no interest in the claim.  In Candelora, the Superior Court distinguished “judgment creditors” from an “injured plaintiff,” indicating that assignments to the latter can be proper.  Whether the distinction between injured third parties and others is legally relevant is an issue of state law, and part of the broader question of whether claims arising under Pennsylvania’s bad faith insurance statute are assignable.  Seeking guidance on this important and unsettled question of Pennsylvania law, the Third Circuit panel unanimously voted to petition the Supreme Court of Pennsylvania to resolve this question. 

The Third Circuit’s petition remains pending in the Supreme Court of Pennsylvania at Docket No. 23 MM 2014.  The Supreme Court of Pennsylvania has not yet ruled on whether it will resolve this issue.

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Saul Ewing LLP
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