Wolfe v. Allstate Prop. & Cas. Ins. Co., No. 12-4450, 2015 WL 3634779 (3d Cir. June 12, 2015).
The Third Circuit Court of Appeals holds that evidence of punitive damages award against insured in underlying suit was not relevant to resolution of bad faith claim.
Several hours after consuming 15 or 16 beers, Karl Zierle was driving and rear-ended Jared Wolfe. Zierle had a blood alcohol content of 0.25% at the time of the accident and had been convicted of three prior DUIs. Wolfe suffered injuries in the accident that required emergency room treatment.
After the accident, Wolfe made an initial settlement demand of $25,000 to Allstate, Zierle’s insurer. Allstate, however, only valued Wolfe’s claim at between $1,200 and $1,400 and, therefore, made a counteroffer of $1,200. After the parties reached an impasse in their negotiations, Wolfe filed suit against Zierle seeking compensatory and punitive damages. In pretrial settlement conferences, two judges each placed a settlement value of $7,500 on the case. Wolfe later stated that if Allstate offered $7,500, he would have accepted the offer, but at the time neither party moved from their initial demand and offer of $25,000 and $1,200 respectively.
The case proceeded to trial and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the compensatory damages but not the punitive damages. Wolfe agreed not to enforce the punitive damages judgment against Zierle, and in exchange, Zierle assigned his rights against Allstate to Wolfe. Wolfe then sued Allstate in Pennsylvania state court to recover the $50,000 in punitive damages awarded against Zierle, alleging breach of contract, statutory bad faith, and a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. Allstate subsequently removed the case to federal court.
Allstate filed, and the district court denied, a motion for summary judgment and a motion in limine to exclude evidence related to the punitive damages award from the underlying claim. In denying summary judgment, the court reasoned that Allstate had a duty to negotiate a settlement in good faith and that a reasonable jury could find that Allstate acted in bad faith. The court denied the motion in limine, holding that the $50,000 punitive damage award against Zierle was relevant, as it potentially resulted from Allstate’s failure to negotiate with Wolfe in good faith. According to the court, if Allstate had settled Wolfe’s claim against Zierle, the court would not have been in a position to award Wolfe punitive damages.
At trial, the jury found that Allstate breached its contract with Zierle and violated Pennsylvania’s bad faith statute. While it did not award Wolfe damages on the breach of contract claim, it did award him $50,000 in punitive damages under the bad faith statute. Allstate appealed, asking the Third Circuit to determine: (1) whether the district court erred by allowing Wolfe to introduce evidence of the punitive damages award from the underlying suit against Zierle; and (2) whether the district court erred by denying the motion for summary judgment.
The underlying question that the court had to answer in resolving the first issue was whether an insured can seek to recover from his insurer punitive damages awarded against him in an underlying suit. In the absence of controlling precedent, the Third Circuit predicted that the Pennsylvania Supreme Court would find that, in an action by an insured against his insurer for bad faith refusal to settle, the insured may not collect as damages the punitive damages awarded against the insured in an underlying lawsuit. Therefore, the punitive damages award in the underlying suit against Zierle was not relevant to Wolfe’s bad faith claim and should not have been admitted as evidence. In so holding, the court relied on a Pennsylvania statute which prohibits insurers from providing coverage for punitive damages. The law is based on the public policy that punitive damages are meant to punish and deter the wrongdoer himself. The court reasoned that if it allowed Wolfe to hold Allstate responsible for the punitive damages in the underlying lawsuit, it would punish the insurer and not Zierle, in contradiction of the law and the public policy.
Additionally, the court held that the insurer need not even consider the potential for punitive damages when negotiating a settlement. Imposing such a duty when negotiating a settlement would similarly go against public policy by shifting the responsibility for punitive damages to the insurer. The court consequently held that Allstate was entitled to a new trial where evidence relating to the $50,000 settlement is inadmissible.
The court then evaluated whether the district court should have granted Allstate’s motion for summary judgment. Its ruling with respect to a new trial notwithstanding, the Third Circuit held that the district court properly denied Allstate’s motion for summary judgment on both the breach of contract and bad faith claims.
With respect to the breach of contract claim, the court found that, under Pennsylvania law, even if Wolfe could not establish compensatory damages flowing from the alleged breach, he could still recover nominal damages if he proved that Allstate breached its contractual duty of good faith and so the trial court properly ruled that his claim survived summary judgment. Similarly, the Third Circuit held that the statutory bad faith claim properly survived summary judgment because it was possible that Wolfe might prove that Allstate acted in bad faith independent of its refusal to pay the punitive damages award against Zierle.
