Younis Bros. & Co., Inc. v. CIGNA Worldwide Ins. Co.

• Decision Date: 16 November 1994
• Docket Number: Civ. A. No. 91-6784.
• Citation: 882 F. Supp. 1468
• Court: U.S. District Court — Eastern District of Pennsylvania
• Parties: YOUNIS BROTHERS & COMPANY, INC. v. CIGNA WORLDWIDE INSURANCE CO.

882 F. Supp. 1468

YOUNIS BROTHERS & COMPANY, INC. v. CIGNA WORLDWIDE INSURANCE CO.

Civ. A. No. 91-6784.

United States District Court, E.D. Pennsylvania.

November 16, 1994.

John J. Seehousen, Langhorn, PA, for plaintiff.

Stephen A. Cozen, David R. Strawbridge, Douglas R. Widin, Elizabeth J. Chambers, Philadelphia, PA, for defendant.

MEMORANDUM

O'NEILL, District Judge.

I. Procedural History

On October 30, 1991, plaintiff Younis, a Liberian corporation, filed its complaint against defendant CIGNA. This Court has jurisdiction pursuant to 28 U.S.C. § 1332.

Plaintiff alleged that defendant breached a pair of fire insurance policies which defendant issued to plaintiff. Counts I through III sought compensatory damages for breach of the policies, which concerned three locations in Liberia. In Count IV, plaintiff alleged:

64. As of the commencement of this action, CIGNA has made no offer to Younis Bros. for any of the losses it suffered in Liberia in August of 1990.

65. CIGNA has acted in bad faith in its adjustment of Younis Bros.'s claim.

66. CIGNA has acted in bad faith in its investigation of Younis Bros.'s claim.

* * * * * *

68. Because of CIGNA's bad faith, Younis Bros. is entitled to an award of interest, counsel fees, punitive damages in accordance with Pennsylvania law, 42 Pa.C.S.A. § 8371.

In its answer, defendant denied plaintiff's allegations of bad faith and asserted affirmative defenses against plaintiff's bad faith claim.

Defendant contended that Count IV failed to state a claim "because application of the statute would be a constitutionally impermissible extraterritorial application of Pennsylvania law" violating the Commerce Clause of and due process rights guaranteed by the United States Constitution;¹ "because the statute violates guarantees of due process ... by failing to adequately to inform those against whom it may be applied of the conduct or actions it prohibits and/or penalizes;"² because the statute allows "the imposition of punitive damages without adequate substantive and procedural guidelines and protections;"³ and because the statute violates "rights of trial by jury afforded by the United States Constitution and Pennsylvania Constitution."⁴

Plaintiff subsequently filed an amended complaint setting forth additional factual allegations and repeating its assertion that defendant acted in bad faith in its investigation and adjustment of plaintiff's losses. In its answer, defendant denied those allegations, incorporated by reference the affirmative defenses asserted in its earlier answer.⁵ During the pretrial phase, the Court consolidated this case with a related case, The Abi Jaoudi and Azar Trading Corporation v. Cigna Worldwide Insurance Company, Civil Action No. 91-6785.

Trial in both cases began on February 7, 1994. The Court divided the cases into phases. In phase one, the jury found that plaintiffs' suits were not barred by the war risk exclusion clauses in the various insurance policies.

In phase two, which concerned a number of affirmative defenses arising out of provisions in the insurance policies, the jury found in favor of plaintiffs on all questions except that it could not reach a decision with respect to the affirmative defense of fraud asserted against plaintiff Abi Jaoudi and Azar Trading Corporation ("AJA").

The Court therefore discontinued proceedings in the AJA case and resumed proceedings in the Younis case. Because the parties did not dispute the amount of compensatory damages claimed by Younis, the Court did not hear any evidence relevant to phase three.

With respect to phase four, the parties disputed the definition of the term "court" in section 8371. Defendant asserted that the term "court" referred only to the trial judge while plaintiff argued that the term meant "judge and jury." I did not resolve this dispute but felt constrained by the Seventh Amendment to submit to the jury the questions whether defendant acted in bad faith, whether its conduct was outrageous and whether plaintiff was entitled to an award of punitive damages. See Transcript, April 6, 1994, at 112-116.

The jury determined that defendant acted in bad faith towards plaintiff. This required phase five, in which the jury found that defendant's conduct was not outrageous. Accordingly, the jury was not required to consider an award of punitive damages to plaintiff.

At a post-trial hearing, I requested that the parties brief the question of whether section 8371 is constitutional. See Transcript, May 13, 1994, at 36-38. Comprehensive briefs were submitted and oral argument was held on August 18.

For the following reasons, I conclude that section 8371 is constitutional. I also conclude that in a federal court action pursuant to section 8371 a party is entitled to a jury trial with respect to a claim for punitive damages but is not entitled to a jury trial with respect to the other remedies available under the statute.

II. Discussion

A. Section 8371

In D'Ambrosio v. Pennsylvania National Mutual Casualty Insurance Company, 494 Pa. 501, 431 A.2d 966 (1981), the Pennsylvania Supreme Court held that there is no common law action for bad faith conduct by an insurer. The Court stated that there "is no evidence to suggest, and we have no reason to believe, that the system of sanctions established under the Unfair Insurance Practices Act must be supplemented by a judicially created cause of action." Id., 431 A.2d at 970. The Court added that "it is for the Legislature to announce and implement the Commonwealth's public policy governing the regulation of insurance carriers" and "to determine whether sanctions beyond those created under the Act are required to deter conduct which is less than scrupulous." Id.

In 1990, the Pennsylvania legislature created a statutory cause of action for bad faith. That statute, which became effective on July 1, 1990, and is codified at 42 Pa.C.S.A. section 8371, provides:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the insurer.

There is no legislative history that specifically concerns the passage of this statute, which was enacted as part of a comprehensive insurance bill.

B. Defendant's Objection that Section 8371 Violates the Due Process Clause of the Fourteenth Amendment

Defendant asserts that section 8371 allows for arbitrary and unreviewable decision making and requests that the Court declare it unconstitutional in violation of the due process clause of the Fourteenth Amendment.⁶ I am unable to agree.

Essentially, defendant contends that section 8371 violates the Fourteenth Amendment because it permits punitive damages and "non-punitive damages" (interest, costs and attorney fees) to be imposed by the court at its discretion upon a finding of bad faith without specifying a standard for a court to employ when deciding whether those remedies are appropriate. While disputing the correctness of the cases which uphold the validity of section 8371, defendant asserts that those cases are limited to the distinct issues of "the statute's lack of definition of `bad faith'" and "the arbitrariness inherent in fixing the amount of punitive damages" and do not address defendant's additional Fourteenth Amendment objection. Defendant's Memorandum at 8 (emphasis original) (citing Empire Fire & Marine Ins. Co. v. Nationwide Mut. Ins. Co., No. 93-0325, 1993 WL 220621, 1993 U.S.Dist. LEXIS 8989 (E.D.Pa. June 15, 1993); Santoro v. Allstate Ins. Co., No. 91-3304, 1991 WL 197419, 1991 U.S.Dist. LEXIS 13591 (E.D.Pa. Sept. 25, 1991); W.W. Management & Dev. Co. Inc. v. Scottsdale Ins. Co., 769 F.Supp. 178 (E.D.Pa. 1991); Seeger v. Allstate Ins. Co., 776 F.Supp. 986 (M.D.Pa.1991); Coyne v. Allstate Insurance Company, 771 F.Supp. 673 (E.D.Pa.1991)).

As an initial matter, I agree with the reasoning and result reached by Judge Ludwig in Coyne, where the Court rejected an insurance company's arguments that section 8371 was unconstitutionally vague because it did not define the term "bad faith" and that the statute violated due process by failing to establish standards governing the award of punitive damages.⁷

With respect to the assertion that section 8371 inadequately defines the term "bad faith," the Coyne Court concluded that in the insurance context the term has acquired a peculiar and universally acknowledged meaning: "any frivolous or unfounded refusal to pay proceeds of a policy.... For purposes of an action against an insurer for failure to pay a claim, such conduct imports dishonest purpose and means a breach of a known duty ... through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith." Id. at 677-78, citing Black's Law Dictionary 139 (6th ed. 1990) and Appleman & Appleman, Insurance Law and Practice § 1612 (1967 and Supp. 1990). Judge Ludwig therefore concluded that despite the absence of a statutory definition of "bad faith" in section 8371 the phrase is sufficiently defined in the insurance context to provide constitutionally adequate standards to guide the conduct of the legal community and the insurance industry.⁸Id. at 678.

With respect to defendant's claim that section 8371 fails to provide standards that guide and limit the amount of punitive damages which may be awarded pursuant to the statute, the Coyne Court held that Pennsylvania law — which follows Restatement (Second) of Torts Section 908(2) — guides and limits such awards consistent with due process requirements. Id. at 679. Judge Ludwig therefore concluded that although "§ 8371 confers on the trial court significant discretion in its determination of punitive damages ... that...