Klinger v. State Farm Mut. Auto. Ins. Co.

Decision Date10 June 1997
Docket NumberNos. 96-7102,96-7073 and 96-7074,96-7101,s. 96-7102
Citation115 F.3d 230
PartiesMark KLINGER, Appellant in 96-7073, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, * Cross-Appellant in 96-7102. Linda NEYER, Appellant in 96-7074, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Cross-Appellant in 96-7101.
CourtU.S. Court of Appeals — Third Circuit
*

David L. Lutz, Richard C. Angino (Argued), Angino & Rovner, Harrisburg, PA, for Appellants/Cross-Appellees.

Robert E. Kelly, Jr. (Argued), Duane, Morris & Heckscher, Harrisburg, PA, for Appellee/Cross-Appellant.

Before NYGAARD and LEWIS, Circuit Judges, and COHILL, Senior District Judge. **

OPINION OF THE COURT

NYGAARD, Circuit Judge.

Mark Klinger and Linda Neyer appeal from the decision of the district court denying them costs, attorney's fees and the full amount of pre-judgment interest they sought in their otherwise successful bad faith action against State Farm Mutual Automobile Insurance Company. We conclude that the district court erred only in one aspect--the reasons it gave for denying the request for attorney's fees--but that its error was in its explanation, not in its application of legal precepts and does not affect the amount to which appellants are entitled. We will therefore affirm.

I.
A.

In August 1992, Klinger and Neyer were seriously injured in a head-on collision while riding in Klinger's van, which was one of two vehicles owned by him and insured by State Farm. The other driver's insurance was inadequate to compensate them for their injuries, so Klinger and Neyer filed underinsured motorist claims against the two State Farm policies.

State Farm disputed the amount of coverage available under these insurance policies, and the parties agreed to bifurcate the issues of coverage and damages and to arbitrate them separately. 1 Attorney Richard Wix represented State Farm. Attorney David L. Lutz represented Klinger and Neyer.

In October 1993, the arbitrators determined that the coverage available under Klinger's two policies was $115,000. That established, in November, Attorney Lutz sent two letters to Wix demanding that State Farm tender the policy limits to his clients. Wix, however, never apprised State Farm of either of these letters. State Farm contends that it did not know the results of the arbitration because its attorney, Wix, did not answer his phone calls. A State Farm claims representative, however, did not personally visit Wix's office until March 1994. Nonetheless, in January 1994, Attorney Lutz told Timothy Spader, a State Farm claims representative, the results of the arbitration and of his demand letters, when Spader happened to be talking to Lutz about another matter.

Spader then contacted Attorney Wix, who promised him a letter documenting the status of the case. After receiving nothing, Spader finally visited Wix's office personally in March 1994 and obtained some medical records and documentary data. Only then did Spader contact Attorney Lutz, who had earlier written that he was considering a bad faith claim and stated that he would provide State Farm with whatever information it needed to evaluate the extent of damages.

Still State Farm did nothing. In March 1994, the arbitrators scheduled the damages arbitration for June 28. Again Lutz demanded that State Farm pay the policy limits. Again, State Farm's attorney apparently failed to forward this request to State Farm. In April, Lutz went around State Farm's attorney, writing directly to Spader, and inquired whether State Farm was interested in settling the case. Still State Farm offered its insureds nothing.

In June, although the hearing was scheduled for less than a week later, and even though Wix himself now recommended that State Farm tender them the policy limits, State Farm made no offer to pay the appellants anything. Instead, State Farm sought a stay of the hearing. Attorney Lutz refused, and they arbitrated damages. The arbitrators awarded $115,000 to Klinger and $70,000 to Neyer. Finally, on August 2, 1994, a full two years after the accident, and months after State Farm had all the information necessary to evaluate Klinger and Neyer's claims, State Farm paid them.

B.

Klinger and Neyer filed suit in the Dauphin County Court of Common Pleas, alleging that State Farm's delay in paying their claims was a display of bad faith under 42 Pa.C.S.A. § 8371. State Farm removed the case to federal court based on diversity of citizenship. The case was tried before a jury, which awarded punitive damages to each plaintiffs in the amount of $150,000. State Farm then filed a motion for judgment as a matter of law, or, in the alternative, for a new trial, under Fed.R.Civ.P. 50(b) and 59(a). The district court denied this motion. Klinger and Neyer filed motions seeking interest, costs and attorney's fees under § 8371. The district court awarded interest, but denied the costs and fees, opining that "State Farm ha[d] been adequately punished by the punitive awards...." These appeals followed.

II.
A.

State Farm first argues that the evidence was insufficient to support the jury's verdict of bad faith. It also asserts that the jury was improperly instructed on the test to be applied in determining the existence of bad faith under Pennsylvania law. It is wrong on both points.

1.

The standard for bad faith claims under § 8371 is set forth in Terletsky v. Prudential Property & Cas. Ins. Co., 437 Pa.Super. 108, 649 A.2d 680, 688 (1994), appeal denied, 540 Pa. 641, 659 A.2d 560(1995). There, the Pennsylvania Superior Court applied a two-part test, both elements of which must be supported with clear and convincing evidence: (1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis. The district court instructed the jury accordingly. The Terletsky court also stated, however, that

"[b]ad faith" on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.

Id. (quoting Black's Law Dictionary 139 (6th ed. 1990)). From this, State Farm argues that a third element must be satisfied, to wit, that the insurer was motivated by an improper purpose such as ill will or self-interest.

We reject that reading of Terletsky. Although the definition the court recited did advert to a "dishonest purpose" such as "self-interest or ill will[,]" this is dictum. Moreover, State Farm's self-interest is the only plausible explanation for its delay. Nonetheless, we need not reach that issue: A page later the court actually applied the two-part test:

To recover under a claim of bad faith, the Terletskys were required to show that Prudential lacked a reasonable basis for partially denying payment ... and that Prudential recklessly disregarded a lack of reasonable basis in denying the payment. Prudential's actions, however, were reasonably based.

Id. 649 A.2d at 689-90. In our prediction of how the Pennsylvania Supreme Court would measure bad faith claims, we will rely on the actual test that Terletsky applied and refrain from creating a third part based only on dictum quoted from Black's Law Dictionary. Accordingly, we conclude that the district court did not err when it instructed the jury.

2.

We also believe that the evidence was sufficient for a jury to conclude that State Farm lacked a reasonable basis for refusing to pay the appellants, and knew or recklessly disregarded that fact. State Farm acknowledged at oral argument that it is chargeable with the actions of its attorney. As such, it is also chargeable with his inactions. Moreover, Mr. Spader testified that, as early as March 1994, he knew that liability was clear and that State Farm had received a demand package indicating that both Klinger and Neyer had sustained serious injuries. Next, Wix himself testified that he advised State Farm to tender the policy limits before the damages arbitration. Yet, State Farm never offered to pay Klinger and Neyer anything beyond the early and clearly inadequate offer it made before the coverage arbitration. Finally, plaintiffs' expert testified that State Farm acted recklessly and unreasonably. Hence there is ample evidence from which a reasonable jury could have concluded that State Farm knew or recklessly disregarded the fact that it had no reasonable basis for refusing to pay its insureds' claims. 2 We will not disturb its verdict.

3.

State Farm challenges the bad faith award to Ms. Neyer for yet another reason. Neyer demanded $115,000, but the arbitrator ultimately awarded only $70,000. Thus, State Farm argues, as a matter of law it could not have acted in bad faith by refusing to offer the full $115,000.

State Farm relies on Kauffman v. Aetna Cas. & Sur. Co., 794 F.Supp. 137 (E.D.Pa.1992). First, that is a district court case and not precedential. Second, there, the issue was whether the limits of multiple policies could be stacked for a total of $1 million in coverage; if they could not, the plaintiff's recovery was limited to $500,000. Aetna offered $500,000 to the plaintiffs without prejudice to its litigation of the stacking issue, and they accepted the partial settlement. The arbitrators then awarded $950,000, and Aetna timely paid over the remaining $450,000. The court opined:

Plaintiffs contend that Mr. Kaufmann's injuries were so severe that Aetna should have waived its contractual right to arbitration and simply tendered $1 million.... The arbitrators then awarded less than the full $1 million stacked limit, albeit only $50,000 less. The arbitrators' decision belies plaintiffs' contention that they...

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