Lochbaum v. U.S. Fidelity & Guar. Co.

• Citation: 136 F.Supp.2d 386
• Decision Date: 28 September 2000
• Docket Number: No. CIV.A. 00-154 ERIE.,CIV.A. 00-154 ERIE.
• Parties: Kenneth L. LOCHBAUM, individually and Ken Lochbaum Physical Therapy Clinic, Inc., Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY COMPANY, now by merger St. Paul Insurance Companies, Defendant.
• Court: U.S. District Court — Western District of Pennsylvania

Page 386

136 F.Supp.2d 386

Kenneth L. LOCHBAUM, individually and Ken Lochbaum Physical Therapy Clinic, Inc., Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY COMPANY, now by merger St. Paul Insurance Companies, Defendant.

No. CIV.A. 00-154 ERIE.

United States District Court, W.D. Pennsylvania.

September 28, 2000.

James R. Fryling, Marsh, Spaeder, Baur, Spaeder, & Schaaf, Erie, PA, for Plaintiffs.

Edward P. Whittman, McClure & Miller, Erie, PA, James B. Burns, Deasey, Mahoney and Beneder, Philadelphia, PA, for Defendant.

MEMORANDUM OPINION

McLAUGHLIN, District Judge.

This case arises under the Pennsylvania bad faith statute applicable to insurers, 42 Pa. Cons.Stat. Ann. § 8371.¹ We have jurisdiction pursuant to 28 U.S.C. § 1331, and are asked to determine the proper statute of limitations for section 8371 claims. The Defendant has filed a Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) on the ground that the Plaintiffs' action is timebarred. In the alternative, the Defendant has filed a Motion for a More Definite Statement pursuant to Fed.R.Civ.P. 12(e). Magistrate Judge Robert C. Mitchell issued a Report and Recommendation regarding this matter on August 4, 2000. For the reasons that follow, we decline to accept the Magistrate's recommendation that the statute of limitations for section 8371 claims under Pennsylvania law is six years. Because we find that the statute of limitation is two years, we grant the Defendant's Motion to Dismiss on the ground that Plaintiffs' claim is time-barred and do not reach the Motion for a More Definite Statement.

I. BACKGROUND

On June 12, 1994, a fire severely damaged real property and destroyed personal property owned by the Plaintiffs and insured by a commercial policy issued by then United States Fidelity & Guaranty Company and now by merger St. Paul Insurance Companies (hereinafter "Defendant"). (See Complaint, ¶¶ 8-10). Shortly thereafter, the Plaintiffs filed a claim with the Defendant and allege that, throughout its handling, the Defendant pursued a course of bad faith conduct that resulted in a delayed recovery and damages including but not limited to lost profits, rents, and costs from a demanded arbitration. (See Complaint, ¶¶16-39). The specific instances of behavior alleged to have been undertaken in bad faith are numerous and immaterial to this discussion. In 1996, the Plaintiffs were ultimately awarded $2,160,173, an amount significantly greater than the $778,000 offered to resolve the claim in 1994. (See Complaint, ¶¶ 23, 30). The Plaintiffs commenced this action on March 20, 2000.²

II. STANDARD OF REVIEW

A motion to dismiss under Rule 12(b)(6) is evaluated by accepting all allegations in the complaint as true and viewing them in the light most favorable to the plaintiffs. See Gould Electronics Inc. v. United States, 220 F.3d 169 (3d Cir.2000) (citing In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1420 (3d Cir. 1997)). The proper inquiry is "whether relief could be granted ... `under any set of facts that could be proved consistent with the allegations.'" Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 71 (3d Cir. 1994) (quoting National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 256, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994)). If no cause of action can be identified, dismissal is proper.

III. DISCUSSION

Section 8371 does not contain a statute of limitations provision, and the Pennsylvania Supreme Court has yet to determine which of several potential limitations periods applies to actions under the statute. The possibilities include the two-year period applicable to "action[s] upon a statute for a civil penalty" and tort actions, 42 Pa. Cons.Stat. Ann §§ 5524(5), 5524(7),³ the four-year period applicable to contract actions, 42 Pa. Cons.Stat. Ann. § 5525(8),⁴ and the six-year "catchall" period applicable to actions that do not fall into an enumerated category and are not excepted from the application of a limitations period, 42 Pa. Cons.Stat. Ann § 5527.⁵

In the absence of an opinion from a state's highest court on a matter of state law before it, a federal court sitting in diversity must predict how that court would rule on the matter if it were confronted with it. See Packard v. Provident National Bank, 994 F.2d 1039, 1046 (3d Cir.1993). In making this determination, the court must consider "relevant state precedents, analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand." Id. Given the decision of a lower state court and a conflicting decision of a federal court, the opinion of the state court is given greater weight. See id. at 1047.

The Pennsylvania state courts that have addressed the applicable statute of limitations for section 8371 claims have reached conflicting conclusions. See Susich v. Prudential Property & Cas. Ins. Co., 35 Pa. D. & C.4th 178 (Ct.C.P. Beaver Co.1998) (applying a two-year period on ground that bad faith claims fall into both the "civil penalty" and tort categories); Mantia v. Northern Ins. Co. of New York, 39 Pa. D. & C.4th 178 (Ct.C.P.Lanc.Co.1998) (applying a six-year period on ground that bad faith claims embody elements of both tort and contract); Hospital Shared Services v. CIGNA Ins. Co., No. GD95-2956 (Ct. C.P.Allegh.Co.1998) (applying a six-year period on ground that section 8371 creates a private cause of action for claims under the Pennsylvania Unfair Insurance Practices Act, 40 Pa. Stat.Ann §§ 1171.1-1171.15, and that such causes of action arise under statutorily created obligations as well as under tort law); Copeland v. Farmers Mutual Fire Ins. Co. of McCandless County, No. 11219-1997, 82 Erie Co. L.J. 27 (Ct.C.P. Erie Co.1997) (applying a six-year period on ground that section 8371 claims are sui generis and embody elements of both tort and contract).

Likewise, the federal courts in Pennsylvania that have faced the issue have divided between the two and six-year possibilities. See Nelson v. State Farm Mut. Aut. Ins. Co., 988 F.Supp. 527 (E.D.Pa.1997); Friel v. Unum Life Ins. Co. of America, No. CIV. A. 97-1062, 1998 WL 800336 (E.D.Pa.1998); McCarthy v. Scottsdale Ins. Co., No. C.A. 99-978, 1999 WL 672642 (E.D.Pa.1999); Mantakounis v. Aetna Cas. & Sur. Co., No. CIV A. 98-4392, 1999 WL 600535 (E.D.Pa.1999); Liberty Mut. Fire Ins. Co. v. Corry Indus., C.A. 97-172E (W.D.Pa.2000) (each applying a two-year period), and Woody v. State Farm Fire & Cas. Co., 965 F.Supp. 691 (E.D.Pa. 1997); Kosierowski v. Allstate Ins. Co., 51 F.Supp.2d. 583 (E.D.Pa.1999); Miller v. The Cincinnati Insurance Co., No. 97-CV-1223 (E.D.Pa.1997) (each applying a six-year period). We find it useful to set forth the rationale of both lines of cases as well as the history of the bad faith claim.

The cases that have applied a two-year period have largely characterized claims under section 8371 as tort actions. In explanation, these courts have discussed or noted the development of the bad faith claim generally. See Nelson, 988 F.Supp. at 531-34; McCarthy, 1999 WL 672642, at *3. Beginning with the landmark decision of the California Supreme Court in Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973), a majority of jurisdictions have recognized the bad faith claim in both the third and first-party contexts as a tort action distinct from a breach of contract claim on the insurance contract. See Nelson, 988 F.Supp. at 533-34 (noting that at least twenty-nine jurisdictions appear to characterize the first-party bad faith claim as a common law tort and citing Douglas R. Richmond, The Two Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 Loy. U. Chi. L.J. 95, 107 n. 74 (1996)). As the California court stated in Gruenberg:

The duty violated—that of dealing fairly and in good faith with the other party to a contract of insurance — is a duty imposed by law, not one arising from the terms of the contract itself. In other words, this duty of dealing fairly and in good faith is nonconsensual in origin rather than consensual. Breach of this duty is a tort. Gruenberg, 108 Cal.Rptr. 480, 510 P.2d at 1037 (internal citations omitted).

Under this rationale the duty breached in a bad faith action arises from the relationship of the contracting parties rather than from the terms of the insurance contract. This action more closely resembles a tort than a contract because the standard of conduct is an exogenous one rather than one derived from specific contract terms. See Nelson, 988 F.Supp. at 533.

The cases that have applied a six-year period, on the other hand, have generally determined that actions under section 8371 may sound in either tort or contract, and therefore fall into the six-year "catchall" period because they cannot be exclusively characterized as one or the other. See Woody, 965 F.Supp. at 693-94; Mantia, 39 Pa. D. & C.4th at 76. In Woody, Judge Brody referenced the broad definition of bad faith used in the insurance context for this proposition, and also identified the Pennsylvania Unfair Insurance Practices Act ("UIPA") as "lend[ing] further support that actions under § 8371 can sound in either tort or contract." Woody, 965 F.Supp. at 694. According to Judge Brody, some of the practices prohibited by UIPA sound in tort while others sound in contract. See id. In reaching bad faith determinations, Pennsylvania courts regard conduct constituting a violation of the UIPA as one of several relevant factors. See O'Donnell v. Allstate Ins. Co., 734 A.2d 901, 906 (Pa.Super.Ct.1999).

The general history of bad faith claims is complicated in Pennsylvania by the Pennsylvania Supreme Court's decision in D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 494 Pa. 501, 431 A.2d 966 (1981). In this case, the court declined to create a common law bad faith claim, stating that "[t]here is no evidence to suggest, and we have no reason to...