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

• Decision Date: 12 December 1997
• Docket Number: No. CIV.A. 97-4653.,CIV.A. 97-4653.
• Citation: 988 F.Supp. 527
• Parties: Craig NELSON v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.
• Court: U.S. District Court — Eastern District of Pennsylvania

988 F.Supp. 527

Craig NELSON v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.

No. CIV.A. 97-4653.

United States District Court, E.D. Pennsylvania.

December 12, 1997.

John G. Bravacos, Palma & Sbarbaro, LLC, West Chester, PA, for Craig Nelson.

Louis E. Bricklin, Erin M. Donaldson, Bennett, Bricklin & Saltzburg, Philadelphia, PA, for State Farm Mut. Automobile Ins. Co.

MEMORANDUM

DALZELL, District Judge.

Defendant State Farm Mutual Automobile Insurance Company has filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56, contending that plaintiff Craig Nelson's action is time-barred.¹ At issue is the question of whether under Pennsylvania law an insured's action for bad faith against an insurer under 42 Pa. Cons.Stat. Ann. § 8371 is subject to the two year statute of limitations for torts, see 42 Pa. Cons.Stat. Ann. § 5524(7),² the four year statute of limitations for contracts, see 42 Pa. Cons.Stat. Ann. § 5525(8),³ or the six year "catchall" statute of limitations under 42 Pa. Cons.Stat. Ann. § 5527.⁴

The Erie Doctrine

The question of which statute of limitations applies to an action under § 8371 is one that the Supreme Court of Pennsylvania has not addressed. When the highest court of a state has not addressed an issue of law, a federal court sitting in diversity must predict how that court would decide the issue were it confronted with the problem. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Packard v. Provident Nat. Bank, 994 F.2d 1039, 1046 (3d Cir.1993). In carrying out that task, a federal 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," Packard, 994 F.2d at 1046, including the decisions of state intermediate appellate courts as well as other state courts on that issue. See Ciccarelli v. Carey Canadian Mines Ltd., 757 F.2d 548, 553 n. 3 (3d Cir. 1985) (citing cases).⁵

Bad Faith Actions under Section 8371

In 1990, the Pennsylvania General Assembly enacted 42 Pa. Cons.Stat. Ann. § 8371 to create a statutory remedy for bad faith conduct in the handling of insurance policies. The statute 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.

42 Pa. Cons.Stat. Ann. § 8371.

The statute does not define "bad faith" or establish the elements to make out a claim of bad faith. Recent decisions by our Court of Appeals and the Superior Court of Pennsylvania, however, suggest a two-part test, both elements of which requiring proof by 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." Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir.1997); see also Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 752 (3d Cir.1994); Terletsky v. Prudential Property & Cas. Ins. Co., 437 Pa.Super. 108, 649 A.2d 680, 688 (1994).

For statute of limitations purposes, however, what kind of action is one under § 8371?

Section 8371 as a Contractual Cause of Action

It is clear that § 8371 does not sound exclusively in contract law. The fact that one of § 8371's primary remedies is the award of punitive damages illustrates that the statute is not exclusively contract-based. In Pennsylvania, it is well-settled that the purpose of punitive damages is to punish a tortfeasor for outrageous conduct and to deter him and others from similar conduct in the future. See Kirkbride v. Lisbon Contractors, Inc., 521 Pa. 97, 555 A.2d 800, 803 (1989).

Pennsylvania law is equally clear that punitive damages are not recoverable in an action for breach of contract. See AM/PM Franchise Assoc. v. Atlantic Richfield, 526 Pa. 110, 584 A.2d 915, 927 (1990) (holding in a contract case that "we do not believe that our case law or the Uniform Commercial Code authorizes a legitimate claim for exemplary damages"). See also Thorsen v. Iron and Glass Bank, 328 Pa.Super. 135, 476 A.2d 928, 932 (1984) (citing cases).

Furthermore, it is worth noting that the emerging jurisprudence, albeit not from the Pennsylvania Supreme Court, treats § 8371 as creating a separate and distinct cause of action from the underlying contract claim against the insurer. See e.g. Romano v. Nationwide Mut. Fire Ins. Co., 435 Pa.Super. 545, 646 A.2d 1228, 1231 (1994) ("the emerging jurisprudence treats Section 8371 as creating a separate and distinct cause of action"); March v. Paradise Mutual Insur. Co., 435 Pa.Super. 597, 646 A.2d 1254, 1256 (1994) ("a claim brought under section 8371 is a cause of action which is separate and distinct from the underlying contract claim"); Boring v. Erie Ins. Group, 434 Pa.Super. 40, 641 A.2d 1189, 1190 (1994) (holding that although appellant's insurance coverage claim had not yet been decided, as appellant's bad faith claim was premised upon § 8371, it constituted a clear and distinct cause of action and, therefore, the dismissal of appellant's § 8371 claim was instantly appealable). See also Younis Bros. & Co. v. Cigna Worldwide Ins. Co., 899 F.Supp. 1385, 1396 (E.D.Pa.1995) ("Courts have held that the Legislature enacted § 8371 to curtail bad faith practices on the part of insurers by affording insureds a cause of action that is separate and independent from the claim on the insurance contract"); Margolies v. State Farm Fire and Cas. Co., 810 F.Supp. 637, 642 (E.D.Pa.1992) ("[E]ven if plaintiffs' breach of contract claim were barred by the policy's limitation provision, the § 8371 bad faith claim would survive, since it is independent of the underlying claim."); Kauffman v. Aetna Casualty and Surety Co., 794 F.Supp. 137, 140 (E.D.Pa.1992) (holding that section 8371 creates a separate cause of action rather than simply an additional remedy).

Accordingly, an action under § 8371 appears to be a separate and distinct one that does not sound exclusively in contract law. The issue remains, however, whether this cause of action sounds primarily in tort, thereby giving it a statute of limitations of two years pursuant to 42 Pa. Cons.Stat. Ann. § 5524(7), or is so entwined with both tort and contract law that it cannot be classified, thereby falling under the six year "catchall" statute of limitations pursuant to 42 Pa. Cons.Stat. Ann. § 5527.

Section 8371 As Interpreted To Date In This Court

Two recent cases in this Court have predicted that the Pennsylvania Supreme Court would find that an action under § 8371 is so steeped in both contract and tort law that the six year statute of limitations should apply. See Cynthia Miller v. The Cincinnati Insurance Co., Civ. No. 97-1223 (E.D.Pa. July 9, 1997) ("Cincinnati Insurance"); Woody v. State Farm Fire and Casualty Co., 965 F.Supp. 691 (E.D.Pa.1997) ("Woody").

In Woody, the Court based its decision mainly upon the Black's Law Dictionary definition of "bad faith" which had been adopted by earlier decisions of our Court of Appeals and the Pennsylvania Superior Court. See Woody, 965 F.Supp. at 693. Black's defines "bad faith" in the insurance context as:

Insurance. "Bad Faith" on the 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. (citing cases and Black's Law Dictionary). Relying on this definition, Woody concluded that an action under § 8371 "can sound in either tort or contract, depending upon the conduct exhibited." Id. The Court reached this conclusion because while the definition of "bad faith" included the concept of fraud, which sounds in tort, the definition also mentioned the concept of good faith and fair dealing, which stems from breach of contract. See id. Woody then surmised that because a bad faith action could not be classified as either a tort or a contract, and was, in essence, sui generis in nature, the six year "catchall" statute of limitations should apply. See id. at 695.⁶

Similarly, in Cincinnati Insurance, the Court in a three-page order also predicted that the Pennsylvania Supreme Court would apply a six year statute of limitations to actions under § 8371. In reaching its conclusion, Cincinnati Insurance relied heavily upon Woody's logic, as well as upon a quotation interpreting the applicability of § 8371 in the recent decision of our Court of Appeals in Klinger v. State Farm Mutual Automobile Insur. Co., 115 F.3d 230 (3d Cir. 1997). In Klinger, our Court of Appeals characterized § 8371 as two-fold in purpose: "The obvious design of [§ 8371] is, first, to place [the insureds] in the same economic position they would have been in had the insurer performed as it promised, by awarding attorney's fees as additional damages; and second, to punish [the insurer] for giving primacy to its own self-interest over that of the [insureds] by awarding punitive damages." Id. at 236.

On the basis of this quote, Cincinnati Insurance concluded that § 8371 is "primarily compensatory" in nature, and therefore found that the "catchall" provision of § 5527 was "the most closely analogous limitations provision." Cynthia Miller v. The Cincinnati Insurance Co., Civ. No. 97-1223, at n. 1 (E.D.Pa. July 9, 1997).⁷

Section 8371 as a Tort

Recognizing its perils, we...