The Pennsylvania Supreme Court recently clarified in Allstate Property and Casualty Ins. Co. v. Wolfe, No. 39 MAP 2014, 2014 WL 7088147 (Pa. Dec. 15, 2014) that statutory bad faith claims brought against insurers under 42 Pa. Cons. Stat. § 8371 can be assigned by insureds to injured third-party claimants. The decision originated from a certified question from the United States Court of Appeals for the Third Circuit.

Some background explains the conflicted decisions that gave rise to the Third Circuit’s request for guidance. Historically, bad faith claims against insurers were grounded in contract law. D’Ambrosio v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981)(declining to create a tort of bad faith to allow tort remedies). Accordingly, the insured – not the third-party claimant – was the party injured by an insurer’s bad faith claim handling. Strutz v. State Farm Mut. Ins. Co., 609 A.2d 569, 571 (Pa. Super. 1992)(“the duty to negotiate a settlement in good faith arises from the insurance policy and is owed to the insured, not to a third-party claimant.”).

Reputedly in response to D’Ambrosio, the Pennsylvania legislature enacted 42 Pa. Cons. Stat. § 8371, the so-called statutory bad faith claim authorizing punitive damages and attorneys fees. The Pennsylvania Supreme Court in Ash v. Continental Ins. Co., 932 A.2d 877, 885 (Pa. 2007) ruled that § 8371 claims sound primarily in tort. Notably, § 8371 confirms the insured’s standing for statutory bad faith claims because it applies to “action[s] arising under an insurance policy,” and requires that “the insurer has acted in bad faith toward the insured.” 42 Pa. Cons. Stat. § 8371 (emphasis added); see also Ash, 932 A.2d at 882 (§ 8371 “only permits a narrow class of plaintiffs to pursue the bad faith claim against a narrow class of defendants”).

The conflict addressed by Allstate stemmed from federal reliance on Ash’s pronouncement that § 8371 sounded in tort and Pennsylvania authority precluding the assignment of unliquidated tort claims. Some federal courts concluded that § 8371 claims were not assignable. Feingold v. Liberty Mutual Group, 847 F. Supp. 2d 772, 776 (E.D. Pa. 2012), aff’d, 562 Fed. Appx. 142 (3d Cir. 2014); Canale v. Allstate Prop. And Cas. Ins. Co., No. 13-4398, 2013 WL 1002133 (E.D. Pa. Nov. 21, 2013). In contrast, the Pennsylvania Superior Court has written that bad faith claims for amounts above policy limits can be assigned. See Brown v. Candelora, 708 A.2d 104 (Pa. Super. 1998).

Allstate resolved this conflict in favor of the assignability. Rather than addressing the distinction between assigning contract and unliquidated tort claims, the Court relied on the legislative intent behind § 8371 discerned through statutory construction. The Court cited § 8371’s purpose as a remedial statute woven into the framework of a pre-existing contract-based remedy. Although § 8371 does not expressly allow assignment, neither does it prohibit assignment, and the legislature must have been aware that contractual bad faith claims were assignable prior to § 8371. The reference in § 8371 to “an action under an insurance policy” further suggests an intersection of tort remedies and contract principles that should not disrupt the pre-existing availability of assignment. The Court reasoned that precluding assignment would not be in harmony with the legislature’s overt efforts to broaden remedies through § 8371. The Court in Allstate made the “fundamental conclusion” that – based on § 8371’s statutory objectives, the pre-existing legal landscape, as well as the potential consequences of its interpretation – “it discern[ed] no legislative intent to preclude the assignability of damages claims under Section 8371.” Id. 2014 WL 7088147 at *5 n.9.