In Wolfe v. Allstate Prop. & Casualty Ins. Co., Civil Action No. 12-4450, 2015 U.S. App. LEXIS 9876, (3d Cir. June 12, 2015), the Third Circuit, interpreting Pennsylvania law, held that punitive damages awarded against an insured in a personal injury suit may not be recovered in a later breach of contract or bad faith suit against the insurer. We covered the Wolfe case back in December when the Pennsylvania Supreme Court ruled that the insured could assign statutory bad faith claims to the underlying plaintiff.

In the underlying suit, Allstate’s insured rear-ended the plaintiff while under the influence of alcohol. The insured’s policy provided liability coverage up to $50,000, and required Allstate to defend suits by third parties arising out of automobile accidents, but provided that Allstate “would ‘not defend an insured person sued for damages which are not covered by this policy.’” Id. at *2. Plaintiff made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate provided Plaintiff with a counteroffer of $1,200, which plaintiff rejected. After the plaintiff filed suit, Allstate warned the insured that if the damages at trial exceeded his $50,000 policy limit, the insured would be personally responsible for the excess portion of the award. During the course of the litigation, Plaintiff learned of the insured’s intoxication and amended his complaint to include a claim for punitive damages. Allstate informed the insured about the potential for punitive damages, and reminded him “that those damages were not covered under his policy,” and that “Allstate would not pay that portion of [any] verdict, and he would be held responsible for it.” Id. at *3. Throughout the course of litigation, neither party moved from its initial offer or demand, and the case advanced to trial. At trial, the jury awarded Plaintiff $15,000 in compensatory damages, and $50,000 in punitive damages. Allstate paid the compensatory damage award, but not the punitive damage award. In return for plaintiff’s agreement not to enforce the punitive damages judgment against him personally, the insured assigned his rights against Allstate to plaintiff.

Prior to trial in the subsequent bad faith action, Allstate filed a motion in limine seeking to bar evidence of the punitive damages award in the underlying trial as damages in the bad faith suit, as Pennsylvania law prohibits an insurer from paying a punitive damages award. The District Court denied the motion, but the Third Circuit reversed, predicting the Pennsylvania Supreme Court would conclude “in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit.” Id. at *10. Thus, the District Court erred in denying Allstate’s motion in limine to preclude such evidence from being presented to the jury. Furthermore, based on this finding, the Third Circuit held “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case.” Id. at *21. Imposing such a duty, the Third Court held, would be tantamount to making the insurer responsible for punitive damages, which are not insurable under Pennsylvania public policy. Based on these holdings, the Third Circuit granted Allstate a new trial on the bad faith claims, where plaintiff was barred from presenting evidence relating to the $50,000 in punitive damages, but was allowed to seek compensatory damages based on any injuries other than the punitive damages award.

Allstate also filed a motion for summary judgment on the breach of contract and bad faith claims prior to trial. Allstate argued that once the punitive damages award was removed from the plaintiff’s damages claim, the case should be dismissed because the underlying compensatory damage award was within policy limits and therefore the insured suffered no harm. The District Court denied the motion in its entirety. The Third Circuit affirmed the District Court’s denial, first noting that an insurer “can still be liable for nominal damages for violating its contractual duty of good faith by failing to settle.” Id. at *25. Secondly, the Third Circuit upheld the District Court’s denial of summary judgment on the statutory bad faith claim, as the statute makes no requirement that the plaintiff be entitled to damages for the insurer’s bad faith to bring such a claim. This holding reflects the policy behind the statute, which is intended to deter insurance companies from engaging in bad faith practices, not compensate injured insureds. Thus, an insured “does not need compensatory damages to succeed on his statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.” Id. at *28.

The Wolfe decision is particularly notable for its holding that (1) an insured cannot recover an underlying punitive damages award in a subsequent bad faith claim, and (2) an insurer is not necessarily obligated to consider the potential for punitive damages exposure in the underlying case when evaluating a claim for settlement. It remains to be seen whether a Pennsylvania state court would agree with the Third Circuit’s determination. In addition, Wolfe may have limited application going forward depending on the facts and circumstances of future cases.