In a highly anticipated decision, the Pennsylvania Superior Court vacated an eyebrow-raising $21 million award for an auto policyholder and found that the insurer did not act in bad faith. The Superior Court concluded that the trial court improperly focused on the alleged shortcomings of the insurance industry in general, as opposed to the specific facts before the court.
Berg v. Nationwide Mutual Insurance Co. began two decades ago, when a policyholder’s Jeep was damaged in a crash. While no one was injured, the policyholder believed the Jeep was a total loss and filed a claim for $25,000. Nationwide disagreed, believing the vehicle could be repaired. The years-long case went up and down through the courts several times, involving multiple trial court judges, decisions and trips to the Superior Court.
In the last trial court action in 2014, the judge issued a scathing 42-page opinion against Nationwide, criticizing it for forcing a policyholder to compete with “a conglomerate insurance company.” The Berks County judge found that Nationwide was sending a message that “we can get away with whatever we want to, and . . . you cannot stop us.” He then ordered Nationwide to pay $18 million in punitive damages, plus an additional $3 million in attorney’s fees.
The trial court judge highlighted the perceived shortcomings of Nationwide and, at times, the insurance industry in general. He expressed concerns that insurance company employees “might” be asked to explore cost-cutting measures to lower the amount of claims an insurer must pay. He also cautioned that a policyholder wishing to sue for benefits “takes a huge risk that the case could go on without compensation for years.”
On appeal, the Superior Court found that almost all of this commentary from the trial court was superfluous to the issues raised by the case. Judge Victor P. Stabile, writing a majority opinion joined by Judge Paula Francisco Ott, explained that the question before the trial court was limited to “whether Plaintiffs proved, by clear and convincing evidence, that [Nationwide] acted in bad faith in this case.” (Emphasis added.) Issues such as cost-containment measures used across the insurance industry were not relevant to that question.
The majority criticized what it saw as the trial court’s failure “to limit [its] analysis to the facts of this case and applicable law” as well as the trial court’s “consideration of matters outside this case record,” including ways in which insurance companies conduct their business.
The Superior Court also took issue with the trial court’s decision to rely on an earlier case in which there was evidence that a “Best Claims Practice Manual” allegedly encouraged adjusters to reduce the average claim payment level to a level lower than other insurers. In that earlier case, the court concluded that the manual discouraged case-by-case evaluations of claims, and supported a finding of bad faith. The Berg majority noted there was no evidence that any adjusters involved in the present case relied on that manual, meaning it could not be used to support a finding of bad faith.
The decision was not unanimous, and Superior Court President Judge Emeritus Correale F. Stevens, writing in dissent, concluded that the trial court cited “ample evidence from the certified record to support its verdict and damage award,” and that he believed the majority improperly usurped the trial court’s fact-finding power.
Bad-faith claims in Pennsylvania, governed by 42 Pa. C.S. § 8371, are often expensive propositions for insurance companies. The statute allows policyholders to recover various damages — including punitive damages and attorney’s fees — when plaintiffs can prove “by clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and the insurer knew of, or recklessly disregarded, its lack of a reasonable basis.” See, e.g., Rancosky v. Washington National Ins., 170 A.3d 364 (Pa. 2017). (Read our analysis of the Rancosky decision here.)
However, bad-faith claims often prove costly for insurers even when plaintiffs cannot meet that burden. While contract-based claims for insurance benefits often require relatively limited discovery, discovery in bad-faith claims can be much more invasive, with many plaintiffs seeking information about insurers’ claims-handling policies and their internal deliberative processes, which would otherwise be irrelevant to a standard claim for benefits or protected by judicially recognized work-product considerations.
The Berg decision could aid Nationwide and other insurers in resisting the type of overbroad discovery requests regularly submitted by plaintiffs’ attorneys. These discovery requests often seek information about unrelated lawsuits, claims-handling procedures in other cases, and companywide financial information, which generally have no bearing on the facts involved in individual claims-handling decisions.
By reminding trial courts that bad-faith claims are case-specific — and should not be based on industry practices or trends — the majority’s decision in Berg could help insurers limit discovery to facts relevant to an individual policyholder’s claim, and close off the types of fishing expeditions that trial courts sometimes still allow.