This week, in a 5-1 decision resolving a certified question from the U.S. Court of Appeals for the Third Circuit, the Pennsylvania Supreme Court held that a policyholder or insured is permitted to settle the claims against it by assigning to the plaintiff its rights to both statutory and common-law-based bad-faith claims against its insurance companies. In reaching this decision, the court adopted the positions advanced by Reed Smith LLP on behalf of its client, United Policyholders.
The court’s decision in Allstate Property and Casualty Insurance Co. v. Jared Wolfe is a significant victory for policyholders in Pennsylvania who face litigation that their insurance companies improperly refuse to defend or unreasonably refuse to settle. When an insured is faced with such bad-faith conduct, a settlement that assigns the policyholder’s insurance claims to the plaintiff in exchange for a release that protects the policyholder from the results of the insurer’s breach is often the most practical solution. The court’s decision recognizes the assignment remedy as a valuable and necessary tool for protecting the commonwealth’s diverse policy-holding citizens from insurance company bad faith, and as a means of deterring and punishing bad-faith behavior.
In Wolfe, the court approved a federal trial court’s ruling allowing a defendant facing a punitive damages verdict arising from a drunken driving accident to assign to the victim his statutory bad-faith claims against the insurance company. The jury ruled that Allstate committed bad faith by refusing to protect its policyholder when it had the opportunity, recognizing that an insurer cannot refuse to settle a case before trial merely because a verdict may eventually result in uncovered punitive damages—and then refuse to pay the punitive damages judgment resulting from the failure to settle. With the assigned bad-faith claim, the victim of the accident can recover from the insurance company not only the resulting judgment, but also statutory punitive damages, interest, and attorneys’ fees the policyholder might otherwise have pursued as a result of the insurance company’s bad faith.
In reaching its decision, the Supreme Court approvingly quoted United Policyholders’ explanations of the public policy goals supporting assignment of statutory bad-faith claims. The Legislature provided the bad-faith statute’s remedies “to overcome insurance companies’ inherent advantages in litigation expertise and resources to engage in coverage litigation.” The court noted that permitting assignment of both statutory and common-law-based claims supports the public policy favoring settlements and good-faith settlement negotiations; deters bad-faith behavior by insurance companies; furthers the Legislature’s goal of punishing bad faith; and avoids “splitting” of statutory and common-law, bad-faith claims.
The court recognized that many policyholders facing substantial liability claims are essentially judgment-proof, but may still suffer substantial harm from bad faith, such as impaired credit ratings and the results of insolvency proceedings. In those situations, an assigned insurance claim may be the only significant asset available to settle a case that insurers refuse to settle. The court agreed that, “the right to make assignments protects the most financially vulnerable policyholders from opportunistic breaches by their insurance companies at the crucial moments when policyholders rightfully expect their insurers to protect them as their fiduciaries.”
As a result of this opinion, policyholders and insureds in Pennsylvania now have greater resources to protect themselves from insurance company bad faith. Defendants in Pennsylvania-based litigation who are victims of insurance company bad faith, and the plaintiffs making claims against them, now know that a settlement including an assignment of insurance rights and bad-faith claims will be enforceable.