Claims against insurers under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) occupy a unique place in its jurisprudence. Insurance is highly regulated, and many other recovery avenues exist in Pennsylvania for aggrieved insureds, such as breach of contract and bad faith. Usually, insurance claims are tethered to contract law, since the insured-insurer relationship and duties are governed by the insurance policy. Courts should be reluctant to ignore contractual principles when a UTPCPL claim arises out of a policy.

Generally, deceptive insurance solicitations are actionable under the UTPCPL, while post-inception policy-related claims are not. Toy v. Metropolitan Life Insurance Co.[1] exemplifies this point. Toy involved an insurance salesman’s pre-issuance misrepresentations about the investment qualities of a life insurance policy. The insured asserted both bad faith and UTPCPL claims. The Pennsylvania Supreme Court affirmed dismissal of the statutory bad faith claim, concluding that bad faith did not cover an "insurer engaged in unfair or deceptive practices in soliciting the purchase of a policy."[2] By contrast, the court allowed the UTPCPL deceptive sales practices claim to proceed. Under Toy, claims that arise out of solicitation-related deception can give rise to a UTPCPL claim, such as misrepresentations during the sale of the policy, while bad faith and breach of contract theories apply following policy inception.

Misfeasance / Nonfeasance Distinction

The UTPCPL is a statutory hybrid. Some of its provisions are tortious in nature,[3] but others are steeped in contract.[4] Therefore, many of the UTPCPL’s rules of application draw from the historical division between contract and tort.

Under Pennsylvania law, the test for distinguishing "a cause of action in tort growing out of a breach of contract is whether there was an improper performance of a contractual obligation (misfeasance) rather than the mere failure to perform (nonfeasance)."[5] This rule distinguishing between tort and contract found its way into UTPCPL jurisprudence. Only the improper performance of a contractual obligation can form the basis of an UTPCPL claim.[6] Nonfeasance — the failure to perform a contractual duty — is not actionable under the UTPCPL.[7]

Most of the UTPCPL cases applying the nonfeasance rule arise in the insurance context. An insurer’s refusal to pay an insurance claim is nonfeasance and thus cannot form the basis of an UTPCPL claim.[8] The failure of an insurer to investigate a claim also is nonfeasance.[9]

Claims Handling Under the UTPCPL and Bad Faith Statute

Several recent decisions take the nonfeasance rule one step further to conclude that acts and omissions in claims handling are not actionable under the UTPCPL. In Murphy v. State Farm Mut. Auto Insurance Co., for example, the district court cited the nonfeasance rule, but also suggested that “wrongdoing in the handling of [plaintiff’s] claims” could not provide the basis for an UTPCPL claim.[10] Similarly, Mondron v. State Farm Mut. Auto. Insurance Co.[11] relied on authority "dismiss[ing] UTPCPL actions which were premised on misconduct during the claims handling process."[12]

As suggested in Toy, Pennsylvania’s bad faith statute offers recovery for a panoply of claims handling misconduct by insurers.[13]

Economic Loss Doctrine

Courts have woven contract principles into the UTPCPL, presumably because of a reluctance to disregard the deal reached between parties to a contract.[14] It is not surprising then that the Third Circuit predicted that the economic loss doctrine — which prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract — would bar statutory fraud claims under the UTPCPL where the alleged fraud does not arise separately from the contract. Werwinski v. Ford Motor Co.[15] was sensible in its factual context — claims of defective automobile transmission component parts which were covered by an express warranty and that caused no personal injury.

The Pennsylvania Superior Court, however, disagreed with Werwinski, concluding in summary fashion that the economic loss doctrine does not apply to UTPCPL claims simply because they are statutory claims.[16] As acknowledged in Dixon v. Northwestern Mutual,[17] this split in authority has resulted in the application of the economic loss doctrine to UTPCPL claims in federal courts, but not in state court.[18]

In federal court, the economic loss doctrine applies to UTPCPL claims against insurers when: 1) the factual grounds for the UTPCPL claim is interwoven with the insurance policy; and 2) the plaintiff seeks damages flowing from the policy.[19] Thus, the economic loss doctrine bars UTPCPL claims for the failure to handle, adjust, evaluate and settle claims.[20]

Gist of the Action Doctrine

Pennsylvania’s gist of the action doctrine bars recasting claims in tort when "the gist or gravamen of the cause of action stated in the complaint, although sounding in tort, is, in actuality, a claim against the party for breach of its contractual obligations." Bruno v. Erie Insurance Co.[21] involved a negligence claim against an insurer and illustrates when the gist of the action doctrine does not restrict recovery to breach of contract. The insureds alleged misrepresentations by an insurer’s adjuster and engineer that mold discovered during a home renovation was harmless and should not delay construction. They also alleged that the mold turned out to be toxic, causing both a total loss of the home as well as respiratory disease to the insureds. Bruno looked to the underlying duty to determine whether the claim arose in tort or contract, noting that duties created by broader social policy grounds arise in tort, while duties created by the terms of a contract give rise to contract claims.[22]

It is tempting to assert that the gist of the action doctrine is subject to the same federal-state split as the economic loss doctrine. Werwinski, however, did not turn on the gist of the action doctrine, it merely concurred with the district court that the doctrine evinced Pennsylvania’s penchant for dismissing fraud claims that restate claims for breach of contract.[23] Moreover, Knight did not conclude that the gist of the action doctrine is inapplicable to UTPCPL claims. Knight relied on the precontract solicitation deception nature of the allegations to conclude that (1) the plaintiff had not alleged "masked claims for breach of contract;" (2) the essence of the claims sounded in tort; and (3) "the contract [wa]s collateral to the matters alleged."[24] A federal court may have reached the same conclusion.

Nevertheless, in cases where — unlike Bruno — the wrongdoing alleged against an insurer arises from a contractual duty, negligence claims may be barred by the gist of the action doctrine.[25] Similarly, the gist of the action doctrine has been applied to bar UTPCPL claims.[26] However, some courts prefer to rely on the economic loss doctrine where it and the gist of the action both are raised as a bar to a UTPCPL claim.[27]

Conclusion

Contracts — especially in insurance disputes — define the nature of relationship and obligations between the parties. Courts rightfully apply contractual principles when claims arise out of an insurance policy, regardless of the label assigned to the cause of action. These principles should apply equally when a UTPCPL claim against an insurer arises from an insurance policy.