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 adopted the positions advanced by Reed Smith LLP on behalf of United Policyholders, concluding that policyholders are permitted to settle claims against them by assigning to plaintiffs and other claimants their rights to both statutory and common law-based bad faith claims against their insurance companies.
The Court’s decision in Allstate Property and Casualty Insurance Co. v. Jared Wolfe, is a significant victory for policyholders in Pennsylvania who face dangerous litigation that their insurance companies refuse to defend or unreasonably refuse to settle. Faced with such bad faith conduct by its insurer, a policyholder often has no financial means of satisfying a judgment other than assigning its coverage claim against the insurer, and little interest or experience in direct litigation with the insurer. When a policyholder is victimized by an insurance company’s bad faith, a settlement that assigns the policyholders 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 Supreme 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 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. Gambling on a jury’s whims with the policyholder’s livelihood is not permitted. 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 attorney’s 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. As explained by United Policyholders, 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.” Agreeing with United Policyholders, 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.”
The Court used these public policy rationales together with principles of statutory construction to determine the Legislature that enacted the Pennsylvania bad faith statute, Section 8371, would not have intended to limit bad faith remedies, including the right to assign such claims, already available at common law. As United Policyholders observed, when the statute was enacted in 1990, the General Assembly was aware that assignment of common law bad faith claims had already been permitted in the Commonwealth by the Supreme Court for over twenty-five years, yet the statute did not disturb this practice. The strong and deterrent bad faith remedies permitted by the Legislature, particularly awards of punitive damages and attorney’s fees, demonstrate the Legislature’s emphatic desire to serve the public’s interest in preventing and punishing bad faith conduct by insurance companies, in addition to compensating policyholders.
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 litigation who are victims of insurance company bad faith and the plaintiffs making claims against them may now have greater confidence that a settlement including an assignment of insurance rights and bad faith claims will be enforceable. Insurance companies, likewise, will need to be more diligent to ensure that their coverage determinations and settlement decisions are reasonable and made with due regard for the interests of their policyholders and insureds, who are their fiduciaries.