The idea that a person could sue his insurance company for its misdeeds in handling claims under a policy of insurance is a relatively recent concept in Pennsylvania. For years the legislature invested the power of enforcement in the Insurance Department through the Unfair Insurance Practices Act, 40 P.S. Section 1171.1 et seq. This law specifically prohibited private lawsuits against insurance companies by the public; instead, the Department was given a broad range of enforcement tools to punish wrongdoing. Justice was in the hands of a bureaucracy, which was oftentimes slow and unwilling to institute legal action against carriers doing business in the Commonwealth.
Plaintiff's attorneys were able to find ways around the Statute through the use of the common law remedies of breach of contract as well as fraud and deceit. The courts, however, refused to acknowledge a cause of action in trespass for "bad faith". See D'Ambrosio v. Pennsylvania National Mutual Casualty Insurance Company, 494 Pa. 501, 431 A.2d 966(1981). Private lawsuits against insurance companies were permitted under the Pennsylvania Unfair Trade Practices Act and Consumer Protection Law, 73 P.S. 201, (hereinafter referred to as the Consumer Protection Law). See Pekular v. Eich, 355 Pa. Super. 276, 513 A.2d 427(1986).
In 1990, the Pennsylvania Legislature enacted the legislation, which permits a private cause of action against insurance companies. 42 Pa.C.S. Section 8371 provides as follows:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:
- Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate plus 3%.
- Award punitive damages against the insurer.
- Assess court costs and attorneys fees against the insurer.
In determining whether bad faith exists, the court may look to:
- other cases construing the statute and the law of "bad faith" generally;
- the plain meaning of the term(s) used in the statute; and/or
- other statutes upon the same or similar subjects.
Romano v. Nationwide Insurance Company, 435 Pa. Super. 545, 646 A.2d 1228(1994). The Pennsylvania Superior Court in Terletsky v. Prudential Property and Casualty Insurance, 437 Pa. Super. 108, 649 A.2d 680(1994) defines bad faith as follows:
"Bad faith" on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith. - Black's Law Dictionary 139 (6th ed. 1990) (citations omitted)
Rottmund v. Continental Assurance Company, 813 F. Supp. 1104, 1108-09 (E.D.Pa. 1992): Coyne v. Allstate Insurance Company, 771 F. Supp. 673, 677-78 (E.D.Pa. 1991). Further, bad faith must be proven by clear and convincing evidence and not merely insinuated. Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459, 472, 134 A.2d 223, 229 (1957); Hall v. Brown, 363 Pa. Super.415, 420, 526 A.3d 413, 416 (1987), appeal denied, 522 Pa. 624, 564 A.2d 916 (1989); United States Fire Insurance Company v. Royal Insurance Company, 759 F.2d 306, 309 (1985). Finally, to recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim. American Franklin Life Insurance Company v. Galati, 776 F. Supp. 1054, 1064 (E.D.Pa. 1991): see also D'Ambrosio v. Pennsylvania National Mutual Casualty Insurance Company, supra.
The key to establishing bad faith is clear and convincing evidence that the insurance carrier breached its fiduciary duty of good faith and fair dealing owed to its insured. See The Birth Center v. The St. Paul Insurance Co., 1999 Pa. Super. 49. These standards of care are clearly set forth in the Unfair Insurance Practices Act, 40 P.S.Section 1171.1 et seq. Section 1171.5 clearly sets forth the unfair practices prohibited by law.
Under Pennsylvania law an insurance company must act with the "utmost good faith" and fair dealing toward its insured. Fedas v. Insurance Co. of Pa., 300 Pa. 555, 558, 151 A. 285, 286 (1930). This fiduciary duty is based on the contract of insurance, which mandates the carrier to promptly investigate and pay claims due under the policy. See Romano v. Nationwide Insurance Company, supra. The insurance company must act under a reasonable basis at all times to avoid breaching this standard of conduct.
The primary responsibility on the part of an adjuster is to investigate the claim in a timely manner. Bad faith can occur when the carrier fails to investigate the claim or fails to perform a proper investigation. 40 P.S. Section 1171.5(a)(10)(iv). Look to the claims file to see what was done in the investigation of the claim. Company policies and procedures require the adjuster to perform certain tasks and to document the file. Examining the claims file in light of the rules and procedures uncovers potential areas of bad faith.
A claim for bad faith can be establish not only from what was done, but also from what was not done in the investigation of the claim. Remember, that bad faith is based upon the reasonableness of the company's actions based upon a number of factors including the applicable law and how the carrier handled similar cases. See Terletsky v. Prudential Property and Casualty Insurance, supra.
A plaintiff may establish a claim for bad faith based upon a settlement offer made in a first party claim (i.e. property damage, uninsured motorist). The insurance carrier is required to offer a reasonable settlement amount to resolve a claim made by its insured. Liability for bad faith occurs not only for failure to pay a claim but also for offering too little in settlement. 40 P.S. Section 1171.5(a)(10)(vi). Bad faith also occurs when the insured is forced to litigate the claim against the insurance company when liability is clear. 40 P.S. Section 1171.5(a)(10)(vii).
Bad faith may occur when the insurance carrier fails to settle a third party liability case within the policy limits. See The Birth Center v. St Paul Co, 1999 Pa. Super 49 ( insurer liable in bad faith for failing to settle a malpractice claim within policy limits).
This cause of action for bad faith against the insurance carrier exists with the insured and not the third party plaintiff. Since the right of action is based upon the insurance contract, the injured party has no privity. In an action arising out of a third party lawsuit, it is imperative for the plaintiff to obtain an assignment from the insured to pursue the claim against the carrier.
The Pennsylvania Consumer Protection Law
The Unfair Trade Practices Act and Consumer Protection Law, 73 P.S. 201,(hereinafter referred to as the Consumer Protection Law) prohibits unfair and deceptive business practices. 73 P.S. 201-9.2, Private Actions, provides:
any person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss of money or property , real or personal, as a result of the use or employment by any person of a method, act or practice declared unlawful by section 3 of this act, may bring a private action, to recover actual damages or one hundred dollars($100), whichever is greater. The court may, in its discretion, award up to three times the actual damages sustained, but not less than one hundred dollars($100), and may provide such additional relief as it deems necessary or proper.(Footnote omitted.)
The Superior Court has specifically ruled that insurance companies are subject to the provisions of this act. Pekular v. Eich, 355 Pa. Super. 276, 513 A.2d 427 (1986).
In Pekular, the trial court held that an insured may not maintain an action under the Consumer Protection Law when the allegations in the complaint fall within the purview of the Unfair Insurance Practices Act (UIPA). The Superior Court reversed, noting that the CPL's underlying foundation is fraud prevention. " As a statute for the prevention of fraud, it must be liberally construed to effect the purpose...", Pekular,at p. 432. "With this liberal standard of construction in mind, Pennsylvania courts have repeatedly held that violations of other statutes may also be violations of the CPL." Pekular,supra.
The reasoning in Pekular is similar to that expressed by Judge Dowling in Deetz v. Nationwide Insurance Company, 20 D. & C. 3d 499, 102 Dauphin 374(1981). There, the Court stated that:
"In order to determine what acts constitute unfair trade practices in the insurance business, one may refer back to the Insurance Act.The Pennsylvania legislature intended to prevent fraud in the insurance industry by defining or providing for the determination of all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices, and by prohibiting the trade practices so defined or determined. 40 P.C.S.A. 1171.2,(Purdon's Supp. 1980)
There are two specific practices prohibited by the Insurance Act which plaintiff's charge the defendant in the instant case. They are`misrepresenting pertinent facts or policy or contract provisions relating to coverage at issue': 40 P.C.S.A., Section 1171.5(a)(10)(i)(Purdon's Supp.1980); and ` not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which the company's liability under the policy has become reasonably clear.' 40 P.C.S.A. Section 1171.5(a)(10)(vi)(Purdon's Supp. 1980.
It is not significant that plaintiffs attempt to interface the provisions of one statute within the provisions of the Trade Practices Act. Pennsylvania courts have repeatedly held that the violations of other statutes can also be violations of the Trade Practices Act."
The logic of Pekular was followed by the Superior Court in Hardy v. Pennock Insurance Agency, 365 Pa. Super. 206, 529 A.2d 471(1987). In that case, the Superior Court reversed the lower court's dismissal of the count, which dealt with the Unfair Trade Practices and Consumer Protection Law. They stated that:
"We find it appropriate to follow the findings set forth in Pekular, and hold that the Unfair Insurance Practices Act, wherein penalties are properly enforced by the Insurance Commissioner, does not represent the sole and exclusive source of statutory redress of alleged unfair or deceptive acts of insurers and their agents. Specifically these acts may be redressed in the courts of our Commonwealth under the Unfair Trade Practices and Consumer Protection Law as well as by administrative hearing under the Unfair Insurance Practices Act." Hardy,at p. 479.
The Pennsylvania's Bad Faith Statute and the Consumer Protection Law are available to protect consumers from fraudulent and unfair insurance practices. Both statutes provide not only for the payment of the original claim or damages, but also for attorneys fee and cost as well as punitive damages to punish the insurance company. Victims of insurance fraud should be fully informed of their rights and remedies.