1997 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-10-1997

Klinger v. State Farm Mutl Auto

Precedential or Non-Precedential:

Docket 96-7073,96-7102,96-7074,96-7101

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Recommended Citation

"Klinger v. State Farm Mutl Auto" (1997). 1997 Decisions. Paper 125.

http://digitalcommons.law.villanova.edu/thirdcircuit_1997/125
Filed June 10, 1997 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 96-7073, 96-7102 

MARK KLINGER, 

Appellant in 96-7073 

v. 

STATE FARM MUTUAL AUTOMOBILE 

INSURANCE COMPANY,* 

Cross-Appellant in 96-7102 

(*Amended by 2/20/96 Order) 

(D.C. No. 94-cv-01393) 

Nos. 96-7074, 96-7101 

LINDA NEYER, 

Appellant in 96-7074 

v. 

STATE FARM MUTUAL AUTOMOBILE 

INSURANCE COMPANY, 

Cross-Appellant in 96-7101 

(D.C. No. 94-cv-01469) 

ON APPEAL FROM THE 

UNITED STATES DISTRICT COURT 

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA 
Argued: January 23, 1997 

Before: NYGAARD and LEWIS, Circuit Judges, and 

COHILL, Senior District Judge.* 

(Opinion filed June 10, 1997) 

DAVID L. LUTZ, ESQUIRE 

RICHARD C. ANGINO, ESQUIRE 

(Argued) 

Angino & Rovner 

4503 North Front Street 

Harrisburg, PA 17110 

Attorneys for Appellants/ 

Cross-Appellees 

ROBERT E. KELLY, JR., ESQUIRE 

(Argued) 

Duane, Morris & Heckscher 

305 North Front Street 

P.O. Box 1003 

Harrisburg, PA 17108-1003 

Attorney for Appellee/ 

Cross-Appellant 

OPINION OF THE COURT 

NYGAARD, Circuit Judge. 

Mark Klinger and Linda Neyer appeal from the decision of 

the district court denying them costs, attorney's fees and 

the full amount of pre-judgment interest they sought in 

their otherwise successful bad faith action against State 

Farm Mutual Automobile Insurance Company. We conclude 

that the district court erred only in one aspect--the reasons 

_________________________________________________________________ 

*Honorable Maurice B. Cohill, Jr., United States District Court for the 

Western District of Pennsylvania, sitting by designation. 

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it gave for denying the request for attorney's fees--but that 

its error was in its explanation, not in its application of 

legal precepts and does not affect the amount to which 

appellants are entitled. We will therefore affirm. 

I. 

A. 

In August 1992, Klinger and Neyer were seriously injured 

in a head-on collision while riding in Klinger's van, which 

was one of two vehicles owned by him and insured by State 

Farm. The other driver's insurance was inadequate to 

compensate them for their injuries, so Klinger and Neyer 

filed underinsured motorist claims against the two State 

Farm policies. 

State Farm disputed the amount of coverage available 

under these insurance policies, and the parties agreed to 

bifurcate the issues of coverage and damages and to

arbitrate them separately.1 Attorney Richard Wix 

represented State Farm. Attorney David L. Lutz represented 

Klinger and Neyer. 

In October 1993, the arbitrators determined that the 

coverage available under Klinger's two policies was

$115,000. That established, in November, Attorney Lutz 

sent two letters to Wix demanding that State Farm tender 

the policy limits to his clients. Wix, however, never apprised 

State Farm of either of these letters. State Farm contends 

that it did not know the results of the arbitration because 

its attorney, Wix, did not answer his phone calls. A State 

Farm claims representative, however, did not personally 

visit Wix's office until March 1994. Nonetheless, in January 

1994, Attorney Lutz told Timothy Spader, a State Farm 

claims representative, the results of the arbitration and of 

his demand letters, when Spader happened to be talking to 

Lutz about another matter. 

_________________________________________________________________ 

1. In April 1993, before the coverage arbitration was held, State Farm 

offered each plaintiff $15,000, an amount representing the policy limits 

as State Farm interpreted them. This offer was refused. 

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Spader then contacted Attorney Wix, who promised him 

a letter documenting the status of the case. After receiving 

nothing, Spader finally visited Wix's office personally in 

March 1994 and obtained some medical records and 

documentary data. Only then did Spader contact Attorney 

Lutz, who had earlier written that he was considering a bad 

faith claim and stated that he would provide State Farm 

with whatever information it needed to evaluate the extent 

of damages. 

Still State Farm did nothing. In March 1994, the 

arbitrators scheduled the damages arbitration for June 28. 

Again Lutz demanded that State Farm pay the policy limits. 

Again, State Farm's attorney apparently failed to forward 

this request to State Farm. In April, Lutz went around State 

Farm's attorney, writing directly to Spader, and inquired 

whether State Farm was interested in settling the case. Still 

State Farm offered its insureds nothing. 

In June, although the hearing was scheduled for less 

than a week later, and even though Wix himself now 

recommended that State Farm tender them the policy 

limits, State Farm made no offer to pay the appellants 

anything. Instead, State Farm sought a stay of the hearing. 

Attorney Lutz refused, and they arbitrated damages. The 

arbitrators awarded $115,000 to Klinger and $70,000 to 

Neyer. Finally, on August 2, 1994, a full two years after the 

accident, and months after State Farm had all the 

information necessary to evaluate Klinger and Neyer's 

claims, State Farm paid them. 

B. 

Klinger and Neyer filed suit in the Dauphin County Court 

of Common Pleas, alleging that State Farm's delay in paying 

their claims was a display of bad faith under 42 Pa. C.S.A. 

§ 8371. State Farm removed the case to federal court based 

on diversity of citizenship. The case was tried before a jury, 

which awarded punitive damages to each plaintiffs in the 

amount of $150,000. State Farm then filed a motion for 

judgment as a matter of law, or, in the alternative, for a 

new trial, under Fed. R. Civ. P. 50(b) and 59(a). The district 

court denied this motion. Klinger and Neyer filed motions 

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seeking interest, costs and attorney's fees under§ 8371. 

The district court awarded interest, but denied the costs 

and fees, opining that "State Farm ha[d] been adequately 

punished by the punitive awards. . . ." These appeals 

followed. 

II. 

A. 

State Farm first argues that the evidence was insufficient 

to support the jury's verdict of bad faith. It also asserts that 

the jury was improperly instructed on the test to be applied 

in determining the existence of bad faith under 

Pennsylvania law. It is wrong on both points. 

1. 

The standard for bad faith claims under § 8371 is set 

forth in Terletsky v. Prudential Property & Cas. Ins. Co., 649 

A.2d 680, 688 (Pa. Super. Ct. 1994), appeal denied, 659 

A.2d 560 (Pa. 1995). There, the Pennsylvania Superior 

Court applied a two-part test, both elements of which must 

be supported with clear and convincing evidence: (1) that 

the insurer lacked a reasonable basis for denying benefits; 

and (2) that the insurer knew or recklessly disregarded its 

lack of reasonable basis. The district court instructed the 

jury accordingly. The Terletsky court also stated, however, 

that 

"[b]ad 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. 

Id. (quoting Black's Law Dictionary 139 (6th ed. 1990)). 

From this, State Farm argues that a third element must be 

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satisfied, to wit, that the insurer was motivated by an 

improper purpose such as ill will or self-interest.

We reject that reading of Terletsky. Although the 

definition the court recited did advert to a "dishonest 

purpose" such as "self-interest or ill will[,]" this is dictum. 

Moreover, State Farm's self-interest is the only plausible 

explanation for its delay. Nonetheless, we need not reach 

that issue: A page later the court actually applied the twopart test: 

 To recover under a claim of bad faith, the Terletskys 

were required to show that Prudential lacked a 

reasonable basis for partially denying payment . . . and 

that Prudential recklessly disregarded a lack of 

reasonable basis in denying the payment. Prudential's 

actions, however, were reasonably based. 

Id. at 689-90. In our prediction of how the Pennsylvania 

Supreme Court would measure bad faith claims, we will 

rely on the actual test that Terletsky applied and refrain 

from creating a third part based only on dictum quoted 

from Black's Law Dictionary. Accordingly, we conclude that 

the district court did not err when it instructed the jury. 

2. 

We also believe that the evidence was sufficient for a jury 

to conclude that State Farm lacked a reasonable basis for 

refusing to pay the appellants, and knew or recklessly 

disregarded that fact. State Farm acknowledged at oral 

argument that it is chargeable with the actions of its 

attorney. As such, it is also chargeable with his inactions. 

Moreover, Mr. Spader testified that, as early as March 

1994, he knew that liability was clear and that State Farm 

had received a demand package indicating that both 

Klinger and Neyer had sustained serious injuries. Next, Wix 

himself testified that he advised State Farm to tender the 

policy limits before the damages arbitration. Yet, State 

Farm never offered to pay Klinger and Neyer anything 

beyond the early and clearly inadequate offer it made before 

the coverage arbitration. Finally, plaintiffs' expert testified 

that State Farm acted recklessly and unreasonably. Hence 

there is ample evidence from which a reasonable jury could 

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have concluded that State Farm knew or recklessly 

disregarded the fact that it had no reasonable basis for 

refusing to pay its insureds' claims.2 We will not disturb its 

verdict. 

3. 

State Farm challenges the bad faith award to Ms. Neyer 

for yet another reason. Neyer demanded $115,000, but the 

arbitrator ultimately awarded only $70,000. Thus, State 

Farm argues, as a matter of law it could not have acted in 

bad faith by refusing to offer the full $115,000. 

State Farm relies on Kaufmann v. Aetna Cas. & Sur. Co., 

794 F. Supp. 137 (E.D. Pa. 1992). First, that is a district 

court case and not precedential. Second, there, the issue 

was whether the limits of multiple policies could be stacked 

for a total of $1 million in coverage; if they could not, the 

plaintiff 's recovery was limited to $500,000. Aetna offered 

$500,000 to the plaintiffs without prejudice to its litigation 

of the stacking issue, and they accepted the partial 

settlement. The arbitrators then awarded $950,000, and 

Aetna timely paid over the remaining $450,000. The court 

opined: 

Plaintiffs contend that Mr. Kaufmann's injuries were so 

_________________________________________________________________ 

2. State Farm argues that it reasonably relied upon its counsel. We 

would never opine to the contrary, at least for certain advice and 

representation. Nonetheless, because this point is argued we find it 

necessary to remark that representation is not an excuse for the 

insurer's failure to perform its obligations under the policy it issued to 

the insured. Here, State Farm's attorney would not even answer his 

phone calls. With admittedly clear liability, serious injuries and Mr. 

Klinger on welfare because he could no longer work, it was incumbent 

upon State Farm to do more. And because counsel for the insureds 

cannot simply make an "end-run" around the insurer's attorney to deal 

directly with the insurer, the insurer may not hide behind this 

relationship to argue that it reasonably ignored its obligations under the 

insurance policy to its insureds, one of which is to pay them 

compensation if injured. Otherwise, an insurer could simply hire 

counsel, bury its head in the sand, pay when ordered to do so, retain the 

use of the insured's money in the meantime, and escape without adverse 

consequences. 

 7 
severe that Aetna should have waived its contractual 

right to arbitration and simply tendered $1 million.. . . 

The arbitrators then awarded less than the full $1 

million stacked limit, albeit only $50,000 less. The 

arbitrators' decision belies plaintiffs' contention that 

they were plainly entitled to the full amount which

their policy provided as a limit. Under these 

circumstances, no reasonable factfinder could conclude 

that Aetna's decision to proceed to arbitration 

constituted bad faith. 

Id. at 141. 

Finally, Kaufman is not persuasive. Aetna had at least 

tendered the $500,000 in coverage that was not disputed, 

whereas State Farm never made any offer to Neyer either 

after the coverage arbitration was decided, or when the 

extent of her injuries had become clear to it. A rational jury 

could well have concluded that State Farm, by not making 

an offer to Neyer based upon some objective criteria it 

believed compensated adequately for her injuries, 

knowingly or recklessly acted without reasonable basis. The 

mere fact that the arbitrators ultimately decided that Neyer 

was entitled to less compensation than the amount she 

wanted is not a sufficient basis to relieve State Farm from 

its responsibility to offer what was reasonably due her. Had 

it done so, both the damages arbitration and this suit 

might well have been avoided. We will not overturn the 

jury's verdict. 

B. 

State Farm also takes issue with the jury's decision to 

impose punitive damages. It argues that the evidence was 

insufficient to support such an award and that, in any 

event, the matter should have been decided by the court 

rather than the jury. Again, we disagree. 

1. 

We will look to Pennsylvania law governing punitive

damages to determine whether the award was proper. 

Pennsylvania has adopted section 908 of the Restatement 

 8 
(Second) of Torts governing punitive damages. Delahanty v.

First Pa. Bank, N.A., 464 A.2d 1243, 1263 (Pa. Super. Ct. 

1983). They are awarded to punish a defendant for 

outrageous conduct, which is defined as an act which, in 

addition to creating "actual damages, also imports insult or 

outrage, and is committed with a view to oppress or is done 

in contempt of plaintiffs' rights." Id. Both intent and 

reckless indifference will constitute a sufficient mental 

state. See id.

Here, the district court concluded that the jury could 

have reasonably found that State Farm's conduct, to wit, 

relying on its counsel despite his non-performance and 

never making an offer to pay its insureds before the 

damages arbitration, was egregious enough to warrant 

punitive damages. We agree. Insurance contracts create 

affirmative duties: The insured must pay premiums; the 

insurer must pay when its insured suffers an insured 

event. There was testimony from plaintiffs' expert that State 

Farm's conduct was in reckless disregard of plaintiffs' 

rights because it "didn't have a good reason for not making 

an offer[ ]" and because State Farm was not "considering 

the interests of their -- of Klinger and Neyer who were their 

insureds." He added that "[t]hey made them no offer when 

there was no reason for not doing this. There was clear 

liability and serious injuries." When asked how he would 

characterize that type of conduct, he answered, "I think 

that's disregarding, recklessly disregarding the rights of 

their insured." He then stated that, in his opinion, this 

conduct was outrageous. This testimony provided the jury 

a sufficient basis to award punitive damages. 

2. 

State Farm also argues that the issue of punitive 

damages was required by the terms of § 8371 to be decided 

by the court and not placed before the jury because the 

statute provides that "the court" may impose, inter alia, 

punitive damages. Frankly, we fail to see the harm. Clearly, 

the court can ask for an advisory verdict. Second, the court 

could have rejected the verdict. Finally, it was the court 

that entered judgment on the verdict. Hence, it had control 

at all stages. 

 9 
Moreover, as State Farm acknowledges, the Seventh 

Amendment itself provides the right to trial by jury in suits 

at common law. See Curtis v. Loether, 415 U.S. 189, 192, 

94 S. Ct. 1005, 1007 (1974). Arguing, however, that the 

Seventh Amendment provides no right to a jury trial on 

punitive damages in a § 8371 case, State Farm relies on 

Tull v. United States, 481 U.S. 412, 107 S. Ct. 1831 (1987). 

In that case, the Supreme Court held that the amount of a 

statutory civil penalty under the Clean Water Act could be 

decided by the trial court, id. at 427, 107 S. Ct. at 1840, 

even though the issue of liability implicated the right to 

trial by jury under the Seventh Amendment. Id. at 423, 107 

S. Ct. at 1838. It reasoned that, because "Congress itself 

may fix the civil penalties, it may delegate that 

determination to trial judges[,]" id. at 427, 107 S. Ct. at 

1840, noting that calculations of civil penalties involve 

exercises of discretion "traditionally performed by judges." 

Id.

We find Tull inapposite. Rather, we believe that the 

appropriate precedent is Curtis, in which the Court held 

that a "damages action under [42 U.S.C. § 3612] . . . is 

analogous to a number of tort actions recognized at

common law. More important, the relief sought here-- 

actual and punitive damages--is the traditional relief 

offered in the courts of law." Id. at 195-96, 94 S. Ct. at 

1009. Thus, we conclude that the punitive damages remedy 

in a statutory bad faith action under § 8371 triggers the 

Seventh Amendment jury trial right, a result consistent 

with several cases that have decided the issue. See Fahy v.

Nationwide Mut. Fire Ins. Co., 885 F. Supp. 678, 679 (M.D. 

Pa. 1995); Younis Bros. & Co. v. CIGNA Worldwide Ins. Co., 

882 F. Supp. 1468, 1470, 1476 (E.D. Pa. 1994); 

MacFarland v. United States Fidelity & Guarantee Co., 818 

F. Supp. 108, 112 (E.D. Pa. 1993); Thomson v. Prudential

Property & Cas. Ins. Co., No. 91-4073, 1992 WL 210088, *4 

(E.D. Pa. Aug. 24, 1992).3 

_________________________________________________________________ 

3. State Farm relies additionally on three district court cases in which 

the courts held that the issue of punitive damages under § 8371 was for 

the court rather than the jury. See Giampa v. State Farm Ins. Co., No. 

93-4948, 1993 WL 505614 (E.D. Pa. Dec. 8, 1993); Gilderman v. State

Farm Ins. Cos., No. 91-6353, 1991 WL 276017 (E.D. Pa. Dec. 18, 1991); 

Carson v. ITT Hartford Ins. Group, No. 91-3113, 1991 WL 147469 (E.D. 

Pa. July 24, 1991). Notably, however, none of these cases analyzed the 

issue in a Seventh Amendment context. 

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Accordingly, we will affirm the jury's award of punitive 

damages. 

III. 

Klinger and Neyer appeal from the district court's 

decision not to award pre-judgment interest, costs and 

attorney's fees. We have examined their arguments with 

respect to the timing of pre-judgment interest and the 

awarding of costs and find them to be without merit. The 

fee issue requires a little more discussion. 

The district court denied attorney's fees because it 

believed that State Farm had been punished enough by the 

punitive damages the jury had awarded. This reasoning is 

problematic. Indeed at argument, counsel for State Farm 

acknowledged that the statute provides "both punitive and 

remedial" relief. In a general sense, punitive damages are 

awarded to punish the defendant for its bad faith in failing 

to do that which it was contractually obligated to do. 

Attorney's fees, however, are awarded to compensate the 

plaintiff for having to pay an attorney to get that to which 

they were contractually entitled. Along with interest, costs 

and delay damages, the object of an attorney fee award is 

to make the successful plaintiff completely whole. 

Appellants here were put to the unnecessary expense of 

having to hire an attorney by State Farm's refusal to do for 

them what it had contracted to do. Hence, appellants were 

damaged economically as surely as if State Farm had

purposely or negligently rammed one of its automobiles into 

appellants'. The obvious design of the Pennsylvania statute 

is, first, to place Klinger and Neyer in the same economic 

position they would have been in had the insurer performed 

as it promised, by awarding attorney's fees as additional 

damages; and second, to punish State Farm for giving 

primacy to its own self-interest over that of the appellants 

by awarding punitive damages. The separate provisions of 

this statute answer both needs. Thus, it would appear that 

in refusing to award attorney's fees because the defendant 

had been "punished" enough, the court erred. Nonetheless, 

we believe that the error was only in how the court

explained the award, but not in its application of the law. 

 11 
The district court obviously intended to both punish State 

Farm and to make the appellants whole, and it believed 

that the punitive damage award accomplished both. Hence, 

we conclude that a remand is unnecessary. 

IV. 

Because the district court's rulings on the merits were 

legally correct and the jury's verdicts supported by 

sufficient evidence, we will affirm State Farm's crossappeals; and because the court's error is harmless and it is 

unnecessary to remand, we will also affirm Klinger's and 

Neyer's primary appeals. 

A True Copy: 

Teste: 

Clerk of the United States Court of Appeals

for the Third Circuit

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