## 1997 D e c i sion s O p inion s of the U nit e d
S t a t e s C our t of Appe al s for the Thir d C ir c uit

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. e du/thir dc ir c uit_1997/125Filed 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 PENNSYLVANIAArgued: 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 decisi on of the district court denying them costs, attorney's f ees and the full amount of pre-judgment interest they sough t in their otherwise successful bad faith action against State Farm Mutual Automobile Insurance Company. We conclu de that the district court erred only in one aspect--t he reasons

___________________________________________________ ______________

*Honorable Maurice B. Cohill, Jr., United States Di strict Court for the Western District of Pennsylvania, sitting by design ation.

2it gave for denying the request for attorney's fees --but that

its error was in its explanation, not in its applic ation of legal precepts and does not affect the amount to wh ich appellants are entitled. We will therefore affirm.

I.

A.

In August 1992, Klinger and Neyer were seriously in jured in a head-on collision while riding in Klinger's va n, which was one of two vehicles owned by him and insured by State Farm. The other driver's insurance was inadequate t o 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 availabl e under these insurance policies, and the parties agr eed to bifurcate the issues of coverage and damages and to arbitrate them separately.1 Attorney Richard Wix represented State Farm. Attorney David L. Lutz repr esented Klinger and Neyer.

In October 1993, the arbitrators determined that th e coverage available under Klinger's two policies was $115,000. That established, in November, Attorney L utz sent two letters to Wix demanding that State Farm t ender the policy limits to his clients. Wix, however, nev er apprised
State Farm of either of these letters. State Farm c ontends
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 person ally visit Wix's office until March 1994. Nonetheless, i n January 1994, Attorney Lutz told Timothy Spader, a State Fa rm claims representative, the results of the arbitrati on and of his demand letters, when Spader happened to be talk ing to
Lutz about another matter.

___________________________________________________ ______________

1. In April 1993, before the coverage arbitration w as held, State Farm offered each plaintiff $15,000, an amount represent ing the policy limits as State Farm interpreted them. This offer was refu sed.

3Spader then contacted Attorney Wix, who promised hi m

a letter documenting the status of the case. After receiving nothing, Spader finally visited Wix's office person ally in
March 1994 and obtained some medical records and documentary data. Only then did Spader contact Atto rney Lutz, who had earlier written that he was consideri ng 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 J une 28. Again Lutz demanded that State Farm pay the policy limits. Again, State Farm's attorney apparently failed to f orward this request to State Farm. In April, Lutz went aro und State Farm's attorney, writing directly to Spader, and in quired whether State Farm was interested in settling the c ase. Still State Farm offered its insureds nothing.

In June, although the hearing was scheduled for les s 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 appella nts 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 i n paying their claims was a display of bad faith under 42 Pa . C.S.A. § 8371. State Farm removed the case to federal cour t based on diversity of citizenship. The case was tried bef ore a jury, which awarded punitive damages to each plaintiffs i n 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). T he district court denied this motion. Klinger and Neyer filed m otions

4seeking 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 adequ ately punished by the punitive awards. . . ." These appea ls
followed.

II.

A.

State Farm first argues that the evidence was insuf ficient to support the jury's verdict of bad faith. It also asserts that the jury was improperly instructed on the test to b e 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 s et forth in Terletsky v. Prudential Property & Cas. In s. Co. , 649 A.2d 680, 688 (Pa. Super. Ct. 1994), appeal denied , 659 A.2d 560 (Pa. 1995). There, the Pennsylvania Superi or Court applied a two-part test, both elements of whi ch must be supported with clear and convincing evidence: (1 ) that the insurer lacked a reasonable basis for denying b enefits; and (2) that the insurer knew or recklessly disrega rded its
lack of reasonable basis. The district court instru cted the jury accordingly. The Terletsky court also stated, however,
that

"[b]ad faith" on part of insurer is any frivolous o r unfounded refusal to pay proceeds of a policy; it i s not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failur e to pay a claim, such conduct imports a dishonest purpo se and means a breach of a known duty (i.e., good fait h and fair dealing), through some motive of self-inte rest 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 m ust be

5satisfied, to wit, that the insurer was motivated b y 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 "disho nest purpose" such as "self-interest or ill will[,]" thi s is dictum. Moreover, State Farm's self-interest is the only pl ausible 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 Terlets kys 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 Pennsylvan ia Supreme Court would measure bad faith claims, we wi ll rely on the actual test that Terletsky applied and refrain from creating a third part based only on dictum quo ted from Black's Law Dictionary . Accordingly, we conclude that
the district court did not err when it instructed t he jury.

2.

We also believe that the evidence was sufficient fo r a jury
to conclude that State Farm lacked a reasonable bas is for refusing to pay the appellants, and knew or reckles sly disregarded that fact. State Farm acknowledged at o ral argument that it is chargeable with the actions of its attorney. As such, it is also chargeable with his i nactions. Moreover, Mr. Spader testified that, as early as Ma rch 1994, he knew that liability was clear and that Sta te Farm had received a demand package indicating that both Klinger and Neyer had sustained serious injuries. N ext, Wix
himself testified that he advised State Farm to ten der the policy limits before the damages arbitration. Yet, State Farm never offered to pay Klinger and Neyer anythin g beyond the early and clearly inadequate offer it ma de before the coverage arbitration. Finally, plaintiffs' expe rt testified that State Farm acted recklessly and unreasonably. Hence there is ample evidence from which a reasonable jur y could

6have concluded that State Farm knew or recklessly

disregarded the fact that it had no reasonable basi s for refusing to pay its insureds' claims.2 We will not disturb its
verdict.

3.

State Farm challenges the bad faith award to Ms. Ne yer for yet another reason. Neyer demanded $115,000, bu t the arbitrator ultimately awarded only $70,000. Thus, S tate Farm argues, as a matter of law it could not have a cted 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 b e stacked for a total of $1 million in coverage; if they coul d not, the plaintiff 's recovery was limited to $500,000. Aetn a offered $500,000 to the plaintiffs without prejudice to its litigation of the stacking issue, and they accepted the partia l 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 wer e so

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2. State Farm argues that it reasonably relied upon its counsel. We would never opine to the contrary, at least for cer tain advice and representation. Nonetheless, because this point is argued we find it necessary to remark that representation is not an e xcuse 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, serio us 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 it s obligations under the insurance policy to its insureds, one of which is t o pay them compensation if injured. Otherwise, an insurer coul d simply hire counsel, bury its head in the sand, pay when ordere d to do so, retain the use of the insured's money in the meantime, and esc ape without adverse

consequences.

7severe that Aetna should have waived its contractua l

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. Th e 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 concl ude 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 disp uted, whereas State Farm never made any offer to Neyer ei ther after the coverage arbitration was decided, or when the extent of her injuries had become clear to it. A ra tional jury could well have concluded that State Farm, by not m aking an offer to Neyer based upon some objective criteri a it believed compensated adequately for her injuries, knowingly or recklessly acted without reasonable ba sis. The mere fact that the arbitrators ultimately decided t hat Neyer was entitled to less compensation than the amount s he
wanted is not a sufficient basis to relieve State F arm from its responsibility to offer what was reasonably due her. Had it done so, both the damages arbitration and this s uit might well have been avoided. We will not overturn the jury's verdict.

B.

State Farm also takes issue with the jury's decisio n to impose punitive damages. It argues that the evidenc e was insufficient to support such an award and that, in any event, the matter should have been decided by the c ourt 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 Restate ment

8(Second) of Torts governing punitive damages. Delah anty 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 whic h, 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 co uld 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 th e damages arbitration, was egregious enough to warran t punitive damages. We agree. Insurance contracts cre ate affirmative duties: The insured must pay premiums; the insurer must pay when its insured suffers an insure d event. There was testimony from plaintiffs' expert that State Farm's conduct was in reckless disregard of plainti ffs' rights because it "didn't have a good reason for no t making an offer[ ]" and because State Farm was not "consid ering 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 c lear liability and serious injuries." When asked how he would characterize that type of conduct, he answered, "I think that's disregarding, recklessly disregarding the ri ghts 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 d ecided 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 th e court that entered judgment on the verdict. Hence, it had control at all stages.

9Moreover, as State Farm acknowledges, the Seventh

Amendment itself provides the right to trial by jur y 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 relie s on Tull v. United States , 481 U.S. 412, 107 S. Ct. 1831 (1987). In that case, the Supreme Court held that the amoun t of a statutory civil penalty under the Clean Water Act c ould be decided by the trial court, id. at 427, 107 S. Ct. at 1840, even though the issue of liability implicated the r ight 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 i nvolve 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 rel ief
offered in the courts of law." Id. at 195-96, 94 S. Ct. at 1009. Thus, we conclude that the punitive damages r emedy in a statutory bad faith action under § 8371 trigge rs the Seventh Amendment jury trial right, a result consis tent
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 In s. 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. Prude ntial 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); Gi lderman v. State
Farm Ins. Cos. , No. 91-6353, 1991 WL 276017 (E.D. Pa. Dec. 18, 19 91); 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.

10Accordingly, we will affirm the jury's award of pun itive

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 w ith 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 i t believed that State Farm had been punished enough b y the punitive damages the jury had awarded. This reasoni ng is problematic. Indeed at argument, counsel for State Farm acknowledged that the statute provides "both puniti ve and remedial" relief. In a general sense, punitive dama ges are awarded to punish the defendant for its bad faith i n 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 intere st, costs and delay damages, the object of an attorney fee aw ard 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, appellant s were damaged economically as surely as if State Farm had purposely or negligently rammed one of its automobi les into appellants'. The obvious design of the Pennsylvania statute is, first, to place Klinger and Neyer in the same e conomic position they would have been in had the insurer pe rformed as it promised, by awarding attorney's fees as addi tional damages; and second, to punish State Farm for givin g primacy to its own self-interest over that of the a ppellants by awarding punitive damages. The separate provisio ns of this statute answer both needs. Thus, it would appe ar that in refusing to award attorney's fees because the de fendant had been "punished" enough, the court erred. Noneth eless, we believe that the error was only in how the court explained the award, but not in its application of the law.

11The district court obviously intended to both punis h State

Farm and to make the appellants whole, and it belie ved that the punitive damage award accomplished both. H ence, 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 b y sufficient evidence, we will affirm State Farm's cr ossappeals; 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

12