### 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

9-30-1997



# P ol sel li v . N a t ion w ide M utl F ir e

P r e c e de n t i al or N on-P r e c e de n t i al :

D ock e t

96-1107



### F o l lo w thi s a nd a dd it ion al w ork s a t : h tt p://d i g it alc ommon s .l a w

. v i l l a no v a

. e du/thir dc ir c uit_1997

Thi s de c i sion i s br ou gh t t o y ou for f r e e a nd ope n a c c e s s b y the 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 a t V i l l a no v a

U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. I t h as be e n a c c e pt e d for inclusion in 1997 D e c i sion s b y a n a uthor i z e d a dmini s tr a t or of V i l l a no v a

U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. F or mor e infor m a t ion, p le as e c on t a ct Be n j a min

. C a rl s on@l a

w

. v i l l a no v a

. e du

. 

### R e c omme nde d C it a t ion

" P o l s e l l i v . N a t ion w ide M utl F ir e " (1997). 1997 D e cisio n s

. P a pe r 234.

h tt p://d i g it alc ommon s .l a

w

. v i l l a no v a

. e du/thir dc ir c uit_1997/234Filed September 30, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96

- 1107

REGINA POLSELLI; RUDOLPH R. POLSELLI,

(Intervenor

- Plaintiff in D.C.)

v.

NATIONWIDE MUTUAL FIRE INSURANCE COMPANY

Regina Polselli,

Appellant

Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civ. No. 91

- cv

- 01365)

Argued

February 7, 1997

Before: STAPLETON and MANSMANN, Circuit Judges

and RESTANI, Judge.*

(Filed September 30, 1997)

Harry P. Begier, Jr., Esquire

(ARGUED)

Harry P. Begier, Jr., Ltd.

1650 Market Street

One Liberty Place, 50th Floor

Philadelphia, PA 19103

Counsel for Appellant

__________________________ _______________________________________

*Honorable Jane A. Restani, Judge, United States Court of International

Trade, sitting by designation.

R. Bruce Morrison, Esquire

(ARGUED)

Marshall, Dennehey, Warner,

C oleman & Goggin

1845 Walnut Street

Philadelphia, PA 19103

Counsel for AppelleeOPINION OF THE COURT

MANSMANN, Circuit Judge.

In this case of first impression, we must decide whether

a plaintiff who prevails on a claim f or bad faith conduct,

pursuant to 42 Pa. Cons. Stat. Ann. S 8371, may recover

attorney's fees against an insurer for time spent

prosecuting the bad faith claim itself, in addition to those

fees attributable to prosecuting the underlying insurance

cont ract claim, under section 8371(3). We conclude that

such fees may be assessed.

We are also faced with the issue of whether, and under

what circumstances, a court may enhance a fee under

Pennsylvania law to reflect the contingent risk of

nonpayment a ssumed by the plaintiff 's attorney in

accepting the case on a contingent

- fee basis. We conclude

that a court may enhance a fee in such circumstances, but

only to the extent that the enhancement (1) reflects the

contingent risk of the particular case a nd (2) is not based

on factors already considered in calculating the lodestar

amount.

We will reverse the judgment of the district court in part

and will remand for further proceedings.

I.

After a fire destroyed her home, Regina Polselli sued

Nationwide Mutual Fire Insurance Company for benefits

due under her insurance contract with Nationwide and for

damages under 42 Pa. Cons. Stat. Ann. S 8371 for

2

Nationwide's alleged bad faith in handling her cla ims.1 On

the day of trial, the parties settled Polselli's contract claims

for building loss, personalty loss, and additional living

expenses. The court conducted a bench trial on the bad

faith claim, the only remaining claim.

The court found, by a p reponderance of the evidence,

that Nationwide had acted in bad faith with respect to

Polselli's personalty and living expense claims and awarded

$90,000 in punitive damages. Polselli v. Nationwide Mut.

Fire Ins. Co., No. CIV.A.91

- 1365, 1992 WL 247271 ( E.D. Pa.

Sept. 23, 1992). The court did not assess attorney's fees at

that time, or upon motion for reconsideration, because

Polselli had not presented evidence at trial to establish a

reasonable assessment. Id., 1992 WL 247271, at *8; Polselli

v. Nat ionwide Mut. Fire Ins. Co., No. CIV.A.91

- 1365, 1993WL 137376, at *1 (E.D. Pa. Apr. 30, 1993).

Polselli subsequently filed a Motion to Assess Costs and

Attorney's Fees accompanied by a verified statement signed

by Polselli's counsel, Harry P. Begier, Jr. After an

evidentiary hearing, the court assessed costs and attorney's

fees against Nationwide. Polselli v. Nationwide Mut. Fire Ins.

Co., No. CIV.A.91

- 1365, 1993 WL 479050 (E.D. Pa. Nov. 12,

1993). Begier submitted a list of billable hours totalin g

346.9 hours, and Nationwide did not dispute the

reasonableness of this claim. Id., 1993 WL 479050, at *4.

The court determined that Begier's regular hourly rate was

$300. The court thus calculated the "lodestar" amount to

be $104,070 ($300 per hour multiplied by 346.9 hours).

Finding the case to be unique in that it was based upon the

"relatively new" Pennsylvania bad faith statute, the court

concluded that Begier faced a "substantial risk of a minimal

recovery and [an] extensive number of hours risked . . .

with no guarantee of remuneration." Id. Citing what it

called the "closely analogous" provisions of Pa. Stat. Ann.

tit. 41, S 503, which permit a court to enhance a fee award

________________________________________________________________ _

1. The district court had diversity jurisdiction pursuant to 28 U.S.C.

S 1332. A federal court exercising diversity jurisdiction must apply the

substantive law of the state whose laws govern the action. Kleinknecht v.

Gettysburg College, 989 F.2d 1 360, 1365 (3d Cir. 1993). The parties

agree that Pennsylvania law governs this dispute.

3

based on the "contingency or the certainty of

compensation," the court found it appropriate to increase

the lodestar amou nt by sixty percent, or $62,442. Id. The

court assessed a total attorney's fee against Nationwide in

the amount of $166,412. Id.

Nationwide appealed both the merits determination of

bad faith and the subsequent assessment of fees and costs.

We rever sed the merits determination and remanded for

application of the "clear and convincing evidence" standard

to the bad faith claim. Polselli v. Nationwide Mut. Fire Ins.

Co., 23 F.3d 747, 750

- 51 (3d Cir. 1994); see also Terletsky

v. Prudential Property & Cas. Ins. Co., 649 A.2d 680, 688

(Pa. Super. Ct. 1994) (bad faith must be proven by clear

and convincing evidence). We did not reach the issue of

attorney's fees.

On remand, the district court found that Polselli satisfied

the higher burden of proo f. Polselli v. Nationwide Mut. Fire

Ins. Co., No. CIV.A.91

- 1365, 1995 WL 430571 (E.D. Pa.

July 20, 1995). We affirmed by judgment order. Polselli v.Nationwide Mut. Fire Ins. Co., No. 95

- 1715 (3d Cir. May 3,

1996).

Polselli filed a Renewed Motion to Assess Attorney's Fees,

and the district court heard oral argument on the motion.

At that time, Nationwide conceded that $300 per hour was

a reasonable rate for Begier's services.2 Likewise,

Nationwide did not challenge the hours claimed by Begier.

Rather, Nationwide argued that section 8371 allows for the

award of attorney's fees only with respect to those hours

expended on the underlying insurance contract claim and

not on the bad faith claim itself.

The district court agreed with Nationwide. The court

concluded that section 8371 creates a new cause of action,

independent and distinct from the underlying policy action.

Further, the court found that "[t]o allow attorney['s] fees for

prosecuting bad faith claims would reimburse plaintiff for

costs beyond those necessitated by the insurer's conduct,

indirectly augmenting the punitive damages already

_________________________________________________________________

2. We express no view regarding whether $300 per hour is a reasonable

rat e for Begier's services.

4

awarded." Polselli v. Nationwide Mut. Fire Ins. Co., No.

CIV.A.91

- 1365, 1995 WL 678212, at *3 (E.D. Pa. Nov. 14,

1995). The court assessed fees in favor of Polselli only for

work relat ed to the insurance contract claims for personalty

losses and living expenses, and not for the time spent

litigating the bad faith claim. Id.

The parties subsequently filed a stipulation allocating

154.9 hours for the time Begier dedicated to the

co ntractual claims as to personalty losses and living

expenses. The revised lodestar amount was therefore

$46,470 ($300 per hour multiplied by 154.9 hours).

Nationwide also argued that the court should not

enhance the fee as it did in its November 1993 order. The

court agreed: "Given the decision not to assess fees for

work on plaintiff's bad faith claim, the court's earlier

rationale for enhancing the hourly rate no longer applies."

Id. The court reasoned that its earlier justification for the

six ty percent enhancement

-- the complexity of the bad

faith claim and the uncertainty of prevailing on that claim

-- did not apply to an award of fees premised solely on time

spent prosecuting a straightforward insurance contract

claim. Id., 1995 WL 6782 12, at *2

- 3. The court assessed

attorney's fees in the amount of $46,470 againstNationwide.

Nationwide appealed from the court's order of attorney's

fees on the ground that Polselli was not entitled to fees

because Nationwide had not acted in bad f aith in its

handling of the underlying insurance claims, a position still

then pending in Nationwide's appeal from the merits of the

district court's finding of bad faith. Polselli cross

- appealed

from the district court's calculation of the fee assessm ent.

When we affirmed the district court's finding of bad faith,

Polselli v. Nationwide Mut. Fire Ins. Co., No. 95

- 1715 (3d

Cir. May 3, 1996), Nationwide withdrew its appeal. The only

matter presently before us is Polselli's appeal from the

assessment of attorney's fees.3

_________________________________________________________________

3. We have jurisdiction over this appeal from afinal order pursuant to 28

U.S.C. S 1291. The district court's application and interpretation of

state

law is subje ct to plenary review. Hofkin v. Provident Life & Accident Ins.

5

II.

In 1981, the Pennsylvania Supreme Court refused to

create a common law "bad faith" cause of action for a

plaintiff whose insurance company w rongfully refused to

pay a claim under an insurance policy. D'Ambrosio v.

Pennsylvania Nat'l Mut. Cas. Ins. Co., 431 A.2d 966 (Pa.

1981); see also Johnson v. Beane, 664 A.2d 96, 99 n.3 (Pa.

1995) (there is no common law remedy in Pennsylvania for

insu rer bad faith). In 1990, in what some call a delayed

response to D'Ambrosio, the Pennsylvania legislature

enacted 42 Pa. Cons. Stat. Ann. S 8371, entitled "Actions on

Insurance Policies." The statute reads as follows:

In an action arising unde r 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:

(1) 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 of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the

insurer.

42 Pa. Cons. Stat. Ann. S 8371. In this case of firstimpression, we must decide whether a cause of action for

bad faith under section 8371 is itself an "action arising

under an insurance policy."

Although the issue of whether a section 8371 cause of

action arises un der an insurance policy is an open

question, in other contexts a Pennsylvania intermediate

_________________________________________________________________

Co., 81 F.3d 365, 369 (3d Cir. 1996). In the absence of any precedent of

the Pennsylvania Sup reme Court, we must predict how that court would

decide this issue. Winterberg v. Transportation Ins. Co., 72 F.3d 318,

321

- 22 (3d Cir. 1995). In predicting how the state supreme court would

rule on the issue, we should give intermediate appellate court decisions

"significant weight in the absence of an indication that the highest state

court would rule otherwise." City of Phila. v. Lead Indus. Ass'n, 994 F.2d

112, 123 (3d Cir. 1993).

6

appellate court has hel d that claims brought under section

8371 are "distinct from the underlying contractual

insurance claims from which the dispute arose." Nealy v.

State Farm Mut. Auto. Ins. Co., 695 A.2d 790, 792 (Pa.

Super. Ct. 1997) (deciding that unlike contract cause of

action, "distinct" bad faith cause of action could not be

decided by arbitration panel but had to be decided by

court); accord March v. Paradise Mut. Ins. Co., 646 A.2d

1254, 1256 (Pa. Super. Ct. 1994) (deciding that bad faith

cause of action was not barred by policy's limitations clause

since it was "separate and distinct" from underlying

contract cause of action, which was barred); Romano v.

Nationwide Mut. Fire Ins. Co., 646 A.2d 1228, 1231 (Pa.

Super. Ct. 1994) (permitting "separate and dis tinct" bad

faith cause of action to be based on alleged violation of

Unfair Insurance Practices Act); see also Winterberg v.

Transportation Ins. Co., 72 F.3d 318, 326 (3d Cir. 1995)

(noting that "Pennsylvania case law shows an intent to

allow a separa te action on the `bad faith' statute").

Section 8371 provides an "independent cause of action to

an insured that is not dependant upon success on the

merits, or trial at all, of the contract claim." Nealy, 695

A.2d at 793; accord March, 646 A.2d at 1 256 (insured's

claim for bad faith is "independent of the resolution of the

underlying contract claim"); Doylestown Elec. Supply Co. v.

Maryland Cas. Ins. Co., 942 F. Supp. 1018, 1020 (E.D. Pa.

1996) (insured may bring bad faith claim prior to resoluti on

of contract dispute). While not obvious from the language of

section 8371, it is apparent that Pennsylvania courts have

interpreted section 8371 to create "a cause of action that

exists separately and independently from a claim on theinsurance con tract itself." Winterberg, 72 F.3d at 326.

Nationwide argues, and the district court agreed, that

since a section 8371 cause of action is separate and

distinct from the cause of action to obtain benefits due

under the policy, the section 8371 cause o f action is not an

"action arising under an insurance policy" and fees may not

be awarded for the time spent litigating the bad faith claim.

We conclude, however, that the separate and independent

cause of action for bad faith is still an action"arisin g under

an insurance policy" such that attorney's fees may be

7

awarded for time spent litigating the issue of bad faith. We

reach this conclusion for three reasons: (1) the bad faith

cause of action depends on the existence of a predicate

contract cause of action; (2) the bad faith cause of action

enables an insured to enforce an insurer's implicit

contractual duty of good faith; and (3) assessment of

attorney's fees for time spent prosecuting the bad faith

cause of action is necessary to fulfill the "make whole"

purpose of section 8371(3).

Initially, we observe that under the plain language of the

statute, it is reasonably clear that a section 8371 claim may

not be the sole claim of an insured. Sectio n 8371 provides

that "[i]n 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

. . . ." 42 Pa. Cons. Stat. Ann. S 8371. This languag e implies

that a determination of bad faith is merely an additional

finding to be made in a predicate action arising under an

insurance policy. Absent a predicate action to enforce some

right under an insurance policy, an insured may not sue an

insure r for bad faith conduct in the abstract.

In Winterberg, the district court concluded that the bad

faith claim "must be related to at least one other colorable

claim over which the court has jurisdiction." Winterberg v.

CNA Ins. Co., 868 F. Supp. 713, 722 (E.D. Pa. 1994), aff'd,

72 F.3d 318 (3d Cir. 1995). The court reasoned that "[h]ad

the legislature wanted to allow a person wronged by his or

her insurance company to sue directly, and only, under

[section] 8371, surely it would not have used the language

it did." Id. at 722 n.13 (emphasis in original). We agree.

Instead of creating a cause of action for bad faith conduct

that can exist in a vacuum, the Pennsylvania legislature

provided an insured with additional remedies upon a

finding of bad faith made in a predicate action under an

insurance policy.Of course, an insured may list the section 8371 cause of

action and the contract cause of action as separate counts

in the same complaint. E.g., Boring v. Erie Ins. Group, 641

A.2d 1189, 1 190 (Pa. Super. Ct. 1994); Doylestown, 942 F.

Supp. at 1020 (noting that courts interpreting section 8371

have "consistently entertained multi

- count complaints

8

containing both unresolved insurance contract disp utes

and bad faith claims"). An insured may also, as Polselli did

here, settle the claim under the policy and proceed to trial

on the bad faith claim alone. Indeed, the bad faith claim

may remain viable even if the insured fails to file suit on

the pr edicate policy claim within the period required by the

policy. March, 646 A.2d at 1256

- 57; accord Margolies v.

State Farm Fire & Cas. Co., 810 F. Supp. 637, 641

- 42 (E.D.

Pa. 1992). At the very least, however, the predicate policy

cause of action must b e ripe before a section 8371 cause of

action may be recognized. Doylestown, 942 F. Supp. at

1019

- 20 (so long as claim under insurance policy is ripe for

judicial determination, bad faith issue is also ripe); see also

Nealy, 695 A.2d at 793, 794 n.4 (ba d faith claim runs

"parallel" to contractual claim and can be "brought

contemporaneously with or subsequent to" the contractual

claim); March, 646 A.2d at 1256 ("[S]ection 8371 provides

relief only in actions `arising under' an insurance policy

. . . . [Section] 8371 was promulgated to provide additional

relief to insureds . . . .") (emphasis supplied).4

Next, we conclude that since an insurer's duty of good

faith toward an insured is implicit in every insurance

policy, an action to enforce that duty must necessarily

"arise under" that policy. There is no common law private

remedy for bad faith conduct, but the Pennsylvania

Supreme Court has long recognized that an insurer must

act with the "utmost" good faith toward its insured. Fedas

v. Ins urance Co. of Pa., 151 A. 285, 286 (Pa. 1930); accord

Dercoli v. Pennsylvania Nat'l Mut. Ins. Co., 554 A.2d 906,

909 (Pa. 1989) (insurer was "bound" to act in good faith

toward the insured). In Romano v. Nationwide Mut. Fire Ins.

Co., 646 A.2d 1228 (Pa . Super. Ct. 1994), the court

concluded that an insurer's duty of good faith exists

_________________________________________________________________

4. In the ordinary case, the insured's insurance contract cause of action

and bad faith cause of act ion may be brought in the same action. It may

be, however, that an insured is unable to bring the contract action due

to the running of the applicable limitations period. See, e.g., March, 646

A.2d at 1256. In that case, the insured should indicate that the

predicate contract cause of action, which was viable at one time, may

not now be brought due to the running of the applicable limitationsperiod.

9

"because of the special relationship between an insurer an d

its insured and the very nature of the insurance contract.

The insurer's duty of good faith, therefore, is contractual

and arises because the insurance company assumes a

fiduciary status by virtue of the policy's provisions which

give the insurer th e right to handle claims and control

settlement." Id. at 1231.

In Okkerse v. Prudential Prop. & Cas. Ins. Co., 625 A.2d

663 (Pa. Super. Ct. 1993), the court held that section 8371

applied so long as the alleged bad faith conduct occurred

after the e ffective date of section 8371, even though the

insurance contract was entered into prior to the effective

date of the section. Id. at 664. The court reasoned:

[The insurer's] obligations under the policy issued

prior to the effective d ate of section 8371 have not been

changed. Section 8371 also does not affect either the

terms of the insurance contract or the vested rights

thereunder. It merely prohibits an insurer from

engaging in a bad faith refusal to pay benefits due

under the policy. An insurer did not have a right to act

in bad faith toward its insured prior to the statute's

enactment. Thus, it is clear that the statute is not

being applied retroactively in this case.

Id. at 665

- 66 (citations and footnote omitted, emphasis

supplied); see also Seeger by Seeger v. Allstate Ins. Co., 776

F. Supp. 986, 988 (M.D. Pa. 1991) (there is no contractual

right to act in bad faith); Coyne v. Allstate Ins. Co., 771 F.

Supp. 67 3, 675 (E.D. Pa. 1991) (insurer "never had the

right to act in bad faith toward the insured").

In Winterberg v. Transportation Ins. Co., 72 F.3d 318 (3d

Cir. 1995), we held that a workers' compensation claim is

not "based on an insurance policy" with in the meaning of

section 8371:

The [workers' compensation] claim is statutory and has

its genesis in the contract of hire between the employer

and employee, see, [Pa. Stat. Ann. tit. 77, S 431], not

an insurance contract . The employer's obligation to pay

for a compensable injury is not predicated on an

insurance policy.

10Id. at 325 n.4. In contrast, while a section 8371 bad faith

claim itself is created by statu te, the claim has its genesis

in the policy of insurance. The insurer's duty of good faith

toward an insured is predicated on the fiduciary

relationship created at the inception of the contract

between the parties. In other words, but for the insurance

policy, Nationwide would not owe a duty of good faith to

Polselli. The fact that Polselli's ability to enforce that duty

was altered by statute does not change the fact that the

duty itself arose by contract.

In deciding whether a section 8371 acti on "arises under"

an insurance policy, we should determine where the

insured's rights at issue arose, not whether the policy itself

permits the insured to enforce those rights. In this case, a

section 8371 action is brought to enforce an insured's righ t

to be free from the bad faith conduct of the insurer. That

right is inherent in every insurance policy, and it therefore

"arises under" the insurance policy. The fact that the

enforcement mechanism is statutory is of no consequence.5

Finally, an a ward of attorney's fees under section 8371 is

meant "to compensate the plaintiff for having to pay an

attorney to get that to which [the plaintiff was]

contractually entitled. Along with interest, costs and delay

damages, the object of an attorney fee award is to make the

successful plaintiff completely whole." Klinger v. State Farm

Mut. Auto. Ins. Co., 115 F.3d 230, 236 (3d Cir. 1997). In

this case, Nationwide's bad faith conduct forced Polselli to

incur attorney's fees to obtain the benefits due u nder the

insurance policy. To be made "completely whole," therefore,

Polselli needed to obtain those fees from Nationwide. To

obtain those fees, however, Polselli was required to incur

additional attorney's fees to prove, by clear and convincing

evide nce, that Nationwide acted in bad faith. In other

_________________________________________________________________

5. Our view is informed by reference to the Pennsylvania legislature's use

of the phrase "arising under" in other contexts. For example , Pa. R. Civ.

P. 2207 is captioned "Actions Arising Under Foreign Law." Rule 2207

deals with actions brought "to enforce rights arising under the laws of

some other jurisdiction." Pa. R. Civ. P. 2207 (emphasis supplied). Thus,

in this context, an "acti on to enforce rights arising under [X]" is itself

an

"action arising under [X]."

11

words, to obtain the fees necessary to make Polselli whole,

Polselli was required to incur additional fees.This is not a tra ditional fee

- shifting statute where a

prevailing party may be automatically entitled to a

reasonable fee. An insured is not entitled to recover her fees

merely because she prevails on her claim to enforce the

policy; rather, the insured must also preva il on the bad

faith claim. The Pennsylvania rules of statutory

construction state that, in general, the "provisions of a

statute shall be liberally construed to effect their objects

and to promote justice." 1 Pa. Cons. Stat. Ann. S 1928(c).

The narrow construction of section 8371 proposed by

Nationwide runs counter to this rule. If Polselli was unable

to obtain the fees incurred in proving Nationwide's bad

faith, Polselli would never be made whole and the purpose

of section 8371(3) would be thwarte d.6

We predict that the Pennsylvania Supreme Court would

conclude that, upon a finding of bad faith conduct by clear

and convincing evidence, a trial court may assess attorney's

fees against an insured for the time spent (1) litigating the

claim un der the policy and (2) litigating the bad faith claim

itself.7

_________________________________________________________________

6. Cf. In re Tutu Wells Contamination Litig. , 120 F.3d 368 (3d Cir.

1997).

In Tutu Wells, the district court imposed hea vy sanctions upon a law

firm, several of its partners, and its client for discovery violations in

connection with an environmental lawsuit. The court also imposed the

sum of $120,000 on the law firm as counsel fees and costs incurred by

the moving part ies for the time they spent in connection with the

underlying sanctions proceedings. We affirmed the award of counsel fees

and costs. We reasoned:

The time, effort, and resources expended in bringing sanctionable

conduct to light would have been unnecessary had the sanctionable

conduct never occurred. These costs are as much a harm to a party

in the litigation as is the delay in the litigation or the

substantive

prejudice caused by the conduct. If we exclude from a possible

award the costs of sanctions proceedings, we would undermine the

compensatory goal of a sanctions award.

Id. at 388.

7. We recognize that some other jurisdictions draw a distinction between

fees incurred by an insured to o btain benefits due under a policy and

12

III.

Section 8371 does not provide any guidance on how atrial court should calculate a reasonable attorney's fee.8

Courts deciding cases under Pennsylvania law are gui ded

by Pennsylvania Rule of Civil Procedure 1716 when

considering the amount of a reasonable fee:

In all cases where the court is authorized under

applicable law to fix the amount of counsel fees it shall

consider, among other t hings, the following factors:

(1) the time and effort reasonably expended by the

attorney in the litigation;

(2) the quality of the services rendered;

(3) the results achieved and benefits conferred upon

the cl ass or upon the public;

(4) the magnitude, complexity and uniqueness of the

litigation; and

(5) whether the receipt of a fee was contingent on

success.

Pa. R. Civ. P. 1716.9 The district court did not rely on Rule

__ _______________________________________________________________

those incurred in prosecuting a bad faith claim against the insurer to

obtain damages that are not included in the policy benefits. See, e.g.,

Bernhard v. Farmers Ins. Exch., 885 P.2d 265 , 271

- 72 (Colo. Ct. App.

1994), aff'd, 915 P.2d 1285 (Colo. 1996); Schwartz v. Farmers Ins. Co.

of Ariz., 800 P.2d 20, 22

- 23 (Ariz. Ct. App. 1990); Brandt v. Superior

Court, 693 P.2d 796, 798

- 800 (Cal. 1985); see also Kirchoff v. American

Cas. Co., of Reading, Pa., 997 F.2d 401, 406

- 07 (8th Cir. 1993)

(predicting South Dakota law). Other jurisdictions allow a successful

plaintiff to recover fees for time spent preparing and trying a bad faith

claim. See, e.g., Thompson v. Shelter Mut. Ins., 875 F.2d 1460, 1463

- 64

(10th Cir. 1989) (predicting Oklahoma law).

8. Like costs, attorney's fees under section 8371(3) may be assessed after

a finding of bad faith is made at the conclusion of trial. It is not

necessary for an insured's attorney to introduce evidence of attorney's

fees and costs at trial; rather, such evidence may be considered upon

motion following trial.

9. Before the adoption of Rule 1716, the Pennsylvania Supreme Court

instructed trial courts to consider, inter alia, the amount of w ork

13

1716; it looked instead to Pa. Stat. Ann. tit. 41,S 503,

which permits borrowers and debtors who prevail in usury

actions against their lenders to recover a "reasonableamount for attorney's fee." Id. S 5 03(a). In determining the

amount of a section 503 fee, the court may consider:

(1) the time and labor required, the novelty and

difficulty of the questions involved and the skill

requisite properly to conduct the case;

(2) the customary charges of the members of the bar

for similar services;

(3) the amount involved in the controversy and the

benefits resulting to the client or clients from the

services; and

(4) the contingency or the certainty of the

compensation.

Id. S 503(b).10

The question of what standard to apply in calculating

attorney's fees and costs is a legal question and is subject

to plenary review. While section 503 and Rule 1716 are

similar, the di strict court should have looked to Rule 1716

in calculating a reasonable fee. Ultimately, however, we are

not concerned with the specific list of factors the district

court cited when it calculated the fee in this case. Rather,

we turn to the task of d etermining whether the fees

_________________________________________________________________

performed, the character of the services rendered, the difficulty of the

problems involved, the importance of the litigation, the amount of money

or value o f the property in question, and the results the attorney was

able to obtain. In re Trust Estate of LaRocca, 246 A.2d 337, 339 (Pa.

1968).

10. Contrary to Polselli's assertion, a court assessing a section 503 fee

is

not required to enhance a fee based on the contingency or the certainty

of compensation. Indeed, whether the court even considers contingency

is a matter within the court's discretion. Pa. Stat. Ann. tit. 41, S 503

(court "may" consider contingency). Even under Rule 1716, where

consider ation of contingency is required, a district court need not

actually enhance a fee based on contingency.

14

assessed are, under the circumstances of the case,

"reasonable."11

A.

We will affirm the judgment of the district court insofaras it assessed attorney's fees in the amount of $46,470

against Nationwide for the time Begier spent litigating the

contract claim. The district court first calculated the

lodestar amount based on the stipulated hourly ra te for

Begier's work in non

- contingency matters and stipulated

number of hours allocated to the contract claim. 12

Assuming that an enhancement for contingent risk was

permissible, see Pa. Stat. Ann. tit. 41,S 503(b)(4), the court

considered a myriad of factors in an effort to determine

whether it was appropriate to enhance the lodestar amount

to account for the contingency or certainty of the

compensation. The court found that the contract claim was

not unique or complex, and that it did not entai l a

substantial risk of failure. Thus, the court concluded that

a contingency enhancement was not appropriate for the

time Begier spent litigating the contract claim. Polselli v.

Nationwide Mut. Fire Ins. Co., No. CIV.A.91

- 1365, 1995 WL

678212, at *3

- 4 (E.D. Pa. Nov. 14, 1995). We will not

interfere with the district court's exercise of discretion. On

remand, the district court should not reconsider the fee

award relating to prosecution of the contract claim.

_______________________________________ __________________________

11. If the correct legal standards are applied and the findings of fact

are

not clearly erroneous, the reasonableness of a fee award is reviewed only

for abuse of discretion. Abrams v. Lightolier Inc., 50 F.3d 1204, 1219 (3d

Cir. 1995); accord In re Trust Estate of LaRocca, 246 A.2d 337, 339 (Pa.

1968); Commonwealth v. PBS Coals, Inc., 677 A.2d 868, 870 (Pa.

Commw. Ct.) ("award of attorney's fees and costs is within the discretion

of the trial court, whose discretion will not be disturbed on appeal

absent abuse of discretion"), appeal denied, 686 A.2d 1313 (Pa. 1996);

Shaw by Ingram v. Bradley, 672 A.2d 331, 332 (Pa. Super. Ct. 1996).

12. The "lodestar" amount is a product of the number of attorney hours

reasonably e xpended on the particular case and the reasonable hourly

rate of compensation for the attorney's services. Adjustments to the

lodestar amount are made as appropriate. While the Pennsylvania state

courts have not yet embraced the lodestar method, we beli eve that the

factors considered in Rule 1716 are implicitly taken into account in the

lodestar method.

15

B.

We turn now to the district court's task on remand.

Before it decided that Polselli was unable to r ecover

attorney's fees for the time spent litigating the bad faith

cause of action, the district court found that the bad faith

claim was based on a relatively new statute, that there was

little guidance from the statute or the caselaw, and thatPolse lli faced a high risk of no recovery on the bad faith

claim. Citing section 503, the court increased the lodestar

amount by sixty percent to account for the "the contingency

or the certainty of the compensation." Pa. Stat. Ann. tit. 41,

S 503(b)(4). Si nce the district court later eliminated the

enhancement when it determined that fees were

unavailable for the bad faith claim, we are not in a position

to review a final order of the district court imposing

attorney's fees calculated with a contingency enhancement.

We write further only to provide the district court with

some guidance in the hope that this case, which began

almost seven years ago and which has reached our court

for decision three times, will soon draw to a close.

Initially, we ar e reminded that a trial court in a section

8371 action "may" assess attorney's fees and costs against

an insurer upon a finding of bad faith, but it need not

award such fees. The decision to assess attorney's fees and

costs against an insured upon a fi nding of bad faith is

wholly within the discretion of the trial court, whose

discretion will not be disturbed on appeal absent abuse of

discretion. Thus, if a district court exercises its discretion

to assess fees for time spent litigating the contract cause of

action, but not the time spent litigating the bad faith cause

of action, or if it elects not to assess any fees at all, we will

not disturb that decision absent abuse of discretion.13

Should the district court on remand elect to assess

att orney's fees against Nationwide for the time spent

litigating the bad faith claim, it must apply the proper legal

_________________________________________________________________

13. Our ability to review, and reverse, the district court's decision n ot

to

assess fees on Polselli's bad faith cause of action rests on the court's

legal error in concluding that such fees may not be awarded as a matter

of law. Had the court elected not to assess such fees as a matter of

discretion, we could not have in terfered with that decision.

16

standards in calculating such fees. Rule 1716 instructs the

court to consider, inter alia, the magnitude, complexity and

uniqueness of the litigation, and whether the receipt of a

fee was contingent on success. Polselli asserts that the

district court should consider two manifestations of

contingency enhancement: (1) an enhancement to take into

account the complexity and risk of Polselli's bad faith claim

against Nationwide; an d (2) an enhancement to reflect the

risk of contingency

- fee cases as a class. Nationwide

contends that contingency enhancement is impermissible in

any context. Absent guidance from the Pennsylvania courtson these issues, we predict that the Pennsylvan ia Supreme

Court would limit the use of contingency enhancements

that reflect the risk of the particular contingency litigation

and that it would reject the use of contingency

enhancements that reflect the risk of contingency

- fee cases

as a class.

1.

In City of Burlington v. Dague, 505 U.S. 557 (1992), the

Supreme Court held that the fee

- shifting provisions of two

federal statutes do not permit enhancement of a fee beyond

the lodestar amount to reflect the fact that the prevailing

party's att orneys were retained on a contingent

- fee basis.

The Court rejected the argument that "a `reasonable' fee for

attorneys who have been retained on a contingency

- fee

basis must go beyond the lodestar, to compensate for risk

of loss and of consequent nonpa yment." Id. at 562.

The Court first rejected the use of contingency

enhancements that reflect the risk of no recovery in a

particular case. The Court concluded that an "enhancement

for contingency would likely duplicate in substantial part

factors a lready subsumed in the lodestar." Id. The Court

reasoned that the attorney's contingent risk of no recovery

in a particular case is the product of (1) the legal and

factual merits of the claim and (2) the difficulty of

establishing those merits. Id.

Rejecting the encouragement of attorneys to bring

nonmeritorious claims, the Court noted that thefirst factor

should not be considered in calculating a reasonable fee. Id.

17

at 563. In other words, the risk of no recovery in a case is

high if the legal and/or factual merits of the case are low.

In this context, to enhance a fee award based on degree of

risk would encourage attorneys to bring nonmeritorious

claims

-- clearly not an objective of the typical fe e

- shifting

statute. Id.

The Court noted that the second risk factor

-- difficulty

and complexity

-- is ordinarily reflected in the lodestar,

"either in the higher number of hours expended to

overcome the difficulty, or in the higher hourly rate of t he

attorney skilled and experienced enough to do so." Id. at

562. Taking into account the complexity or difficulty of a

case would, therefore, ordinarily amount to double counting

and would skew the calculation of a "reasonable" rate. Id.

at 563.T he Supreme Court concluded that a contingency

enhancement based on the attorney's contingent risk in a

given case is unwarranted. Were this case based on a

federal fee

- shifting statute, we would instruct the district

court pursuant to Dague not to cons ider the contingent risk

Begier accepted when he agreed to pursue Polselli's bad

faith claim against Nationwide.

Since this case is governed by Pennsylvania law,

however, we must predict whether the Pennsylvania

Supreme Court would permit considerat ion of the

contingent risk of a particular case in calculating a

reasonable fee for that case. We conclude that the

Pennsylvania Supreme Court would permit such

consideration in a bad faith claim under section 8371.

The federal fee

- shifting statutes considered in Dague did

not provide for consideration of contingent risk. If those

statutes did require district courts to consider contingent

risk, we believe that Dague would have been decided

differently. The Dague majority found no justification f or

recognizing a common law enhancement for contingent risk;

a statutory provision requiring consideration of

enhancement would have been quite another matter.

Unlike courts assessing fees under the federal fee

- shifting

statutes like those considere d in Dague, courts assessing

fees under section 8371 are guided by Pennsylvania Rule of

18

Civil Procedure 1716. Rule 1716 provides that courts shall

consider, among other things, the magnitude, complexity

and u niqueness of the litigation and whether the receipt of

a fee was contingent on success. Pa. R. Civ. P. 1716. Thus,

even if the Pennsylvania Supreme Court was persuaded by

Dague, it would be bound by Rule 1716.

While we predict that the Pennsylvania S upreme Court

would permit courts to consider a case's contingent risk

when calculating a reasonable fee, we also predict that the

court would conclude that a contingency enhancement

would not apply in every case. As the Supreme Court

reasoned in Dague , a contingency enhancement often will

duplicate factors already subsumed in the lodestar amount.

For example, a difficult case may require a high number of

hours dedicated to research or discovery. Or, it might

require the skills of someone who ordina rily bills at a high

hourly rate. Both of these factors are considered in

calculating the lodestar amount, and they should not be

reconsidered in enhancing the lodestar.We predict that the Pennsylvania Supreme Court would

permit a trial court to en hance the lodestar amount to

account for a particular case's contingent risk only to the

extent that those factors creating the risk are not already

taken into account when calculating the lodestar amount.

Thus, when a trial court is faced with a reque st to enhance

a fee based on contingent risk arising from the magnitude,

complexity and uniqueness of the litigation, the court

should exercise caution so as not to skew the calculation of

a reasonable rate by double counting. For example, if the

comp lexity of a case is reflected in the high number of

hours researching the complex issues or in the relatively

high regular hourly rate of the attorney, complexity does

not justify a contingency enhancement.

The court should also consider whether the attorney was

able to mitigate the risk of nonpayment. For example, an

attorney who has entered into a contingency

- fee contract in

a suit seeking substantial damages has significantly

mitigated the contingent risk; in exchange for accepting the

risk of nonpayment, the attorney obtains the prospect of

compensation under the agreement substantially in excess

of the lodestar amount. Likewise, "attorneys who are paid a

19

portion of their reasonable hourly fee irr espective of result

have partially mitigated the risk of nonpayment." Rendine v.

Pantzer, 661 A.2d 1202, 1229 (N.J. 1995).

We emphasize that the determination of a reasonable fee

is an inherently case

- specific endeavor. Just as every case

is unique, so too are the particularized risks faced by

attorneys accepting contingency

- fee cases. We are therefore

reluctant to provide courts with a specific list of factors to

consider in determining whether and to what extent a

contingency enhancement is app ropriate in any given case.

When applying Rule 1716, courts must consider whether

the receipt of a fee was contingent on success. Courts must

not, however, deviate from their ultimate responsibility

--

the calculation of a "reasonable" fee. To the exte nt that the

factors creating a contingent risk in a particular case are

mitigated or are already taken into account when

calculating the lodestar amount, a contingency

enhancement is not "reasonable" and should not be

applied.

In Rendine, the New J ersey Supreme Court departed from

Dague and established a rule favoring the award of

contingency enhancements to prevailing parties under the

New Jersey Law Against Discrimination. The court held

that "a counsel fee awarded under a fee

- shifting statutecannot be `reasonable' unless the lodestar, calculated as if

the attorney's compensation were guaranteed irrespective of

result, is adjusted to reflect the actual risk that the

attorney will not receive payment if the suit does not

succeed." Rendine, 661 A.2d at 1228. The court focused on

risk of attorney non

- payment, and it recognized that such

risk will vary with the circumstances of each unique case.

The court concluded that "contingency enhancements in

fee

- shifting cases ordinarily should rang e betweenfive and

fifty

- percent of the lodestar fee, with the enhancement in

typical contingency cases ranging between twenty and

thirty

- five percent of the lodestar." Id. at 1231. We believe

that our prediction of Pennsylvania law is not significantly

different from the statement of New Jersey law in Rendine.

See, e.g., id. at 1228 (acknowledging concern about

overpayment and double counting).

20

2.

Polselli also contends that the district court should ha ve

considered a contingency enhancement to account for the

riskiness of contingency

- fee cases as a class. In her

concurring opinion in Pennsylvania v. Delaware Valley

Citizens' Council for Clean Air, 483 U.S. 711 (1987)

(Delaware Valley II), Justice O 'Connor wrote that

contingency enhancements should not be based on the

particular risks of an individual case, but rather should be

based on the risk of loss in the "class" of case. Id. at 731

(O'Connor, J., concurring). In Dague, the Court rejected

t his theory of enhancement. Dague, 505 U.S. at 563

- 65.14

In Rendine, the New Jersey Supreme Court also rejected

the view that "all contingent

- fee cases should be treated as

a class, without distinction based on their specific

circumstances." Rendine, 66 1 A.2d at 1229.

_________________________________________________________________

14. Polselli draws our attention to Black Grievance Comm. v. Philadelphia

Elec. Co., 690 F. Supp. 1393 (E.D. Pa. 1988). In Black, the district court

awarded a 200 perce nt contingency enhancement in an employment

discrimination action. That court followed the reasoning of Delaware

Valley II, and it placed special emphasis on Justice O'Connor's

concurring opinion in that 4

- 1

- 4 decision. Black , 690 F. Supp. at 1398

(ci ting Delaware Valley II, 483 U.S. at 731 (O'Connor, J., concurring)).

The district court found that "the market compensates for contingency

cases at a rate of approximately 200% and that it would be significantly

more difficult for plaintiffs to obtain counsel willing to handle

employment discrimination class actions if plaintiff's counsel had no

prospect of receiving a contingency enhancer." Black, 690 F. Supp. at

1401.While Polselli relies heavily on Black, she fails to mention that in

Dague, t he Supreme Court expressly rejected Justice O'Connor's

concurring opinion in Delaware Valley II, and concluded that a

contingency

- fee enhancement was never appropriate under the fee

shifting statutes at issue. Dague, 505 U.S. at 563

- 67. If the district

court

decided Black today, the court would have concluded that a contingency

enhancement was not appropriate in that case.

We are reminded that Third Circuit Local Appellate Rule 28.3(b)

provides that for each legal proposition supported by citation s in the

argument, "counsel shall cite to any opposing authority if such authority

is binding on this Court, e.g., U.S. Supreme Court decisions . . . ." 3d

Cir. R. 28.3(b) (emphasis supplied).

21

Trial courts ar e charged with the duty to attempt to

calculate a "reasonable" fee in a particular case. To

consider the risk of contingency fee cases as a class skews

that calculation. Recognizing the individualized inquiry

necessary to the calculation of a "reasonab le" fee, we

predict that the Pennsylvania Supreme Court would reject

the argument that trial courts may enhance a lodestar

amount to account for the riskiness of contingency

- fee

cases as a class.15

Similarly, we predict that the Pennsylvania Supreme

Court would not permit trial courts to enhance a lodestar

amount to account for the purported riskiness of a more

limited class of contingency

- fee cases (e.g., insurance cases

"as a class" or civil rights cases "as a class"). To the extent

that it is permitted at all, enhancement must be based on

the specific risks of the specific case.

Polselli also contends that Begier's "contingent

- fee billing

rate" is approximately double his non

- contingent fee billing

rate, and that the district court shoul d use his "contingent

fee billing rate" in the calculation of a reasonable fee. This

argument ignores the reality of the contingency agreement.

By its very nature, contingent litigation entails an

______________________________________________________ ___________

15. In Romano by Romano v. Lubin, 530 A.2d 487 (Pa. Super. Ct. 1987),

the Pennsylvania Superior Court reasoned:

It must also be noted that attorneys often accept cases on a

contingent fee basis which result in no recovery. The lawyer not

only

does not get paid, he will lose the money he has advanced the

clientto pay for the costs of the suit. When the court calculates the fee

of

a plaintiff 's attorney, it must consider that the very same

attorney

may have spent thousands of uncompensated hours working on

other cases. A single recovery may constitute the better portion of

his yearly income.

Id. at 488. We predict that the Pennsylvania Supreme Court would not

agree with thi s reasoning. Fee

- shifting statutes"were not designed as a

form of economic relief to improve the financial lot of lawyers." Dague,

505 U.S. at 563 (quoting Pennsylvania v. Delaware Valley Citizens'

Council for Clean Air, 478 U.S. 546, 565 (1986) (Delawa re Valley I)). An

attorney's inability to obtain fees in unrelated cases should have no

bearing on the attorney's "reasonable fee" in the case in which he is

successful.

22

agreement whereby a client agrees to p ay an attorney a

certain percentage of any money recovered by settlement or

judgment. It does not entail an agreement whereby a client

agrees to pay an attorney a fee of double his non

contingency hourly rate if the plaintiff is successful. Thus,

whi le a reasonable fee is to be calculated "according to the

prevailing market rates," Rode v. Dellarciprete, 892 F.2d

1177, 1183 (3d Cir. 1990), there is "no such thing as a

prevailing market rate in contingent litigation." 2 Mary

Frances Derfner & Arthu r D. Wolf, Court Awarded Attorney

Fees P 16.04[4], at 16

- 140 (rev. ed. 1997). It may be true

that an attorney's fee in a contingent

- fee case is often

mathematically equivalent to twice the fee the attorney

would have received if the attorney billed at the attorney's

non

- contingent regular hourly rate. It does not follow that

the attorney's contingent fee "rate" is equal to double the

attorney's non

- contingent fee "rate."

On remand, the district court may elect to assess

attorney's fees against Na tionwide for the time Begier spent

litigating Polselli's bad faith claim. If it chooses to assess

such fees, the court may consider the possibility of

enhancing those fees to reflect the contingent risk posed by

this particular case. In considering thi s possibility, the

court should not consider any factor already taken into

account in calculating the lodestar amount nor should the

court consider the risk posed by contingent

- fee cases as a

class.

IV.

Polselli also contends that the district co urt may assess

fees against Nationwide for the time Begier spent preparingand litigating the fee petition itself. It is well

- settled that

under federal law, "the time expended by attorneys in

obtaining a reasonable fee is justifiably included in the

attorneys' fee application, and in the court's fee award."

Prandini v. National Tea Co., 585 F.2d 47, 53 (3d Cir. 1978)

(explaining that a contrary holding would "not comport with

the purpose behind most statutory fee authorizations");

Public Interest Research Group of N.J., Inc. v. Windall, 51

F.3d 1179, 1190 (3d Cir. 1995) ("legal services rendered in

23

a dispute over the attorneys' fees due a prevailing plaintiff

are recoverable under a fee shifting statut e").

Pennsylvania courts have carved out a narrow exception

to this general rule, concluding that an attorney may not

recover fees for time spent preparing and litigating a fee

petition when such efforts are directed solely to the benefit

of the att orney and not the client. Weidner v. Workmen's

Comp. Appeal Bd., 442 A.2d 242, 245 (Pa. 1982). In

Weidner, a workmen's compensation claimant had a

contingent fee agreement with his attorney whereby there

would be no fee if the claimant did not receive an award.

Although the attorney successfully resisted suspension of

the claimant's benefits, there was no additional award;

hence, the attorney was not entitled to any fee from the

claimant. When the attorney later successfully pursued

statutory fees under the Workmen's Compensation Act, the

claimant had no interest in the fee litigation because the

outcome of that litigation did not impact the claimant's

obligation to pay his attorney. Thus, the attorney was not

entitled to recover fees for the ti me the attorney spent

seeking fees on his own behalf. See Allums v. Workmen's

Comp. Appeal Bd., 532 A.2d 549, 551

- 52 (Pa. Commw. Ct.

1987) (discussing Weidner).

Reasonable fees incurred in the course of fee petition

preparation and litigation may be recovered, however, as

long as the client has a material interest in the fee

litigation. Milton S. Hershey Med. Ctr. v. Workmen's Comp.

Appeal Bd., 659 A.2d 1067, 1070

- 71 (Pa. Commw. Ct.

1995); Allums, 532 A.2d at 552 (attorney is entitled to fees

wh en work is on behalf of client's interests).16 We believe

_________________________________________________________________

16. In American Mut. Liab. Ins. Co. v. Zion & Klein, P.A., 489 A.2d 259

(Pa. Super. Ct. 1985), the court stated that an award o f counsel fees "is

not usually intended to include reimbursement for fees and expenses

incurred in proceedings to recover such attorney's fees." Id. at 262

(citing

Weidner, 442 A.2d 242). Weidner did not stand for this proposition;rather, the Pennsylv ania Supreme Court merely held that an attorney

may not recover fees for time spent solely for the benefit of the attorney

and not the client. Weidner, 442 A.2d at 245. We predict that the

Pennsylvania Supreme Court would choose not to follow Zion & Kle in,

and would instead adopt the "material interest" test of Milton S. Hershey

Medical Center, 659 A.2d at 1070

- 71.

24

that a client has a material interest in the outcome of the

fee proceedings when those procee dings could affect the

client's duty to pay her attorney. See Milton S. Hershey, 659

A.2d at 1070

- 71. We leave it to the district court to

determine whether Polselli had a material interest in the

outcome of the fee proceedings. If she did have a mater ial

interest in those proceedings, the court may, in its

discretion, assess a reasonable attorney's fee for the time

Begier spent preparing and litigating the fee petition.17

V.

In Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230

(3d Cir. 1997), the district court denied attorney's fees to a

successful section 8371 plaintiff because it believed that

the insurer "had been punished enough" by the punitive

damages already awarded. Reasoning that punitive

damages are awarded to punish the d efendant for bad faith,

while attorney's fees are awarded to make the successful

plaintiff whole, we rejected the district court's explanation.

Id. at 236. We declined to remand for assessment of

attorney's fees, however, finding that the "district cou rt

obviously intended to both punish State Farm and to make

the appellant whole, and it believed that the punitive

damages award accomplished both." Id.

We are unable to determine whether the district court in

this case had the same intention as the district court in

Klinger. It appears from its opinions that the district court

intended that the punitive damages award serve exclusively

to punish Nationwide and that the attorney's fee award

serve to compensate Polselli. To the extent that the dist rict

court did intend the punitive damages award to both

punish Nationwide and make Polselli whole, the court

should indicate how much of the punitive damages award

was attributed to attorney's fees, and it may reduce the

_____________________________ ____________________________________

17. Since the fee petition litigation is separate from the merits

litigation,

the court should calculate the fee assessment for this time separately

from the fee assessment for the time spent litigating the bad fai th claim.

In this case, it is highly unlikely that a contingency enhancement wouldbe appropriate for the time spent preparing and litigating the fee

petition.

25

final assessment of fees accordingly. To avoid t he potential

confusion we faced in Klinger, courts should specify which

portion of the final award is attributable to punitive

damages under section 8371(2) and which portion is

attributable to attorney's fees under section 8371(3).

VI.

In Hensle y v. Eckerhart, 461 U.S. 424 (1983), the

Supreme Court stated that "[a] request for attorney's fees

should not result in a second major litigation." Id. at 437.

In Dague, the Supreme Court noted that permitting

contingency enhancement "make[s] the sett ing of fees more

complex and arbitrary, hence more unpredictable, and

hence more litigable. It is neither necessary nor even

possible for application of the fee

- shifting statutes to mimic

the intricacies of the fee

- paying market in every respect."

Dag ue, 505 U.S. at 566

- 67. Unfortunately, as in a growing

number of cases in both state and federal court, the real

issues in this case have been overshadowed by a dispute

over attorney's fees. We join the Supreme Court in hoping

that future litigants wil l be able to resolve amicably the

amount of a fee. Hensley, 461 U.S. at 437. While the issue

of attorney's fees is not necessarily minor, it should remain

"ancillary and collateral to the underlying controversy.

Thus, [parties] should refrain from maki ng it a major

controversy." Windall, 51 F.3d at 1190.

We will remand this case so that the district court may

assess attorney's fees in a manner consistent with this

opinion.

A True Copy:

Teste:

Clerk of the United States Court of Appea ls

for the Third Circuit

26