Opinion ID: 1536518
Heading Depth: 3
Heading Rank: 1

Heading: The Bad Faith Statute

Text: We turn first to Toy's issue with regard to the bad faith statute, which asks us to consider whether a bad faith claim within the meaning of § 8371 may be premised on allegations that an insurer engaged in deceptive or unfair conduct in soliciting the insured to purchase an insurance policy. This issue is a question of statutory construction, which the Statutory Construction Act of 1972 (Act) controls. 1 Pa.C.S. § 1501 et seq. Therefore, we begin with the provisions of the Act that guide us. Under the Act, it is fundamental that [t]he object of all interpretation and construction of statutes is to ascertain and effectuate the intention of the General Assembly. 1 Pa.C.S. § 1921(a). The Act instructs that [w]hen the words of a statute are clear and free from all ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its spirit. 1 Pa.C.S. § 1921(b). Significantly, only when the words of the statute are not explicit, is the General Assembly's intent to be ascertained by considering matters other than statutory language, like the occasion and necessity for the statute; the circumstances of its enactment; the object it seeks to attain; and the consequences of a particular interpretation. 1 Pa.C.S. § 1921(c); Commonwealth v. Packer, 568 Pa. 481, 798 A.2d 192, 196 (2002). Lastly, the Act provides that [w]ords and phrases shall be construed according to the rules of grammar and according to their common and approved usage; but that technical words and phrases and such others as have acquired a peculiar and appropriate meaning . . . shall be construed according to such peculiar and appropriate meaning or definition. 1 Pa.C.S. § 1903(a). The latter includes words or terms that have acquired a particular meaning in the law. See Semasek v. Semasek, 502 A.2d 109, 111 (1985). Presently, Toy adopts the trial court's perspective, arguing that the Legislature did not articulate the reach of a bad faith claim under § 8371, and intended the statute to remedy any act that is prohibited to insurers under Pennsylvania's common or statutory law. Thus, Toy argues, if an insured alleges that an insurer violated a provision of the UIPA, as she has, the insured necessarily states a bad faith claim under § 8371. We disagree. In 1990, at the time that the General Assembly enacted § 8371 to provide a remedy to an insured when his insurer `acted in bad faith toward [him],' 42 Pa.S.C. § 8371, the term `bad faith' had acquired a `peculiar and appropriate meaning' in this context. See 1 Pa.C.S. § 1903. When we incorporate that meaning into § 8371, as the Act instructs, and also consider that § 8371 speaks to an action arising under an insurance policy, and grants an award based on the amount of the claim from the date the claim was made by the insured, we need go no further than the words of the statute to ascertain that the Legislature did not intend to provide Toy with a remedy under § 8371 for the deceptive or unfair practices in which she alleges Metropolitan engaged in soliciting her purchase of the Policy. 42 Pa.C.S. § 8371. See 1 Pa.C.S. §§ 1903, 1921(a)-(b). The historical development of the claim that an insured brings against its insurer when he accuses his insurer of acting in bad faith and the consideration that such a claim has been given reveals this to be the case. [12] During the early part of the Twentieth Century, insureds with liability policies who had been sued by third parties were routinely subjected to abusive settlement practices by insurers. Stephen S. Ashley (Ashley), Bad Faith Liability, § 1:03 at 8 (1st ed.1987). Because of these practices, insureds were often compelled to contribute their own monies to settle third party actions or were required to satisfy excess verdicts in actions that they had hoped to settle. [13] When the victims of such practices sought redress in the courts under the terms of their insurance contract, they found themselves without a remedy. This was because liability policies provided then, as they provide today, that an insured could not sue his insurer until a third party had obtained a judgment; that the insurer had full control of the defense and settlement of a claim; and that an insured may not settle except at his own expense. Ashley § 1:02 at 6; C. Schmidt, 90 A. at 654. Having rejected a breach of contract action in these circumstances, the early courts suggested that insureds in these circumstances should pursue a remedy by way of a tort cause of action, such as fraud or negligence. Ashley § 1.03 at p. 8. The law in this regard changed. In the landmark case of Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257 (1930), an insured, who sought the amount he was compelled to pay to a third party who had secured a judgment in excess of the insured's liability coverage, brought a claim against his insurer, alleging that the insurer acted in bad faith, by not defending him properly, withholding information from him, and failing to settle the action within policy limits. Altering its traditional view that there was no remedy for insureds making such allegations, the Wisconsin Supreme Court recognized the insured's claim, and upheld the jury's verdict in his favor. Id. at 257-59. For the court, the theoretical underpinning of the insured's claim was the implied covenant of good faith and fair dealing that is part of every contract, and which provides that neither party to a contract will do anything to injure the right of the other to receive the benefits of their agreement. Id. at 258-59. Moreover, it was the court's view that recognition of such a claim for bad faith was needed in light of the provisions in insurance contracts that give insurers control over the defense and settlement of third party actions. Id. at 258. In time, the courts in many jurisdictions provided a remedy at common law under the implied duty of good faith and fair dealing to an insured with liability insurance who alleged that its insurer acted in bad faith in defending or settling or indemnifying a third party action. Ashley, § 1:05 and cases cited in footnote 1. [14] Pennsylvania was one of those jurisdictions. In Cowden v. Aetna Casualty and Surety Company, 389 Pa. 459, 134 A.2d 223 (1957), this Court considered whether the evidence presented in the action between insured and insurer was sufficient to justify the jury's finding that in deciding to proceed with the trial to verdict, the insurer was guilty of bad faith in arriving at its decision. Even though we upheld the judgment n.o.v. entered for the insurer on the grounds that the evidence was insufficient to impose liability upon the insurer, we acknowledged that the contractual relationship under an indemnity policy was one requiring `a high degree of good faith in the conduct of the indemnity company's counsel generally'; that the insurer must act with the utmost good faith toward the insured in disposing of claims in third-party actions where there is little or no likelihood of a verdict or settlement within policy limits; and that the manner by which an insurer handles the defense of an third-party action can give rise to a claim by the insured that the insurer acted in bad faith. Id. at 229 (quotations omitted). We also noted that Pennsylvania was joining the jurisdictions throughout the country that had held that an insurer may be liable for the entire amount of a judgment secured by a third party against the insured, regardless of any limitation in the policy, if the insurer's handling of the claim, including a failure to accept a proffered settlement, was done in such a manner as to evidence bad faith on the part of the insurer in the discharge of its contractual duty. Id. at 227-28. See also Gray v. Nationwide Mutual Insurance Co., 422 Pa. 500, 223 A.2d 8 (1966) (confirming Cowden's holding) In 1973, this area of the law underwent another significant transformation by way of a decision rendered by the California Supreme Court. In Gruenberg, 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973), the court extended the remedy that had been given to an insured alleging bad faith in the third-party claim setting to an insured alleging bad faith in a first-party claim context. In Gruenberg, the court permitted an insured with a policy insuring his business premises against fire to rely on the implied duty of good faith and fair dealing to sue his insurer for refusing to pay for the property damage he sustained. The court held that where an insurer fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing. Id. at 1037. Thereafter, a number of courts adopted Gruenberg or fashioned a similar approach so as to give a common law remedy to an insured who alleged that his insurer dealt with his first party claim in bad faith. [15] The Pennsylvania courts were not among them. In D'Ambrosio, 431 A.2d at 966, this Court was squarely presented with the opportunity to embrace Gruenberg and allow an insured who had made a first party claim for payment under his property insurance policy to recover compensatory damages, punitive damages and attorneys fees and costs on a theory that his insurer breached the implied duty of good faith and fair dealing by wrongfully refusing to pay for damage to his boats. We acknowledged that under Gruenberg, allegations that an insurer refused to compensate its insured for a loss covered by a policy without proper cause were actionable as a breach of the duty of good faith and fair dealing, and that the insured before us argued that such an action was the only remedy that would prevent insurance industry abuse in the of handling first party claims. Id. at 968. We determined, however, that [a]lthough the seriousness of `bad faith' conduct by insurance carriers cannot go unrecognized, our Legislature ha[d] already made dramatic, sweeping efforts to curb the bad faith conduct[] in the UIPA, and indicated that it was for the Legislature to announce and implement the Commonwealth's public policy governing the regulation of insurance carriers. Id. at 969, 970. Therefore, we declined to supplement the system of sanctions established under the UIPA with a remedy to deter bad faith conduct on the part of insurers in the first party claim setting, and held that the count in trespass for alleged bad faith conduct of an insurer, which seeks both punitive damages and damages for emotional distress, must be rejected. Id. at 970. At the same time, we invited the Legislature to consider whether additional sanctions were required to deter unscrupulous insurers in the Commonwealth. Id. at 970. It was against this backdrop that the General Assembly enacted § 8371 in 1990. It is evident that by this time, the term bad faith as it concerned allegations made by an insured against his insurer, had acquired a particular meaning in the law. That is, the term bad faith concerned the duty of good faith and fair dealing in the parties' contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first party claim context. See, e.g., Cowden, 134 A.2d at 223; D'Ambrosio, 431 A.2d at 966. See also Black's Law Dictionary 139 (6th ed.1990). (`Bad Faith' on the part of an insurer is any frivolous or unfounded refusal to pay proceeds of policy.) In other words, the term captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties' insurance contract. [16] Thus, when § 8371, which provides a remedy in an action arising under an insurance policy as to a claim an insured has made of his insurer, is read with this meaning of bad faith in mind, we can only conclude on the question before us, that the words of the statute are clear and explicit, and that the Legislature intended not to give relief under the bad faith statute to an insured who alleges that his insurer engaged in unfair or deceptive practices in soliciting the purchase a policy. 42 Pa.C.S. § 8371. Accordingly, we hold that Metropolitan Life was entitled to summary judgment on Toy's § 8371 claim as a matter of law. [17] [18]