Opinion ID: 3032771
Heading Depth: 3
Heading Rank: 1

Heading: Bad Faith Failure to Settle

Text: Medical Protective contends the evidence did not support liability for a bad faith failure to settle. Pennsylvania has long recognized a contractual cause of action for bad faith conduct on the part of an insurer. Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 229 (Pa. 1957). Pennsylvania also provides a statutory remedy, which permits an insured to recover interest, punitive damages, court costs, and attorneys’ fees. 42 Pa. Cons. Stat. § 8371.9 Section 8371 does not define “bad faith,” but Pennsylvania courts and our court have recognized the “universally acknowledged meaning”: “Bad faith” on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such 9 The statute provides: In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions: (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. § 8371 (2006). 14 conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith. Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 751 (3d Cir. 1994) (quoting Black’s Law Dictionary 139 (6th ed. 1990)). We have adopted the test the Pennsylvania Superior Court enunciated in Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1994), which requires a plaintiff, to recover under § 8371, to show by clear and convincing evidence that the insurer: “(1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim.” J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 367 (3d Cir. 2004) (citations omitted); Terletsky, 649 A.2d at 688. “[T]he motive of self-interest or ill will” of the insurer, while not a third element, “is probative of the second element . . . .” Greene v. United Servs. Auto. Ass’n, 936 A.2d 1178, 1190–91 (Pa. Super. Ct. 2007) (internal quotation marks omitted); see also Employers Mut. Cas. Co. v. Loos, 476 F. Supp. 2d 478, 490–91 (W.D. Pa. 2007) (“[C]onsiderations of ‘the motive or self-interest or ill will’ are probative with respect to a refusal to pay being frivolous or unfounded.”). The “clear and convincing” standard requires the plaintiff to show the evidence is “‘so clear, direct, weighty, and convincing as to enable the jury to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue.’” In re Estate of Fickert, 337 A.2d 592, 594 (Pa. 1975) (quoting La Rocca Trust, 192 A.2d 409, 413 (Pa. 1963)). 15 An insurer owes a fiduciary duty to its insured and “must accord the interest of its insured the same faithful consideration it gives its own interest.” Cowden, 134 A.2d at 228. The Pennsylvania Supreme Court explained this standard of care: [W]hen there is little possibility of a verdict or settlement within the limits of the policy, the decision to expose the insured to personal pecuniary loss must be based on a bona fide belief by the insurer, predicated upon all of the circumstances of the case, that it has a good possibility of winning the suit. . . . Good faith requires that the chance of a finding of nonliability be real and substantial and that the decision to litigate be made honestly. Id. This standard “requires more than proof of sincerity; the evaluation of the case by the insurance company must be honest, intelligent and objective.” Shearer v. Reed, 428 A.2d 635, 638 (Pa. Super. Ct. 1981) (citation and internal quotation marks omitted). Section 8371 is not limited to an insurer’s bad faith denial of a claim. Pennsylvania has recognized that an insured may recover against an insurer which, in bad faith, fails to settle on the insured’s behalf. Birth Ctr. v. St. Paul Cos., Inc., 787 A.2d 376, 389–90 (Pa. 2001). A failure to settle will constitute bad faith if an insured has acted in its own selfinterest: [T]here is an inherent conflict of interest between an insurance company and its insured once an offer to settle within policy limits has been received. Whenever the insurance company decides not to settle, it has, in effect, chosen its interests over that of its insured’s . . . . Shearer, 428 A.2d at 639. Medical Protective contends there was no evidence of a demand or expressed willingness to settle within policy limits on the part of Jurinko. The District Court instructed the jury on this point according to Pennsylvania’s standard jury instructions: 16 “There must be an expressed willingness on the part of the third party, the plaintiff in the underlying litigation, at some point in time, to accept an offer of policy limits.”10 Pennsylvania Suggested Standard Civil Jury Instructions § 13.21. Both parties submitted this instruction. Dr. Marcincin’s policy limits, consisting of $200,000 of coverage under 10 We have found no case interpreting Pennsylvania law that has explicitly required an “expressed willingness” on the part of a plaintiff to settle within the policy limits, despite the language of the standard jury instructions. Some states have adopted a bright-line rule in which a plaintiff must make a demand within policy limits in order for an insured to have a claim of bad faith. See, e.g., Messersmith v. Mid-Century Ins. Co., 43 Ca. Rptr. 2d 871, 880 (Cal. Ct. App. 1995) (“Until the insurer is faced with a demand for policy limits, it comes under no duty to evaluate the possibility of an excess judgment.”); Haddick ex rel. Griffith v. Valor Ins., 763 N.E.2d 299, 304–05 (Ill. 2001) (“Since Illinois law generally does not require an insurance provider to initiate settlement negotiations, this duty . . . does not arise until a third party demands settlement within policy limits.”). Other states do not require the insured to show it made a settlement offer within the policy limits. See, e.g., Snowden ex rel. Estate of Snowden v. Lumbermens Mut. Cas. Co., 358 F. Supp. 2d 1125, 1127–29 (N.D. Fla. 2003) (offer to settle by the claimant is not necessary, but the “unwillingness of a victim to settle” is a defense, although the burden of proof is on the insurer); Kingsley v. State Farm Mut. Auto. Ins. Co., 353 F. Supp. 2d 1242, 1248–52 (N.D. Ga. 2005) (finding, while it is unnecessary for a claimant to make a policy limits offer, an insurer must be “on notice that it has an opportunity to settle”), aff’d, 153 F. App’x 555 (11th Cir. 2005). A bright-line rule requiring a demand within policy limits does not appear to reflect Pennsylvania law or the realities of settlement negotiations. “The event constituting breach of the fiduciary duty to handle settlement negotiations in good faith is the refusal to accept a settlement offer which would be reasonably advantageous to the insured in the light of all circumstances known at the time.” LaRocca v. State Farm Mut. Auto. Ins. Co., 329 F. Supp. 163, 169 (W.D. Pa. 1971) (emphasis added); see also Puritan Ins. Co. v. Canadian Universal Ins. Co., 775 F.2d 76, 82 (3d Cir. 1985) (“An insurance carrier may be required to broach settlement negotiations under some circumstances . . . .”). An insurer’s actions may arguably constitute bad faith whether a plaintiff makes a demand within the policy limits or not. Here, we need not reach the question of whether Pennsylvania law imposes a bright-line rule, as the court instructed the jury that an expressed willingness to settle within the policy limits must be shown and the parties do not challenge the instruction. 17 his policy with Medical Protective and $1 million with the CAT Fund, totaled $1.2 million. Frost, Jurinko’s attorney, made a demand of $1.1 million. Therefore, Jurinko demonstrated “an expressed willingness” to settle within the policy limits. The District Court found, and we agree, that the Jurinkos presented sufficient evidence to find a bad faith failure to settle. Alff made it clear Medical Protective “did not have a reasonable basis for” failing to settle “under the policy.” Terletsky, 649 A.2d at 688. He testified that Medical Protective’s refusal to offer more than $50,000 in a settlement was a “negotiating tactic” — Alff thought by refusing to offer more money he could force the CAT Fund to offer more from Dr. Edelman’s policy. This refusal demonstrated an abandonment of the fiduciary duty Medical Protective owed to Dr. Marcincin. Medical Protective acted in its own self-interest rather than in the interest of Dr. Marcincin. Such negotiating tactics do not provide a reasonable basis for failing to tender Dr. Marcincin’s policy limits. Medical Protective “recklessly disregarded its lack of reasonable basis,” id., for failing to tender the policy limits based on “motive[s] of self-interest,” Greene, 936 A.2d at 1190. Two different judges put a settlement value on the case of at least $1.5 million, and Alff believed the case was worth $750,000 but would likely settle for $1 million. The CAT Fund’s letter informed Medical Protective it was acting in bad faith by failing to tender policy limits. Medical Protective knew the CAT Fund, as Dr. Marcincin’s excess insurer, could not offer any money on behalf of Dr. Marcincin in settlement unless Medical Protective tendered its policy limits of $200,000. 18 Medical Protective presented evidence showing it believed, going into the underlying trial, that Dr. Marcincin was not liable. Kilcoyne hired a physician to examine Jurinko’s medical records, who found no connection between the cancer on Jurinko’s nose and the cancer on his neck. Nevertheless, the evidence still supported a claim for bad faith. “[U]nder Pennsylvania law an insurer does not comply with the good faith standard when it refuses to settle merely because it believes that its insured is not liable for the claim asserted.” Haugh v. Allstate Ins. Co., 322 F.3d 227, 237 (3d Cir. 2003) (citing Shearer, 428 A.2d at 638). Medical Protective cannot satisfy its duty of good faith “merely by showing that it acted with sincerity.” Birth Ctr. v. St. Paul Cos., Inc., 727 A.2d 1144, 1156 (Pa. Super. Ct. 1999). While the other parties — Jurinko, Dr. Marcincin, the CAT Fund, and SmithKline — all were interested in reaching a settlement, Medical Protective would not budge from its initial offer. All the parties, including Medical Protective, knew the case was worth far more than $200,000, but Medical Protective refused to negotiate in good faith, instead engaging in admittedly unfair negotiation tactics. Accordingly, we agree with the District Court that there was sufficient evidence for the jury to find Medical Protective acted in bad faith by failing to offer its policy limits in a settlement.