Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-14-2005

Willow Inn Inc v. Pub Ser Mutl Ins Co
Precedential or Non-Precedential: Precedential

Docket No. 03-2837

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PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT
                ___________

                 Case No: 03-2837
                   ___________

   WILLOW INN, INC., a Pennsylvania Corporation,

                          v.

PUBLIC SERVICE MUTUAL INSURANCE COMPANY,
            a New York Corporation,
                        Appellant

          ____________________________

   On Appeal From The United States District Court
      For The Eastern District Of Pennsylvania
                 (Civ. No. 00–5481)
   District Judge: The Honorable Berle M. Schiller

           __________________________

             Argued November 16, 2004
           __________________________

   Before: ROTH, SMITH, and WEIS, Circuit Judges
                 (Filed: February 14, 2005)

Louis J. Brown, Esq.
Edward M. Koch, Esq. (argued)
White and Williams LLP
1800 One Liberty Place
Philadelphia, PA 19103-7395

Counsel for Appellant.

Howard G. Silverman, Esq. (Argued)
Kane & Silverman, P.C.
2401 Pennsylvania Avenue, Suite 1C-44
Philadelphia, PA 19130

Counsel for Appellee.

Robin S. Conrad, Esq.
National Chamber Litigation Center
1615 H. Street, N.W.
Washington, DC 20062

Carter G. Phillips, Esq.
Eric A Shumsky, Esq.
Sidley Austin Brown & Wood LLP
1501 K Street, N.W.
Washington, DC 20005

Counsel for Chamber of Commerce of the United States –
Amicus Curiae in Support of Appellants.

                             2
Amy Bach, Esq.
United Policyholders
42 Miller Avenue
Mill Valley, CA 94941

Timothy P. Law, Esq.
Anderson Kill & Ollick, P.C.
1600 Market Street, Suite 2500
Philadelphia, PA 19103

Counsel for United Policyholders – Amicus Curiae in Support
of Appellees.
                _______________________

                 OPINION OF THE COURT
                 _______________________

SMITH, Circuit Judge.

        The Willow Inn received the final payment on its
property damage claim over two years after the building was
damaged by a tornado. Having encountered sustained
resistance to its insurance claim rather than cooperation in
settling it, Willow Inn, Inc. sued its real and personal property
insurance carrier, Public Service Mutual Insurance Company
(“PSM”), asserting, inter alia, a $2,000 breach of contract
claim and unspecified punitive damages, attorney fees, and
costs pursuant to Pennsylvania’s bad faith statute, 42 Pa.
Cons. St. § 8371. Following a bench trial, the District Court

                                3
awarded Willow Inn $2,000 in compensatory damages on the
contract claim and $150,000 in punitive damages plus
attorney fees and costs, later set at $128,075 and $7,372,
respectively, on the bad faith claim.

        On M ay 20, 2003, this Court upheld the compensatory
award and the attorney fees and costs awards. We did not
discuss, however, the District Court’s findings that PSM had
breached the insurance contract and had acted in bad faith
under § 8371. Because the District Court had not addressed
its punitive damages award in terms of the United States
Supreme Court’s guideposts enunciated in BMW of North
America, Inc. v. Gore, 517 U.S. 559 (1996), we vacated that
award. We instructed the District Court to determine the
appropriate punitive damages award in accordance with the
Supreme Court’s dictates in Gore and reinforced in State
Farm Mutual Automobile Insurance Company v. Campbell,
538 U.S. 408 (2003), which had been filed after the District
Court’s decision. The District Court’s Gore/Campbell survey
determined that its earlier award accorded with due process,
and it reinstated the $150,000 punitive damages award. We
affirm.

                             I.

      On June 1, 1998, a tornado caused severe damage to
the Willow Inn, a bar/restaurant and residence in Willow
Grove, Pennsylvania. Within days of the storm Willow Inn

                             4
hired a public adjusting firm, Assured Adjustment, on a
contingency fee to assist it in submitting its insurance claim to
PSM. PSM retained McShea Associates to adjust the claim.
On June 23, 1998, Assured Adjustment forwarded its initial
claim estimate of $216,000 to McShea. On July 24, 1998,
McShea countered with its initial claim estimate. Perhaps
predictably, given their opposing incentives (Assured
Adjustment to maximize the claim to increase its fee and
Willow Inn’s recovery, and McShea to minimize the claim to
attract future PSM business), McShea’s estimate of $90,000
was less than 45% of the one prepared by Assured
Adjustment a month earlier.

       At Willow Inn’s request, on September 16, 1998, PSM
advanced a $75,000 payment to its insured. Because of the
variance between their estimates, Assured Adjustment and
McShea retained a contractor to evaluate Willow Inn’s loss
and to facilitate negotiations. With the contractor’s
evaluation and following negotiations, Assured Adjusters and
McShea agreed to a claim amount of $126,810, which
McShea recommended to PSM on October 1, 1998. When
PSM inexplicably failed to respond to its adjuster’s
correspondence for over a month, McShea iterated the
recommendation on November 4, 1998.

      On November 6, 1998, Willow Inn submitted to PSM a
sworn Proof of Loss for $127,810, an amount that after the
$1,000 deductible was the same as that agreed upon by

                                5
Assured Adjustment and McShea. Willow Inn also claimed
an additional $2,000 for costs associated with preparing the
Proof of Loss, the maximum allowed under a separate policy
provision. On November 10, 1998, PSM rejected the
$127,810 Proof of Loss, and did not respond to the $2,000
preparations costs claim. By this time PSM had hired another
estimator, Casson Associates, to evaluate the claim.

       Casson estimated Willow Inn’s loss to be $91,312. On
December 15, 1998, PSM authorized McShea to offer Willow
Inn $16,312 (i.e., the Casson estimate less the $75,000
advance) to settle the claim. Willow Inn rejected this offer.
On January 25, 1999, Willow Inn withdrew its adherence to
the $126,810 proposed settlement, and, per the policy,
requested an appraisal within 20 days.

       On February 1, 1999, PSM refused the appraisal
request, stating that it did not have a sworn Proof of Loss
statement from Willow Inn and that it could not go forward
with an appraisal because it was no longer established that a
dispute in fact existed. The District Court found PSM’s stated
rationale for refusing to participate in the appraisal process to
be disingenuous. Willow Inn had merely retreated from the
settlement offer; it had not withdrawn its Proof of Loss
statement. Despite repeated requests from Willow Inn, PSM
did not submit to an appraisal until October 7, 1999. During
the appraisal process, PSM relied on materially identical
documents it originally averred were insufficient to document

                               6
the existence of a dispute. On July 5, 2000, the appraisal
umpire fixed Willow Inn’s property loss claim at $117,000,
which, less the $75,000 advance, PSM paid on August 17,
2000. PSM did not pay the $2,000 preparations costs claim.
Willow Inn filed this suit two months later.

       The parties agreed to a bench trial. The District
Court’s January 2, 2002, Rule 52(a) Memorandum and Order
awarded W illow Inn $2,000 on the breach of contract claim.
The Court considered the policy provision defraying up to
$2,000 of claimants’ Proof of Loss preparations costs to be
unambiguous, and found that the undisputed evidence at trial
established that Assured Adjustment had reasonably expended
“well in excess of the $2,000 policy limit” in preparing the
Proof of Loss.

        The District Court noted that bad faith under § 83711

  1
      Pennsylvania’s bad faith 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

                                7
must be proven by “clear and convincing evidence and not
merely insinuated,” Terletsky v. Prudential Prop. & Cas. Ins.
Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994), such that it
“enables a court to reach its decision with ‘a clear
conviction.’” Polselli v. Nationwide Mut. Fire Ins. Co., 23
F.3d 747, 751 (3d Cir. 1993).

      The District Court then wrote,

      Mindful of this high standard, I find that PSM ’s
      conduct constituted “bad faith” as contemplated
      by section 8371. Specifically, unreasonable
      delays in the processing of the Willow Inn’s
      claims were extraordinarily unwarranted such
      that there can be no conclusion except that PSM
      knowingly or recklessly disregarded the absence
      of a reasonable basis for its conduct. The
      record is replete with examples of PSM’s failure
      to respond in a timely fashion to Willow Inn’s
      various reasonable requests, and even to the

             interest plus 3%.
             (2) Award punitive damages
             against the insurer.
             (3) Assess court costs and attorney
             fees against the insurer.

42 Pa. Cons. St. § 8371.

                              8
       requests of those working on PSM’s behalf. As
       one egregious example, PSM’s unjustified delay
       in appointing an appraiser prevented the
       appraisal from commencing, despite the Willow
       Inn’s and its adjusters’ diligent efforts, until
       more than eight months after the W illow Inn’s
       initial appraisal request. Similarly, PSM failed
       to pay the Willow Inn for its costs incurred in
       preparing proof of the Willow Inn’s loss, or to
       even acknowledge the Willow Inn’s request for
       more than three months, despite ample evidence
       that the Willow Inn was entitled to this
       compensation. While each of these examples
       standing alone evinces bad faith, this conclusion
       becomes even stronger when one considers the
       abundance of evidence presented at trial
       pointing out the dramatic contrast between the
       Willow Inn’s conscientious efforts and PSM’s
       reckless and obstructive actions. See also 31
       Pa. Code § 146.7(a)(1) (insurer must provide
       notice of its decision to insured within fifteen
       (15) working days after receipt of a proof loss).

      Though “cognizant of multi-million dollar punitive
damage awards in section 8371 cases,” the District Court
concluded that “$150,000 is an appropriate, adequate, and
reasonable award.” The court also indicated that it would
“award appropriate fees and costs after considering Plaintiff’s

                               9
counsel’s forthcoming petition.” After considering Willow
Inn’s petition and the parties’ briefs, on April 11, 2002, the
District Court awarded Willow Inn $128,075 in attorney fees
and $7,372 in costs.

        PSM appealed the District Court’s breach of contract
and bad faith findings, its exercise of discretion in awarding
attorney fees and costs, and its punitive damages assessment,
which PSM argued was constitutionally excessive. We
summarily affirmed the District Court’s decision with respect
to the first three issues, having granted argument limited to
the punitive damages award. We vacated and remanded that
award to the District Court with instructions to apply the
Gore/Campbell guideposts. Willow Inn, Inc. v. Public Serv.
Mut. Ins. Co., 66 Fed. Appx. 398, 2003 U.S. App. LEXIS
9767 (3d Cir. May 20, 2003) (Not Precedential).

       On remand, the District Court declared its $150,000
punitive damages award not to be constitutionally excessive.
Following the three Gore/Campbell guideposts, the District
Court first found PSM ’s behavior reprehensible due to
Willow Inn’s financially vulnerable position, the repeated
misconduct of PSM, and because the unreasonable delay in
PSM ’s payment of the claim was not “mere accident.” Next,
the District Court found the appropriate ratio of the punitive
damages penalty to the harm caused by PSM’s conduct to be
approximately 1:1, because “the punitive damages award of
$150,000 is approximately equal to the value of the Willow

                              10
Inn’s claim under the policy and the payment that it belatedly
received.” As to the guidepost of other sanctions that could
be imposed for comparable misconduct, the District Court
reasoned that the significant attorney fees authorized under §
8371 evince the Pennsylvania legislature’s intent to hold
insurers accountable for acting in bad faith, and that the
significant attorney fees awarded in prior cases gave PSM
notice that its conduct would subject the company to
punishment.

                              II.

       The District Court exercised diversity jurisdiction
under 28 U.S.C. § 1332(a); this Court has final order
jurisdiction under 28 U.S.C. § 1291. We review de novo the
District Court’s decision upholding the constitutionality of the
amount of its punitive damages award. Cooper Indus., Inc. v.
Leatherman Tool Group, Inc., 532 U.S. 424, 431 (2001).
More specifically, we must “engage[] in an independent
examination of the relevant criteria,” id. at 435, to determine
whether the punitive damage award is so “grossly
disproportional” to the defendant’s conduct as to amount to a
constitutional violation. Id. at 434 (quoting United States v.
Bajakajian, 524 U.S. 321, 334 (1998)).

                              III.

       Due process demands that a defendant “receive fair

                              11
notice not only of the conduct that will subject him to
punishment, but also of the penalty the State may impose.”
Gore, 517 U.S. at 574. Thus, punitive damages awards must
not be disproportionately excessive to the degree of
reprehensibility of the defendant’s conduct and the harm that
conduct visited upon the plaintiff, and the award must not
exceed the state legislature’s judgment of the appropriate
sanctions for the conduct. Campbell, 538 U.S. at 418.
Addressing each of the three Gore/Campbell guideposts, and
acknowledging the “inherent imprecision” of the substantive
due process analysis, we consider the $150,000 punitive
damages to approach but not cross the constitutional line. See
Cooper Indus., 532 U.S. at 434-35 (“[T]he relevant
constitutional line is ‘inherently imprecise,’ rather than one
‘marked by a simple mathematical formula.’”) (citations
omitted).

Degree of Reprehensibility

       “Perhaps the most important indicium of the
reasonableness of a punitive damages award is the degree of
reprehensibility of the defendant’s conduct.” Gore, 517 U.S.
at 575. Just as criminal sanctions are calibrated to comport
with the gravity of the offender’s conduct, so should the
amount of the punitive damages imposed on a defendant
“reflect[] the accepted view that some wrongs are more
blameworthy than others.” Id.

                              12
         Given the procedural posture of this case, we find
especially salient the Supreme Court’s observation that with
respect to the reprehensibility inquiry, “the district courts have
a somewhat superior vantage over courts of appeal, and even
then the advantage exists primarily with respect to issues
turning on witness credibility and demeanor.” Cooper Indus.,
532 U.S. at 424. The District Judge presided over this case
for well over a year and ruled on the defendant’s motion for
summary judgment and countless non-dispositive motions.
During a two day bench trial the District Judge heard
testimony from witnesses and observed their demeanor. The
trial transcript reveals several instances in which the District
Judge questioned witnesses and cited specific pages of the
record to which counsel had alluded before counsel
themselves could locate the pages. The transcript reveals a
district judge who was deeply engaged in the proceedings and
who had a thorough grasp of the evidence. M ost importantly,
the critical input to the reprehensibility calculus in this case is
whether the delay in settling the claim was due to legitimate
differences of opinion over its value or, rather, to PSM’s
dilatoriness and inertia. This evaluation was best made by the
judge who heard the testimony and observed the demeanor of
all of the significant participants – adjusters, contractors, and
claims agents – involved in Willow Inn’s claim.

       Further, the importance of the District Court’s superior
vantage is magnified in bench trials. When the Supreme
Court articulated de novo review of punitive damages awards,

                                13
it was in the usual context of an appellate court “passing on
district courts’ determinations of the constitutionality of
punitive damages awards” made by juries. Id. at 436. The
concerns undergirding de novo review may be tempered
somewhat, however, when a federal district judge, rather than
a local jury, is the factfinder setting the punitive damages
award. In such a case, the potential for an ill-founded or
inflated reprehensibility determination is less.

        While due process demands that states guide the
discretion of juries contemplating punitive damages awards,
Cooper Indus., 532 U.S. at 433, concerns of judicial
overreaching dictate that trial judges view jury determinations
of appropriate punitive damages with a measure of deference.
See Dunn v. HOVIC, 1 F.3d 1371, 1381 (3d Cir. 1993) (en
banc) (determining that due process is satisfied where a
district court accords a jury’s punitive damages award
“substantial deference” while “remit[ting] the portion of the
verdict in excess of the maximum amount supportable by the
evidence”) (internal quotation marks omitted). If a jury’s
punitive damages award is free of irrationality, passion, and
prejudice, and falls within the “broad discretion in authorizing
and limiting permissible punitive damages awards” lodged
with state legislatures, Cooper Industries, 532 U.S. at 433; see
Campbell, 538 U.S. at 418, a trial judge should not substitute
his or her view of the appropriate amount of punitive damages
for the jury’s determination. Similarly, the touchstone of
appellate review of punitive damages awards is

                              14
reasonableness, not exactitude. Gore, 517 U.S. at 582; see
Haslip, 499 U.S. at 20 (“As long as the discretion is exercised
within reasonable constraints, due process is satisfied.”). If a
court determines that a jury’s punitive damages award is
constitutionally excessive, Dunn indicates that the court
should decrease the award to an amount the evidence will
bear, which amount must necessarily be as high – and may
well be higher – than the level the court would have deemed
appropriate if working on a clean slate. 1 F.3d at 1381. The
danger inherent in the typical procedure – i.e., for punitive
damages awards to creep toward the constitutional limit as the
potential prejudice infecting a jury’s reprehensibility analysis
and its punitive damages calculus can be tempered but not
eliminated by remittitur – is allayed when a federal judge sets
the amount of punitive damages as an initial matter.

        In sum, while the reprehensibility of PSM’s conduct is
not a “fact” established at trial, see Cooper Industries, 532
U.S. at 437, that the quantum of reprehensibility necessary to
support the punitive damages award was determined to exist
by a judge exercising diversity jurisdiction lessens our
concern that the conclusion was the product of local bias,
distaste for corporate defendants, or sympathy for the
plaintiff.

       The Supreme Court has parsed the reprehensibility
analysis into five subfactors, three of which – the financial
vulnerability of the plaintiff, that the conduct involved

                               15
repeated actions by the defendant, and that the harm was
intentionally inflicted – the District Court determined were
applicable to this case. See Gore, 517 U.S. at 576-77;
Campbell, 538 U.S. at 419. We agree with the District Court
that Willow Inn was financially vulnerable, and that its need
for the insurance proceeds was “particularly pressing.”
Though no documents related to Willow Inn’s financial
standing were introduced at trial, the trial testimony amply
supports the District Court’s finding. For example, the
uncontroverted testimony of Gerald DiMarzio, a Willow Inn
co-owner, was that in the 36 hours following the tornado, he
and neighborhood volunteers fastened tarps to cover holes in
the roof and exterior of the building, and cleared debris from
the building and its grounds to make the area less hazardous.
His testimony established that the Willow Inn is
unquestionably a modest family-run business, and is not an
enterprise with the resources to have had its premises repaired
professionally without the benefit of insurance proceeds.

        The District Court noted that the delay in settling and
paying W illow Inn’s claim “was not the result of one specific
event, but, rather, a series of instances in which PSM failed or
refused to act on Plaintiff’s claim.” The District Court
considered this conduct to evince reprehensibility because
“repeated conduct is more reprehensible than an individual
instance of malfeasance.” Gore, 517 U.S. at 577. The
District Court seems to have misinterpreted this subfactor, at
least as it has been applied by the Supreme Court. The

                               16
“repeated conduct” cited in Gore involved not merely a
pattern of contemptible conduct within one extended
transaction (i.e., the sale of one automobile to Dr. Gore), but
rather specific instances of similar conduct by the defendant
in relation to other parties. In Gore, the behavior the plaintiff
argued was recidivistic involved BMW selling repainted cars
as “new” to 1,000 people, all but fourteen of whom lived in
other states. The claimed recidivistic behavior did not refer to
the series of steps that amounted to the alleged fraud related
to Dr. Gore’s automobile. Similarly, in Campbell, the
plaintiffs essentially attempted to put State Farm’s policy for
minimizing claims on trial. The “repeated conduct” alleged in
Campbell related to the insurer’s nationwide claims handling
practices across thousands of claims, not to the series of
unreasonable decisions various State Farm employees made in
handling the Campbells’ specific claim.

       Here, the District Court improperly considered the
various stonewalling tactics employed by PSM in processing
Willow Inn’s claim to satisfy the “repeated conduct”
reprehensibility subfactor of Gore and Campbell.
Notwithstanding this misinterpretation, however, we consider
this subfactor to be relevant, but with less force, insofar as the
series of actions and inaction by PSM which delayed
settlement of the claim until more than two years after the
windstorm implied a concerted effort to lessen PSM’s
expected payment on the claim. PSM’s pattern of delay
suggests that its actions were designed to achieve a fiscally

                                17
beneficial result for itself at odds with the Pennsylvania
Supreme Court’s long-time dictate that an insurer must act
with the “utmost good faith” toward its insured. Fedas v.
Insurance Co. of Penn., 151 A. 285, 286 (1930).

       As noted by the District Court, valid claimants who
were less diligent than Willow Inn in pressing their claims,
when confronted with similar behavior by PSM, would have
abandoned their claims in frustration. We have little doubt
that had Willow Inn not vigorously pursued a final settlement,
PSM would not have made payment beyond the $75,000
advance. Indeed, the dilatory tactics of PSM effectively
produced an interest-free loan to PSM from W illow Inn of the
difference between the advance and the value of the claim for
as long as PSM was able to stretch out payment. In this
regard, we think the Gore/Campbell “repeated conduct”
subfactor applies to this case in a way not captured in the
“intent” subfactor, to which we now turn.

        The District Court concluded that the unreasonable
delay here was due to PSM’s intentional stonewalling and was
not the result of “mere accident.” Campbell, 538 U.S. at 419
(citing Gore, 517 U.S. at 576-77). We agree. The trial
transcript indicates that PSM repeatedly asked Willow Inn for
documentation that the insured had already submitted or was
otherwise unnecessary; that PSM unreasonably asserted that
no dispute warranting an appraisal existed and told its
appraiser to freeze the appraisal process; and that PSM

                              18
withheld the difference between the lowest pre-appraisal
estimate and its advance payment on the unreasonable ground
that the appraisal might be returned in an amount less than the
lowest estimate. In short, PSM’s conduct in settling and
paying W illow Inn’s claim was a mix of purposefully
indifferent inaction and intentionally dilatory action.

        Our reprehensibility review is not an exhaustive
catalog of PSM’s misconduct. As indicated by the District
Court, the trial transcript reflects “the abundance of evidence
presented at trial pointing out the dramatic contrast between
the Willow Inn’s conscientious efforts and PSM’s reckless
and obstructive actions.” For example, among the actions and
inactions by PSM indicative of bad faith, but not mentioned
by the District Court, was PSM’s inappropriate vagueness in
rejecting the settlement recommended by McShea, PSM ’s
persistent and unvarying attempts to lowball Willow Inn
regarding construction materials, and PSM’s neglect in failing
to keep Willow Inn reasonably apprised of the status of its
claim. Acknowledging, too, that the reprehensibility analysis
is rightly augmented by the demeanor evidence available only
to the District Judge, we cannot conclude that the punitive
damages award here is out of proportion to the
reprehensibility of PSM ’s conduct.

Ratio of Punitive Damages to Harm

       “The second and perhaps most commonly cited

                              19
indicium of an unreasonable or excessive punitive damages
award is its ratio to the actual harm inflicted on the plaintiff.”
Gore, 517 U.S. at 580. The constitutionally acceptable range
is not reducible to a “simple mathematical formula,” id. at
582, and the Supreme Court has been “reluctant to identify
concrete constitutional limits on the ratio.” Campbell, 538
U.S. at 424. Rather, the ratio of punitive damages to the harm
caused by the defendant is a tool to ensure that the two bear a
reasonable relationship to each other. Gore, 517 U.S. at 580;
Campbell, 538 U.S. at 426. While “few awards exceeding a
single-digit ratio between punitive and compensatory
damages, to a significant degree, will satisfy due process,”
Campbell, 538 U.S. 425, greater ratios “may comport with
due process where ‘a particularly egregious act has resulted in
only a small amount of economic damages.’” Id. (quoting
Gore, 517 U.S. at 582).

        The Supreme Court’s ratio discussions evidence a
concern that the punishment should fit the crime, and imply
the general observation that conduct that visits great economic
harm onto a plaintiff is likely to be more culpable than where
the stakes are lower. The Supreme Court has never
suggested, for example, that a large compensatory award
could sustain a significant punitive damages award, regardless
of the resulting compensatory to punitive damages ratio,
where the underlying conduct was not of punishable
character.

                               20
        Accordingly, the question becomes: What figure
comprises the second term of the ratio to compare to the
$150,000 punitive damages award? There is no shortage of
candidates. The District Court used the amount of “Willow
Inn’s claim under the policy and the payment that it belatedly
received” – approximately $125,000 – creating a ratio of
roughly one to one. To reach this ratio, the District Court
reasoned that because Willow Inn had to be uncommonly
diligent in asserting its claim in the face of PSM’s mix of
obstructionism and passivity, the entire claim amount was the
potential harm. The District Court cited TXO Productions,
the seminal “potential harm” case, for the proposition that a
plaintiff’s potential harm and not its actual harm is the
relevant term to compare to the punitive damages award. See
TXO Productions, 509 U.S. at 462. We do not agree that this
is a “potential harm” case or that the claim amount is the
proper figure of comparison. In TXO Productions, the
defendant attempted to defraud the plaintiff out of potentially
lucrative royalties of which the plaintiff was unaware. The
lesson of TXO Productions is that punitive damages amounts
need not be tethered to the small actual harm frauds visited
upon their victims. Rather, just as the criminal justice system
punishes attempts to commit crime with roughly the same
severity as it does substantive offenses, punitive damages
awards can match the scale of the attempted swindle. Here,
PSM was merely unreasonable in not settling and paying
Willow Inn’s claim in a fair and timely manner. Willow Inn’s
claim was limited to repairing wind damage, so TXO

                              21
Production’s potential harm analysis is inapposite.2

        PSM and its amicus argue that the $2,000 award on
Willow Inn’s contract claim is the compensatory award, and
that Campbell’s “single-digit” ratio guidance caps the
punitive damages award at $18,000. Though this solution has
the virtue of clarity, the $2,000 is a red herring, and we do not
adopt it as a term of the ratio analysis. The $2,000 award
relates to only one aspect of PSM ’s bad faith conduct – its
unreasonable refusal to pay on the policy provision defraying
Willow Inn’s costs of preparing the Proof of Loss – and is in
no way indicative of the sum of PSM’s culpability. 3 Section
8371 allows punitive damages awards even in the absence of
other successful claims brought by the plaintiff, see March v.
Paradise Mut. Ins. Co., 646 A.2d 1254, 1256 (Pa. Super.
1994), in which case, according to PSM’s argument, it would

      2
       PSM’s handling of Willow Inn’s claim was marked by
dissembling and feigned ignorance; PSM ’s conduct is not fairly
characterized as fraudulent. In any event, PSM never contested
liability, so the entire claim amount – a disputed but not hidden
figure – was never in jeopardy. The District Court did not note
PSM’s $75,000 advance to Willow Inn in its analysis. Though
this payment four months after the windstorm was not a model
of timeliness, it at least indicates that the entire cost of repairing
the W illow Inn was not at risk.
  3
   The $2,000 figure reflects the ceiling on insurance proceeds
available pursuant to that policy provision.

                                 22
be impossible to formulate a ratio. Thus, as here, when an
insurance claim has been settled and paid, Pennsylvania’s bad
faith statute provides insurance claimants a means of
redressing unreasonable delays by their insurers. Klinger v.
State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 236 (3d Cir.
1997) (upholding a $150,000 punitive damages award on a §
8371 delay claim where the insurance claim had been settled
by an arbitrator before the bad faith claim was filed).
Therefore, we view the $2,000 award on Willow Inn’s
contract claim to be incidental to the punitive damages award.
It would be an improper term to use in the ratio analysis.

        Willow Inn argues that the term for ratio purposes
should include the amount of the claim, attorneys fees and
costs, and should consider the potential profits PSM would
reap from deploying similar stonewalling tactics as its normal
operating procedure. Willow Inn urges that additur into the
millions of dollars is needed to deter PSM from viewing
grudging claims settlement as a revenue stream, i.e., earning
interest on payments delayed and reducing claims payments
by getting valid claims holders to abandon their claims in
frustration. We reject this approach not only because Willow
Inn did not prove at trial that PSM’s conduct here was typical
of its claims handling practices, but because we believe the
$150,000 punitive damages award approaches the
constitutional limit given the reprehensibility of PSM’s
conduct.

                              23
        As Willow Inn’s main insurance claim had been settled
before this case was brought, and because the $2,000 award
on the contract claim was only incidental to the bad faith
thrust of this litigation, we conclude that the attorney fees and
costs awarded as part of the § 8371 claim is the proper term to
compare to the punitive damages award for ratio purposes.
These awards totaled $135,000, resulting in approximately a
1:1 ratio, which is indicative of constitutionality under Gore
and Campbell.

        We acknowledge that this conclusion is not without
conceptual difficulty. The purpose of Pennsylvania’s bad
faith statute and the language establishing the ratio analysis in
Gore and Campbell are in tension. Section 8371 empowers a
court which finds “that the insurer has acted in bad faith
toward the insured” to award interest, shift the insured-
plaintiff’s court costs and attorney fees to the insurer-
defendant, and impose punitive damages. The statute evinces
Pennsylvania’s policy that whereas parties act at arm’s-length
when negotiating insurance contracts, insurers must deal
fairly and not in their narrowly-defined economic self-
interest4 when their insureds submit claims in good faith. See

  4
    The modifier “narrowly-defined” is used here to isolate an
insurer’s economic self-interest to minimizing and delaying
claims payments in any given claim. A broader conception of
economic self-interest would include, for example, the
reputational effects of an insurer becoming known for

                               24
Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d 1228,
1231 (Pa. Super. 1994). Gore states that the ratio analysis is
intended to ensure that a punitive damages award reasonably
relates “to the actual harm inflicted on the plaintiff.” Gore,
517 U.S. at 580; accord Campbell, 538 U.S. at 425.
Pennsylvania policy and the Gore/Campbell ratio language
collide where, as here, an insurer’s conduct in settling and
paying a claim is unacceptable, but where the claim itself was
settled and paid prior to the commencement of a § 8371
action.

        The attorney fees and costs here were awarded in the
insured’s bad faith suit, not in a suit to settle the main
underlying insurance claim, which eventually PSM paid.
Therefore, it is something of a stretch to say that PSM
“inflicted” Willow Inn’s attorney fees and court costs on it.
On the other hand, § 8371 would be useless where, as here,
the allegation is that the insurer acted in bad faith by
unreasonably delaying settlement. Section 8371's attorney
fees and costs provisions vindicate the statute’s policy by

grudgingly settling and slowly paying claims. While other states
may rationally adopt a more laissez-faire stance, Pennsylvania’s
bad faith statute suggests that the state legislature does not
believe the prospect of a bad reputation in handling claims is
sufficient deterrent to guarantee that insurers maintain a
threshold level of diligent, competent, and fair claims settlement
and payment.

                               25
enabling plaintiffs such as Willow Inn to bring § 8371 actions
alleging bad faith delays to secure counsel on a contingency
fee. Moreover, “one function of punitive-damages awards is
to relieve the pressures on an overloaded system of criminal
justice by providing a civil alternative to criminal prosecution
of minor crimes,” Mathias v. Accor Economy Lodging, Inc.,
347 F.3d 672, 676 (7th Cir. 2003), and the structure of § 8371
enlists counsel to perform a filtering function akin to
prosecutorial discretion, because rational attorneys will refuse
to work on a contingent fee arrangement when their
investigation reveals the bad faith allegations of prospective
clients to be meritless.

        Our decision to include awards of attorney fees and
costs in the ratio analysis is supported in the case law. A
recent en banc panel of the Superior Court of Pennsylvania
was unanimous in considering § 8371's attorney fees and
costs awards to be compensatory damages for Gore/Campbell
multiplier purposes. Hollock v. Erie Ins. Exch., 842 A.2d
409, 421 (Pa. Super. 2004) (en banc) (eight-judge majority
opinion); id. at 424 (Klein, J., dissenting) (two judges
dissenting in the judgment, but agreeing with the majority that
attorney fees should be considered in establishing the ratio).
Given the unanimity of the Superior Court on the point and
the policy underlying § 8371, we believe the Pennsylvania
Supreme Court would adopt the Superior Court’s view. See
West v. American Tel. & Tel. Co., 311 U.S. 223, 236 (1940);
Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co.,

                               26
652 F.2d 1165, 1167 (3d Cir. 1981) (“[I]n the absence of an
authoritative pronouncement from the state’s highest court,
the task of a federal tribunal is to predict how that court
would rule.”). We recognize, too, that the Superior Court’s
Hollock decision is not purely its interpretation of
Pennsylvania’s bad faith statute to which we must defer, but
rather is its judgment of how the statute fits a federal
constitutional scheme. See Missouri v. Hunter, 459 U.S. 359,
368 (1983) (stating that although federal courts are bound to
the construction of a state statute by the state’s highest court,
federal courts are not bound to their conclusions of whether
the interpretation comports with the federal Constitution).
We find persuasive and reasonable Hollock’s conclusion that
an award of attorney fees and costs pursuant to § 8371 is an
apt term in the Gore/Campbell ratio analysis. Moreover, it
accords with this Court’s prior discussion of the bad faith
statute’s attorney fees provision. Klinger, 115 F.3d at 236
(“Attorney’s fees ... are awarded to compensate the plaintiff
for having to pay an attorney to get that to which they were
contractually entitled. ... The obvious design of the
Pennsylvania statute is, first, to place [plaintiffs] in the same
economic position they would have been in had the insurer
performed as promised, by awarding attorney’s fees as
additional damages; and second, to punish [the insurer] for
giving primacy to its own self-interest over that of the
[insureds] by awarding punitive damages.”).

       Our conclusion that attorney fees and costs awarded

                               27
pursuant to § 8371 are compensatory damages for
Gore/Campbell ratio purposes creates an approximately 1:1
ratio in this case. Further, we consider the relationship
between punitive and compensatory damages here to be
reasonable given the degree of reprehensibility of PSM’s
conduct.

Civil Penalties

        “The third guidepost in Gore is the disparity between
the punitive damages award and the ‘civil penalties authorized
or imposed in comparable cases.’” Campbell, 538 U.S. at 428
(quoting Gore, 517 U.S. at 575). This guidepost reflects a
“deference to legislative judgments concerning the
appropriate sanctions for the conduct at issue,” Gore, 517
U.S. at 583 (citation and internal citation omitted), and
provides notice of possible sanctions to potential violators.
Id. at 584.

       The District Court on remand wrote, “Because
attorney’s fees are authorized by section 8371– and have been
granted in amounts roughly equal to the punitive damages
award in this case – the relevant considerations under the third
guidepost also support the imposition of the $150,000 award.”
We believe the District Court is mistaken to consider attorney
fees to be a “civil penalty.” A “civil penalty” is a “fine
assessed for a violation of a statute or regulation,” and as such
are paid to the government, not to the opposing party or their

                               28
counsel. Black’s Law Dictionary 1168 (8th ed. 2004).
However, the Supreme Court has suggested that a loss of
one’s business license might count as a civil penalty for
purposes of due process review of punitive damages awards,
see Campbell, 538 U.S. at 428, an interpretation that has been
adopted by the Seventh Circuit. Mathias, 347 F.3d at 678
(upholding an $186,000 punitive damages award on a $5,000
compensatory award under the third guidepost of
Gore/Campbell because the court was “sure that the
defendant would rather pay the punitive damages assessed in
this case than lose its license”).

       Here, both parties agree that the most applicable civil
penalty is contained in Pennsylvania’s Unfair Insurance
Practices Act, 40 Pa. Cons. St. § 1171, which includes a
penalty of up to $5,000 for knowingly “failing to
acknowledge and act promptly upon written or oral
communication with respect to claims arising under insurance
policies, if committed or performed with such frequency as to
indicate a business practice.” 40 Pa. Cons. St. §
1171.5(a)(10)(ii). The punitive damages amount here is 30
times as large as the civil penalty. However, the Supreme
Court has not declared how courts are to measure civil
penalties against punitive damages, and many courts have
noted the difficulty in doing so. See, e.g., BMW of N. Am. v.
Gore, 701 So. 2d 507, 514 (Ala. 1997) (remand from
Supreme Court) (finding the “consideration of the statutory
penalty does little to aid in a meaningful review of the

                              29
excessiveness of the punitive damages award” and remitting
the punitive damages to a figure 25 times the maximum civil
penalty); Campbell v. State Farm M ut. Auto. Ins. Co., 98 P.3d
409, 419 (Utah 2004) (remand from Supreme Court) (terming
this comparison “quixotic” and remitting punitive damages to
a figure 900 times the maximum statutory penalty). We are
similarly unsure as to how to properly apply this guidepost,
and we are reluctant to overturn the punitive damages award
on this basis alone. We note that PSM’s conduct arguably
amounted to multiple violations of § 1171, and that the statute
provides for escalating civil penalties for repeat violations, up
to and including the suspension and revocation of one’s
license to issue insurance policies. 40 Pa. C.S.A. § 1171.9.
We believe that the punitive damages award here honors the
Pennsylvania legislature’s judgment of appropriate sanctions
for PSM’s conduct, as evidenced in various provisions of the
state’s Unfair Insurance Practices Act.

                               IV.

       Because our independent review of the $150,000
punitive damages award in light of the Gore/Campbell
guideposts indicates that the award is not constitutionally
excessive, we affirm the judgment of the District Court.

                               30