Superior Court Issues Important Bad Faith Decision

by Amy Kirkham

The Pennsylvania Superior Court recently confirmed, and some would argue expanded, its 1994 decision in Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d 1228 (Pa. Super. 1994). On April 17, 2012, the Court held that a plaintiff seeking damages for an insurer’s bad faith conduct under Section 8371 of the Pennsylvania bad faith statute may, in addition to other means, attempt to prove bad faith by demonstrating that the insurer has violated one or more provisions of related Pennsylvania insurance statutes or regulations, even if those provisions do not provide for private rights of action. Berg v. Nationwide Mut. Ins. Co., 2012 Pa. Super. 88 (April 17, 2012).

The factual background of this decision involved a property damage claim in which the insureds subsequently brought an action against both Nationwide and the repair facility which was part of Nationwide’s direct repair program. The insureds brought claims against Nationwide involving breach of contract, negligence, common law fraud, conspiracy, violations of the Uniform Trade Practices and Consumer Protection Law (“UTPCPL”) and statutory bad faith. The Court bifurcated the action so that the common law fraud, conspiracy and UTPCPL claims were decided first and a jury found in favor of the insureds, finding that Nationwide violated the “catch all” provision of the UTPCPL. The Court then moved forward with the second phase of trial, where ultimately the trial court granted Nationwide’s motion for a directed verdict with regard to the statutory bad faith claim. The insureds argued that the trial court erred in entering a directed verdict on the bad faith claim because the jury’s verdict of finding that Nationwide violated the UTPCPL was sufficient to move forward on the bad faith claim.

The Superior Court, looking to its decision in Romano, held that an insurer’s bad faith could be predicated upon violations of other insurance and consumer based statutes. An insured can point to bad faith conduct as defined in various other statutory provisions as a basis for recovery under the bad faith statute, 42 Pa.C.S.A. § 8371. The Court clarified that its decision in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), did not trump its decision in Romano. A court may use both the Terletsky standards, as well as the standards set forth in other related statutes, to prove bad faith. Berg, 2012 Pa. Super. at *16; see also Hayes v. Harleysville Mut. Ins. Co., 841 A.2d 121 (Pa. Super. 2003).

The Court in Berg limited its decision to note that a violation of another related statute constitutes “some evidence” but does not constitute per se bad faith. In that regard, the Court noted that the Bergs had offered other evidence which established the Pennsylvania Supreme Court’s definition of bad faith under Section 8371, as defined in Toy v. Metropolitan Life Ins. Co., 928 a.2d 186, 199 (Pa. 2007). Of interest, the Supreme Court in Toy specifically addressed the fact that it did not consider what actions amount to bad faith; what actions of an insurer may be admitted as proof of its bad faith; whether an insurer’s violations of other statutes, specifically the Unfair Insurance Practices Act (“UIPA”), are relevant to proving a bad faith claim; or whether the standard of conduct that the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is correct. Id. at n.16. Rather, the Supreme Court simply noted that the term “bad faith” under Section 8371 concerns “the duty of good faith and fair dealing in the parties’ contract and the manner in which an insurer discharged its obligations of defense and indemnification in the third-party context or its obligation to pay for a loss in the first party claim context.” Id. at 199.

In fact, the Supreme Court in Toy acknowledged the Superior Court’s decision in Romano in favor of using standards applied in other statutes to establish bad faith, as well as federal court decisions which have held to the contrary, in ruling that an insurer’s alleged violation of a regulatory standard is irrelevant to a bad faith analysis. Id. at n.17, citing Parasco v. Pacific Indemnity Co., 920 F. Supp. 647 (E.D. Pa. 1996); see also Oehlmann v. Metro Life Ins. Co., 644 F. Supp. 2d 521, 529-31 (M.D. Pa. 2007).

The Superior Court’s decision in Berg broadens the standard of conduct which many courts will apply when reviewing a statutory bad faith claim. Before Berg, the sole standard applied was that set forth in Terletsky, as the thought was that the Terletsky standard trumped the previous decision of Romano. After Berg, the standards to which an insurance company will be held when defending a bad faith action will vary to include any standards established under any relevant statute or regulation that can be applied to the insurance industry, opening up the door for broader discovery, of which the Superior Court in Berg has endorsed in its comment that in bad faith insurance litigation, “the fact finder needs to consider ‘all of the evidence available’ to determine whether the insurer’s conduct was ‘objective and intelligent under the circumstances’….” Berg, 2012 Pa. Super 88, at *29. The question becomes whether the Supreme Court will chime in on whether or not the standard of conduct that the Superior Court has applied to assess an insurer’s performance of contractual obligations in bad faith cases is correct, or whether bad faith actions will become a de facto regulation of the insurance industry under the guise of a Section 8371 claim.