Third Circuit Federal Court of Appeals Rules That Punitive Damages Are Not Recoverable Against an Insurer

In an opinion predicting Pennsylvania state law, the Third Circuit Federal Court of Appeals ruled that punitive damages awarded against an insured in a personal injury suit are not recoverable in a later breach of contract or bad faith suit against the insurer. In Wolfe v. Allstate, the Court examined Pennsylvania’s long-standing public policy regarding the uninsurability of punitive damages and predicted that the Pennsylvania Supreme Court would conclude that, in a bad faith action against an insurer, an insured may not collect as compensatory damages the punitive damages awarded against the insured in the underlying suit.

In this case, Wolfe was injured in a collision with an inebriated driver. Wolfe sued the driver and the case went to trial, where the jury awarded Wolfe $15,000.00 in compensatory damages and $50,000.00 in punitive damages due to the defendant’s long history of driving under the influence. The driver’s insurance policy excluded coverage for punitive damages, so the insurer, Allstate, paid the $15,000.00 in compensatory damages, but not the punitive damage award. Wolfe then assigned his rights against Allstate to the driver in exchange for an agreement that Wolfe would not enforce the punitive damages judgment against the driver personally. The driver then brought a breach of contract and bad faith action against Allstate.

In that action, Wolfe sought to recover the $50,000.00 in punitives in the breach of contract action and statutory interest, punitive damages and court costs under the bad faith statute. The jury found in favor of Plaintiff and awarded him $50,000.00 in punitive damages, but did not award any compensatory damages. Allstate appealed, arguing that the trial court erred in allowing Plaintiff to introduce the punitive damages award from the underlying suit as evidence of damages, which was the subject of one of Allstate’s motions in limine. Given Pennsylvania’s public policy against insuring punitive damages, Allstate argued that the trial court committed error when it denied Allstate’s motion and admitted the evidence of punitive damages.

The Third Circuit agreed. The Court examined whether the earlier punitive damages award was properly considered an item of compensable damages in the later breach of contract action. In doing so, the Court looked at Pennsylvania’s well-established rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law.

The Court recognized that Pennsylvania law prohibits insurers from providing coverage for punitive damages to ensure that the wrongdoer is directly responsible, and held that Allstate could not be held liable for the punitive damages awarded in the underlying case. The Third Circuit awarded Allstate a new trial and directed that no evidence of the $50,000.00 punitive damages award could be introduced in that matter.