In a landmark decision, the Pennsylvania Supreme Court has held that claims under the Pennsylvania insurance bad faith statute may be assigned to third parties. This decision will enable plaintiffs who have obtained an excess verdict against a policyholder to not only pursue a common-law bad faith claim against the liability insurer for the excess verdict, but also pursue a statutory bad faith claim for punitive damages, attorney’s fees, interest, and costs.
The Supreme Court’s decision in Allstate Prop. and Cas. Co. v. Wolfe answered a question certified by the United States Court of Appeals for the Third Circuit in a matter concerning an insurer’s failure to settle an automobile liability claim against a policyholder. The liability claim proceeded to trial and resulted in an award of compensatory and punitive damages. The insurer paid the compensatory award but declined to pay the punitive damages award, as indemnification for punitive damages was not available under the policy. The policyholder and injured party entered into a settlement in which the injured party accepted an assignment of the insured’s policy rights in lieu of punitive damages.
The injured party then instituted a bad faith action against the insurer. The United States District Court for the Eastern District of Pennsylvania rejected the insurer’s contention that statutory bad faith claims were not assignable, and the matter proceeded to trial, resulting in a jury verdict against the insurer. An appeal to the Third Circuit followed.
In support of its contention that statutory bad faith claims could not be assigned, the insurer relied upon Ash v. Continental Ins. Co., in which the Pennsylvania Supreme Court characterized statutory bad faith actions as tort claims. The insurer observed that Pennsylvania law has generally prohibited the assignment of tort claims in order to guard against champerty: the involvement of “intermeddlers” in litigation for profit-making purposes. The insurer also argued that on public policy grounds, authorizing the assignment of bad faith claims would encourage injured parties to pursue unreasonable settlement demands in order to lay the groundwork for a statutory bad faith claim.
In rejecting these arguments, the Pennsylvania Supreme Court focused upon the legal landscape at the time the bad faith statute was enacted. Specifically, the Court noted that when the bad faith statute was enacted in 1990, common-law contractual bad faith claims had long been recognized as assignable. The Court therefore determined that in enacting the bad faith statute, the General Assembly’s supplementation of available remedies for bad faith conduct was not intended to curtail the pre-existing ability to assign bad faith claims or require the splitting of actions. Accordingly, the Court held that claims under the Pennsylvania insurance bad faith statute could be assigned to an injured plaintiff and judgment creditor.
The Pennsylvania Supreme Court’s determination that statutory bad faith claims are assignable clearly raises the stakes for insurers faced with liability claims. Policyholders who may not have wished to pursue statutory bad faith claims against insurers on their own behalf may be compelled to assign such claims to limit exposure to large verdicts. Furthermore, as the insurer in Wolfe noted, plaintiffs in tort actions may make excessive settlement demands in order to “set up” a potential statutory bad faith claim.
The prospect that Pennsylvania statutory insurance bad faith claims may be assigned to injured parties emphasizes the importance of performing a fair and thorough analysis of all settlement demands made in cases against policyholders. Following Wolfe, insurers who fail to do so may face exposure to underlying plaintiffs for amounts far greater than an excess verdict.
