On December 31, 2001, the Supreme Court of Pennsylvania clarified that insurance carriers are liable for compensatory damages as the results of their bad faith breach of an insurance contract.  In Birth Center v. St. Paul Companies, Inc., 567 Pa. 386, 787 A.2d 376 (2001), the Court held that an,“insurer is liable for the known and/or foreseeable compensatory damages of its insured that reasonably flow from the bad faith conduct of the insured.”  Id., 787 A.2d at 379.  More importantly, in reaching this decision, the Court reasoned that the remedies set forth in the Pennsylvania Bad Faith Statute, 42 P.C..S.A. § 8371, are not exclusive remedies for an insurer’s misconduct.  Rather, Section 8371 provides for “Special Damages” as reflected by the title of the subchapter in which Section 8371 appears.  Despite this clear and cogent reasoning, carriers in Pennsylvania continue to argue that a pre-Section 8371 case, D’Ambrosio v. Pennsylvania National Mutual Casualty Insurance Company, 49 Pa. 501, 431 A.2d 966 (1981), stands for the proposition that an insured cannot recover both consequential damages and punitive damages as a result of a carrier’s bad faith.

The Birth Center Court dismissed a similar argument noting that it had qualified its holding in D’Ambrosio because the breach of contract claim was never before the Court in that case.  In fact, the D’Ambrosio Court held that, “[t]he possibility cannot be ruled out that emotional distress damages may be recoverable on a contract where, for example, the breach is of such a kind that serious emotional disturbance was a particularly likely result.”  Id. at 970.  Yet, these judicial declarations have not deterred the insurance industry’s arguments.

Since Birth Center, there have been no reported opinions addressing claims for compensatory damages, more specifically, emotional distress claims arising out of the bad faith conduct of an insurance carrier.  Now, that has changed.  Most recently, in Hatchigian v. Hartford Insurance Company, 2003 U.S. Dis. Lexus 15666, in an unpublished decision, Judge Buckwalter addressed this specific issue.  Judge Buckwalter held that, Section 8371 added the remedy of punitive damages for bad faith conduct by an insured, and did not preclude an injured party from bringing other claims which he may have suffered as a result of the insurer’s bad faith.  Accordingly, plaintiff can sustain an emotional distress claim as well as a punitive damages claim resulting from the carrier’s alleged bad faith.”  Id. at *15.

As a practitioner representing insureds, it is important to understand the implications of this decision in the context of some of the recent developments in Pennsylvania bad faith law.  Most recently, the Pennsylvania Supreme Court resolved a longstanding dispute as to whether the bad faith count in a State Court action will be decided by a judge and jury.  In Mishoe, the Supreme Court of Pennsylvania recently held that the bad faith count is a legal claim to be determined by the judge.  The breach of contract claim will still go to the jury.

The question still remains open as to whether there is to be an award of consequential damages attributed to the breach of contract separate from an award of consequential damages attributed to the bad faith conduct.

As a tactical matter there are many considerations as to whether a bad faith claim should be filed in state court versus federal court.  For example, the scope of discovery in federal court is broader in that expert depositions are permitted while interrogatories are severely limited.  Traditionally, the so-called “rule of thumb” has been that plaintiff’s prefer state court while carriers prefer federal court.  Recent developments, including Judge Buckwalter’s Hatchigian opinion forcing practitioners to rethink their instincts.  As a result, it is imperative that in your representation of the insured that you inundate the carrier with documentation not only of your client’s unreasonable denial, but the consequential damages which your client currently or is reasonably expected to suffer.

Often forgotten in insurance claims is the entire purpose that an individual buys insurance at the outset.  If an insured pays an annual premium yet makes no claim, can an insured claim that it has received no benefits?  Of course not.  The entire purpose for buying insurance is to buy “peace of mind.”  It is from that perspective that you should consider developing your damages claim.  What other protections or opportunities did your client forego as a result of purchasing the insurance?  What motivated the purchase of the insurance in the first place? (i.e., ability to continue mortgage payments if disabled, ability to rebuild home if destroyed in a fire, ability to afford medical care if injured by an uninsured driver, ability to provide for family when the insured dies).  These protections can provide a platform upon which to build a damages model.

The entire notion of buying an “peace of mind” is neither novel nor creative.  The entire insurance industry preys upon this fear by focusing their marketing efforts on these concerns.  After all, we are all aware that, with AllState®, “You’re in Good Hands”; “Like a Good Neighbor, State Farm® is there”; Prudential Financial® is “Growing and Protecting Your Wealth”; Liberty Mutual® is “Helping People Live Safer, More Secure Lives”; and UnumProvident® is the, “Leader in Income Protection.”  At trial, when faced with mounds of fancy marketing materials emblazoned with these well-conceived tag lines, carriers are hard-pressed to argue that emotional distress damages are not foreseeable as a result of unreasonable denials.  Consequently, you may want to explore with your client all of the other financial and non-financial problems that your client is having based on the insurance company’s protracted claims process and ultimate denial.

With the staggering economy and increasing financial risks associated with potential terrorism and related claims, carriers are getting increasingly stingy with their claims dollars.  It does not take a scientific study for the plaintiff’s bar to recognize that denials and rampant undervaluing of claims are on the rise.  Our legislature has provided us with an opportunity to “regulate,” unreasonable conduct.  In pursuing those efforts, it is important to recognize not only the conduct that is improper but the actual scope of the harm.