JULY 2007 BAD FAITH CASES
REVERSING ITSELF, FEDERAL DISTRICT COURT PREDICTS THAT PENNSYLVANIA LAW WOULD PERMIT BAD FAITH BREACH OF CONTRACT CLAIMS FOR FIRST PARTY BENEFITS (Philadelphia Federal)

The plaintiff sustained personal injuries due to an automobile accident and filed a claim with the defendant insurer for uninsured motorist benefits. The insurer offered $18,000 to settle the claim which was rejected by plaintiff. Plaintiff then submitted the claim to arbitration which returned a decision in favor of plaintiff for an amount in excess of his policy coverage. Due to the award, the insurer paid plaintiff $100,000 which was the maximum amount available under the policy.

Plaintiff subsequently filed a complaint against the insurer alleging claims for breach of contract for bad faith and statutory bad faith pursuant to 42 Pa. Cons. Stat. §8371. The District Court initially dismissed plaintiff’s claim for breach of contract for alleged bad faith, however, plaintiff filed a motion for reconsideration and upon further review of the dismissal, the District Court reversed its ruling.

The Court was confronted with the question of whether Pennsylvania law permits a first party breach of contract claim for bad faith. In its analysis, the District Court relied heavily upon the decision rendered by the Pennsylvania Supreme Court in Birth Center v. St. Paul Co., Inc., which held that even though Pennsylvania has a statutory scheme for insurer bad faith, the scheme does not alter the contract remedy also available to the insured under common law.

The question still remained, however, whether the holding in Birth Center extends to all insurance claims including first party claims or whether the holding was limited to third party situations similar to the one in which the Birth Center decision was rendered. After a review of Pennsylvania law, the District Court predicted that the Birth Center ruling would apply to first party insurance claims as well as third party claims for bad faith breach of contract.

Having concluded that plaintiff could bring a breach of contract claim for first party benefits for bad faith conduct under Pennsylvania law, the District Court then confronted the issue as to whether plaintiff could recover damages for emotional distress for contractual bad faith. Although not clear from the Birth Center decision, the District Court also predicted that under certain circumstances (which the Court did not delineate) Pennsylvania law would permit recovery of emotional distress damages in breach of contract claims.

Date of Decision: June 20, 2007

Kakule v. Progressive Casualty Insurance Company, U.S. Dist. Court for the Eastern District of Pennsylvania, No. 06-4995, 2007 U.S. Dist. LEXIS 44942 (E.D. Pa. June 20, 2007) (Kelly, J.)