OCTOBER 2007 BAD FAITH CASES
SUPREME COURT RULES THAT BAD FAITH STATUTORY CLAIMS ARE SUBJECT TO TWO YEAR STATUTE OF LIMITATIONS PERIOD (Pennsylvania Supreme Court)

Pennsylvania’s Supreme Court held that statutory bad faith claims for punitive damages, attorney’s fee and super-interest brought under 42 Pa.C.S. § 8371 are subject to a two-year statute of limitations period. The Court analyzed whether this statutory cause of action should be treated as a tort (two-year statute of limitations), a contract (four-year statute of limitations) or as a mixed or undefined action (defaulting to a six-year statute).

The Court concluded that this statute-based action was in the nature of a tort. It clearly did not arise from the contractual duty of good faith and fair dealing, as the Supreme Court had earlier found such tort remedies did not exist at common law for the breach of an insurance contract. Rather it was a supplemental remedy with tort-like aspects arising out of a legislatively created cause of action that would otherwise not exist under Pennsylvania Law. The Court also closely considered the Third Circuit’s decision leading to the same result in Haugh v. Allstate Ins. Co., 322 F.3d 227 (3d Cir. 2003),

The Court addressed a number of other issues which may have some relevance to insurer-insured disputes, pointing at certain conclusions while not actually deciding any of these other issues.

First, the Supreme Court rejected the argument that the six-year catch-all statute of limitations should apply to section 8371 because it applies to Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) claims and the two statutes must be construed in the same way. However, in doing so, the Court appeared to recognized the validity of the Superior Court’s 1987 holding in Gabriel v. O’Hara, 534 A.2d 488 (Pa. Super. 1987) which upheld application of the six-year statute of limitations, rather than a two or four year statute of limitations period.

Next, without providing any resolution to the issue, the Supreme Court observed in a long footnote the discrepancies in lower state court and federal decisions over just how broad a cause of action for the contractual breach of the covenant of good faith and fair dealing really is.

Finally, in distinguishing the tort-like nature of the bad faith statutory action and a breach of the contractual duty of good faith, the Court observed that Pennsylvania courts had drawn a distinction between tort actions, which arise out of social duties, and contract actions, which arise out of mutual obligations created by contracting parties.

The cases cited include at least two seminal “gist of the action doctrine” cases, possibly indicating that the Supreme Court will favor application of that doctrine in Pennsylvania when it finally decides the issue, which would result in a diminution in the number of actionable negligence and fraud claim where causes of actually are truly based on breach of contract. eToll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10 (Pa. Super. 2002) and Bash v. Bell Telephone Company, 601 A.2d 825 (Pa. Super. 1992).

Date of Decision: October 11, 2007

Ash v. Continental Insurance Company, No. 35 WAP 2005, 2007 Pa. LEXIS 2139 (Oct. 11, 2007) (Eakin, J.)

L.A.