Punitive Damages Awarded Against An Insured Are Not Recoverable In A Bad Faith Suit Against The Insurer

A recent 3rd Circuit decision has excluded punitive damages awarded in the underlying suit from the types of damages an insurer may be liable for in a subsequent breach of contract or bad faith suit. In Wolfe v. Allstate Prop. & Cas. Ins. Co., No. 12-4450 (3d. Cir., June 12, 2015), Judge Rendell held that it was error for the District Court to allow the introduction of the punitive damages award from the underlying suit as evidence of damages in a breach of contract/bad faith suit against the insurer.

The underlying lawsuit involved Defendant Zierle rear-ending Plaintiff Wolfe’s vehicle after a night of drinking.  This was Zierle’s fourth DUI and his blood alcohol level tested at 0.25%. Wolfe filed suit against Zierle for personal injuries which was amended to include a claim for punitive damages.  Zierle was insured by Allstate and upon the amendment Allstate communicated to Zierle that his $50,000 policy excluded coverage for punitive damages.

Prior to suit Wolfe had demanded $25,000 for settlement and Allstate had countered with an offer of $1,200.  During settlement conferences, two judges had placed a value of $7,500 on the compensatory damage claim. At trial the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages.  Allstate paid the $15,000 compensatory damages and Zierle assigned his rights against Allstate to Wolfe, who sued, alleging breach of contract/bad faith/ violation of Pennsylvania’s Unfair Trade Practices Consumer Protection Law; (the “Bad Faith Suit”).

During the Bad Faith Suit, two issues arose.  The first issue was that Allstate moved for summary judgment arguing that since it had no duty to indemnify Zierle for punitive damages, it could not be required to consider the potential for punitive damages when deciding whether to settle the compensatory claim. Allstate argued that since the jury returned a verdict on compensatory damages within the policy limits, and Allstate paid that portion, there could be no breach of contract/bad faith. The District Court denied Allstate’s summary judgment since it concluded that separate and apart from the punitive damages aspect, Allstate had a fiduciary duty to negotiate a settlement in good faith on behalf of Zierle, and since Allstate refused to increase its settlement offer over a period of years, a reasonable jury could find that Allstate’s actions amounted to bad faith.

The second issue was a motion in limine brought by Allstate which sought to exclude evidence relating to the punitive damages awarded at trial.   Allstate argued that Wolfe was barred as a matter of public policy from claiming the $50,000 punitive damages award as an item of damages, because indemnification for punitive damages was impermissible under Pennsylvania law.  The District Court denied the motion, finding that if a jury concluded that Allstate had failed to negotiate a settlement of the compensatory damages portion of Wolfe’s claim good faith, then the $50,000 would be relevant as flowing  from that failure: i.e., if Allstate had settled the claim, then punitive damages would not have been awarded.

Following the denial of both of Allstate’s motions, the jury found a violation of Pennsylvania’s bad faith statute and breach of contract.  It awarded no compensatory damages, but $50,000 in punitive damages.  Allstate then appealed the denial of its motions to the 3rd Circuit.  The Court ultimately upheld the denial of the Allstate’s summary judgment motion but vacated the award and remanded for a new trial at which Wolfe will be barred from introducing evidence of the punitive damages award.

In addressing Allstate’s motion in limine which sought to exclude the amount of punitive awarded in the underlying action, the 3rd Circuit predicted that the Pennsylvania Supreme Court would conclude that, in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit.  As a result, the punitive damages award was not relevant in the later suit and should not have been admitted.  The 3rd Circuit found that allowing for consideration of the punitive damages award as an element of damages in the bad faith suit effectively shifted the liability of Zierle’s liability for punitive damages to Allstate; which violated Pennsylvania’s public policy.   The Court went even further by establishing a bright line rule that, “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case.”

Even though the 3rd Circuit overturned the District Court on the issue of consideration of punitive damages in a bad faith action it did not overturn the denial of summary judgment to Allstate.  Allstate had urged that, once the punitive damages award is removed from the equation, the District Court should have granted summary judgment since an insurer does not breach its duty or act in bad faith, as a matter of law, if it does not settle and the Jury awards a compensatory judgment within the policy limits. Hence, there was no harm suffered by the insured.  The Court noted that District Court for the Western District of Pennsylvania had previously predicted that the Pennsylvania Supreme Court would hold that entry of an excess verdict was not necessary for a third party bad faith claim under Pennsylvania common law (McMahon v. Med. Protective Co., No 13- 911, — F. Supp 3d —-, 2015 WL 1285790, at *12 (W D Pa Mar 20, 2015).  Despite the removal of the $50,000 punitive award from consideration, the Court found that under Pennsylvania law, if a plaintiff is able to prove a breach of contract but can show no damages flowing from the breach, the plaintiff is nonetheless entitled to recover nominal damages.  Therefore, even without compensatory damages, an insurer could be liable for nominal damages for violating its contractual duty of good faith by failing to settle so that summary judgment on the breach of contract claim was not warranted.

With respect to the claim for summary judgment on the §8371 bad faith statutory action, the Court also found that summary judgment was not appropriate since the statute provided for damages without consideration of the compensatory damages awarded as a verdict in the underlying case.  The Court reasoned that Wolfe did not need compensatory damages to succeed on a statutory bad faith claim since the only recovery permitted was interest, punitive damages and costs.  As a result the case was remanded for a new trial on the breach of contract and statutory bad faith claims at which Wolfe will be barred from introducing evidence of the $50,000 punitive damages award.

Even though the insurer in Wolfe still faces the possibility of a breach of contract/bad faith verdict, the important takeaway from this 3rd Circuit case is the Court’s finding that the insurer had no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case.


Matthew C. Wilson

Office: King of Prussia
Phone: (610) 977-2975
Email: mwilson@forryullman.com
Practice Areas: Construction Litigation, Commercial Litigation, General Liability, Nursing Home Defense, Premises Liability, Products Liability, Third Party