December 2014. Feel free to direct questions or comments to Bryan W. Petrilla.
Last week, the Pennsylvania Supreme Court held in Allstate v. Wolfe that an insured may assign its statutory bad faith cause of action to an injured plaintiff and judgment creditor. The case arose when Wolfe was struck by a driver insured by Allstate. Wolfe made settlement demands, which were rejected, before proceeding to trial where he was awarded both compensatory and punitive damages. In exchange for an agreement not to execute the judgment, the defendant assigned his rights to any claims under the Allstate policy to Wolfe. Wolfe then sued Allstate, asserting the bad faith refusal to settle under both common law contract theory and statutory bad faith pursuant to 42 Pa. C.S. § 8371 (which permits the award of punitive damages). Allstate removed the case to federal court and argued that Wolfe lacked standing to pursue the statutory bad faith claim.
The distinction between the “bad faith” contractual refusal to settle and the tort of statutory bad faith became the focal point, with Allstate asserting that unlike contract claims, tort claims are not assignable under Pennsylvania law. The trial court disagreed, finding that Wolfe had standing, and a jury decided that Allstate committed bad faith. Allstate appealed to the Third Circuit, which found state and federal decisions on the issue conflicting and petitioned the Pennsylvania Supreme Court to provide clarity.
Allstate argued that permitting the assignment of statutory bad faith claims would “foster mischief by encouraging plaintiffs to pursue unreasonable settlement demands and advance bad-faith claims which otherwise never would have been initiated.” It generally asserted that assignment would upset the equilibrium between insurer and insured and do nothing to further protect an insured that the common law contractual remedy for the refusal to settle did not already provide. Wolfe countered that an insurer that refused to settle in good faith had nothing to fear and that assignment would further deter bad faith conduct, which was the goal of Pennsylvania’s bad faith statute.
In ruling that a bad faith claim under 42 Pa. C.S. § 8371 may be assigned, the Pennsylvania Supreme Court looked to the legislative intent behind the statute. It noted that the General Assembly was aware when the statute was enacted in 1990 that the assignment of contractual “bad faith” claims was permitted, yet remained silent as to the assignability of what the court viewed as a “supplementation of remedies.” While finding Allstate’s arguments “quite reasonable,” in the end the Court “simply d[id] not believe the General Assembly contemplated that the supplementation of the redress available for bad faith…would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions.” The Court noted that if its belief was mistaken, the Pennsylvania General Assembly could correct it. In other words, until the legislature amends the statute to preclude the assignment of bad faith claims, it is now clear they are assignable and enforceable by a non-insured against an insurer, creating an additional factor to be considered by insurers evaluating settlement demands when Pennsylvania law applies.