According to the pleadings here, Sandra McIlhenny ("McIlhenny") brought the underlying suit against the insureds in the Court of Common Pleas of Philadelphia County for injuries she suffered when she fell outside a building they owned and managed. Although McIlhenny was allegedly willing to settle within GNY's $ 1,000,000 policy limits before trial, GNY apparently refused to do so. A jury subsequently awarded McIlhenny $ 4,000,000 for her injuries. The verdict was molded to add $ 1,796,000 in delay damages pursuant to Rule 238 of the Pennsylvania Rules of Civil Procedure. Thereafter, GNY filed an appeal to the Superior Court of Pennsylvania on behalf of the insureds. This appeal was withdrawn after North River negotiated, on behalf of the insureds, a settlement agreement with McIlhenny. Shortly before the settlement was reached, GNY tendered McIlhenny its $ 1,000,000 policy limits.
Pursuant to the settlement agreement, North River paid McIlhenny $ 1,949,629 and provided her with a lifetime annuity. In return, McIlhenny released North River and the insureds from all further liability. The agreement, however, provides that the "full settlement amount" is $ 5,250,000. Since the "full settlement amount" is more than the total amount McIlhenny has received from North River and GNY, North River agreed to "exercise its best efforts to recover the full settlement amount ($ 5,250,000.00) from [GNY] through litigation or other proceedings." If North River prevails, under a formula set forth in the agreement, it would retain the first $ 1,000,000 and 60% of any amount over that figure. The remaining 40% of the recovered funds would then be paid to McIlhenny. To fund the present litigation, McIlhenny provided North River with $ 400,000 of the $ 1,000,000 she received from GNY.
North River brought suit against GNY in its own right and as the assignee and equitable subrogee of the insureds. North River seeks to recover $ 4,250,000 from GNY, that is, the stated "full settlement amount" of $ 5,250,000 minus the $ 1,000,000 GNY already paid to McIlhenny. If North River succeeds in recovering $ 4,250,000 from GNY in this suit, the 60%-40% split of these funds with McIlhenny will apparently reimburse North River fully for the amount it has paid her or on her behalf. Before North River brought its lawsuit, GNY filed suit against the North River, Crum & Forster, and the insureds (collectively known as "North River defendants") seeking the return of the $ 1,000,000 GNY paid McIlhenny on behalf of the insureds.
I. The North River defendants' motion to dismiss
The North River defendants move to dismiss Counts I, II and III of GNY's amended complaint. In Count I, GNY contends that the North River defendants breached "an implied covenant of good faith and fair dealing towards GNY" in negotiating a settlement of the underlying action which requires North River to sue GNY. Count II alleges a civil conspiracy among the North River defendants to injure GNY by means of the settlement.
Count III asserts that Crum & Forster "acted in concert with the insureds in breaching the duty owed by the insureds to GNY, and the duty owed by North River to GNY."
Finally, the North River defendants have also moved to strike paragraphs 77 and 78
of the complaint, which seek declaratory relief.
The North River defendants correctly note that Count I of GNY's amended complaint hinges on the proposition that they owe a duty of care to GNY. The parties have cited and this court has found no Pennsylvania cases on the issue of whether an excess liability insurer such as North River owes a duty of care to a primary insurance carrier such as GNY. Accordingly, this court must predict how the Pennsylvania Supreme Court would rule if presented with this issue. See, e.g., Robertson v. Allied Signal, Inc., 914 F.2d 360, 364 (3d Cir. 1990).
There is, of course, no contractual relationship between North River and GNY on which a duty of good faith owing to GNY may be premised. In the converse situation, the Court of Appeals for the Third Circuit has held that Pennsylvania would reject the theory "of a direct duty running from the primary to the excess carrier." Puritan Ins. Co. v. Canadian Univ. Ins. Co., 775 F.2d 76, 79 (3d Cir. 1985), citing United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 309, n.3 (3d Cir. 1985). Moreover, the Pennsylvania Supreme Court has ruled that there is no common law cause of action arising in tort for failure to act in good faith in connection with an insurance policy. See D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 494 Pa. 501, 431 A.2d 966, 969-70 (Pa. 1981). On the basis of the Puritan and D'Ambrosio cases, this court predicts that the Supreme Court of Pennsylvania would decide that an excess insurer owes no direct duty of good faith to a primary insurer. We see no reason why a duty of good faith would run from an excess carrier to a primary carrier when no such duty runs in the opposite direction.
GNY has also sued Crum & Forster, North River's parent company, for breach of a duty of good faith. As Crum & Forster has no contractual relationship with GNY, it, like North River, owes GNY no direct duty. Count I of GNY's amended complaint, alleging breach of such a duty, must be dismissed insofar as it relates to North River and Crum & Forster.
We now turn to the question whether an insured owes a duty of good faith to its insurer. The Pennsylvania courts have not specifically addressed the question. In contrast to the relationship between a primary and an excess carrier, an insurance company and its insured are parties to the same contract. While there are no cases directly on point, various decisions of the Pennsylvania courts on the nature of the duty of good faith in the context of an insurance contract as well as certain statutes provide some guidance on this issue.
A leading case is Gray v. Nationwide Mutual Insurance Co., 422 Pa. 500, 223 A.2d 8 (Pa. 1966). There, Gray originally sued MacLatchie, Nationwide's insured, as a result of an automobile accident. MacLatchie's policy with Nationwide was limited to $ 5,000, but Gray obtained a $ 15,000 jury verdict against MacLatchie. After Nationwide tendered its policy limits, Gray demanded the remainder from MacLatchie. MacLatchie settled with Gray by assigning to Gray all rights MacLatchie had against Nationwide. Gray brought suit alleging that Nationwide had breached an obligation to act in good faith towards MacLatchie in refusing to settle with Gray within its insured's policy limits.
The Supreme Court of Pennsylvania held in Gray that an insurance company's obligation to act in good faith towards its insured in deciding whether to settle a claim is implied in the contractual relationship between the parties. Id. at 11. Failure to abide by this obligation resulted in a cause of action for breach of contract. Id. at 12. The Gray court further held that Gray could recover from Nationwide as the assignee of MacLatchie, its insured. Id.
In the D'Ambrosio case, the Pennsylvania Supreme Court resolved the issue of whether an insured could bring a claim in tort as well as in contract against an insurer for a breach of its duty of good faith. 431 A.2d at 967. D'Ambrosio brought suit after his insurer refused to pay him first-party benefits for storm damage to his motor boat. D'Ambrosio brought one count in assumpsit seeking contractual damages for the amount allegedly due under his insurance policy. In another count, D'Ambrosio sued in trespass, that is, in tort, seeking punitive damages and damages for "emotional distress" for a breach of the duty of good faith.
The Court of Common Pleas dismissed D'Ambrosio's count in trespass. On appeal, D'Ambrosio relied on California cases which had permitted private plaintiffs to sue their insurers in tort for alleged breaches of their duties under their insurance policies. The Supreme Court of Pennsylvania held there is no cause of action in tort for breach of the duty of good faith. Id. at 970. In support of its conclusion, the Court cited Pennsylvania's Unfair Insurance Practices Act ("UIPA"), 40 Pa. Stat. §§ 1171.1-1171.15 (1974). The UIPA authorized the Insurance Commissioner of Pennsylvania to investigate complaints regarding insurance companies and to impose administrative and civil penalties upon its violators. §§ 1171.7-1171.9, 1171.11. Calling UIPA a "legislatively-created regulatory scheme" enacted in a "dramatic, sweeping effort to curb the bad faith conduct" of insurance carriers, the D'Ambrosio court held that UIPA provided the exclusive extracontractual remedy for an insurer's breach of its duty to act in good faith. 431 A.2d at 972.
Both before and after D'Ambrosio, Pennsylvania courts consistently refused to permit recovery of punitive damages for a breach of an insurance contract. See, e.g., Smith v. Harleysville Ins. Co., 275 Pa. Super. 246, 418 A.2d 705 (Pa. Super. 1980), aff'd, 494 Pa. 515, 431 A.2d 974 (Pa. 1981). In 1990, however, the Pennsylvania General Assembly changed the law in this respect when it enacted the hotly debated "no-fault" amendments to the Motor Vehicle Financial Responsibility Law, 75 Pa. Cons. Stat. Ann. §§ 1701 et seq. See C. Christopher Hasson et al., Comment, The 1990 Pennsylvania Auto Insurance Law: An Analysis of "Bad Faith" and the "Limited Tort Option, " 29 Duq. L. Rev. 619 (1991). The statutory provision in issue, codified at 42 Pa. Cons. Stat. Ann. § 8371, permits an insured to obtain punitive damages "in an action arising under an insurance policy" when the insurer breaches its duty of good faith. This statute, which is not limited to automobile insurance, provides:
§ 8371. Actions on insurance policies
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions: