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NELSON v. STATE FARM MUT. AUTO. INS. CO.

December 12, 1997

CRAIG NELSON
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.



The opinion of the court was delivered by: DALZELL

 Dalzell, J.

 December 12, 1997

 Defendant State Farm Mutual Automobile Insurance Company has filed a motion for summary judgment pursuant to Fed. R. Civ. P. 56, contending that plaintiff Craig Nelson's action is time-barred. *fn1" At issue is the question of whether under Pennsylvania law an insured's action for bad faith against an employer under 42 Pa. Cons. Stat. Ann. § 8371 is subject to the two year statute of limitations for torts, see 42 Pa. Cons. Stat. Ann. § 5524(7), *fn2" the four year statute of limitations for contracts, see 42 Pa. Cons. Stat. Ann. § 5525(8), *fn3" or the six year "catchall" statute of limitations under 42 Pa. Cons. Stat. Ann. § 5527. *fn4"

 The Erie Doctrine

 Bad Faith Actions under Section 8371

 In 1990, the Pennsylvania General Assembly enacted 42 Pa. Cons. Stat. Ann. § 8371 to create a statutory remedy for bad faith conduct in the handling of insurance policies. The statute provides:

 
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:
 
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
 
(2) Award punitive damages against the insurer.
 
(3) Assess court costs and attorney fees against the insurer.
 
42 Pa. Cons. Stat. Ann. § 8371.
 
The statute does not define "bad faith" or establish the elements to make out a claim of bad faith. Recent decisions by our Court of Appeals and the Superior Court of Pennsylvania, however, suggest a two-part test, both elements of which requiring proof by clear and convincing evidence: "(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis." Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d Cir. 1997); see also Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 752 (3d Cir. 1994); Terletsky v. Prudential Property & Cas. Ins. Co., 437 Pa. Super. 108, 649 A.2d 680, 688 (Pa. Super Ct. 1994).
 
For statute of limitations purposes, however, what kind of action is one under § 8371?
 
Section 8371 as a Contractual Cause of Action
 
It is clear that § 8371 does not sound exclusively in contract law. The fact that one of § 8371's primary remedies is the award of punitive damages illustrates that the statute is not exclusively contract-based. In Pennsylvania, it is well-settled that the purpose of punitive damages is to punish a tortfeasor for outrageous conduct and to deter him and others from similar conduct in the future. See Kirkbride v. Lisbon Contractors, Inc., 521 Pa. 97, 555 A.2d 800, 803 (Pa. 1989).
 
Pennsylvania law is equally clear that punitive damages are not recoverable in an action for breach of contract. See AM/PM Franchise Assoc. v. Atlantic Richfield, 526 Pa. 110, 584 A.2d 915, 927 (Pa. 1990) (holding in a contract case that "we do not believe that our case law or the Uniform Commercial Code authorizes a legitimate claim for exemplary damages"). See also Thorsen v. Iron and Glass Bank, 328 Pa. Super. 135, 476 A.2d 928, 932 (Pa. Super. 1984) (citing cases).

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