Argued: April 27, 2015.
On Appeal from the United States District Court for the Middle District of Pennsylvania. (District Court No.: 4:10-cv-00800). District Judge: Honorable John E. Jones, III.
William P. Carlucci, Esquire (ARGUED), Robert B. Elion, Esquire, Elion Wayne Grieco Carlucci & Shipman, Williamsport, PA; Michael A. Dinges, Esquire, Dinges, Dinges & Waltz, Williamsport, PA, Counsel for Appellee Jared Wolfe.
Marshall J. Walthew, Esquire (ARGUED), Sara B. Richman, Esquire, John L. Schweder, II, Esquire, Kristin Jones, Esquire, Pepper Hamilton, Philadelphia, PA, Counsel for Appellant Allstate Property & Casualty Insurance Co.
Before: RENDELL, JORDAN, and LIPEZ,[*] Circuit Judges.
RENDELL, Circuit Judge
In this insurance dispute between appellant Allstate Property & Casualty Insurance Co. (" Allstate" ) and appellee Jared Wolfe, we are presented with the question of whether punitive damages awarded against an insured in a personal injury suit are recoverable in a later breach of contract or bad faith suit against the insurer. It is Pennsylvania's public policy that insurers cannot insure against punitive damages, and we therefore predict that the
Pennsylvania Supreme Court will answer that question in the negative.
A. Underlying Personal Injury Lawsuit
On March 2, 2007, around 4:00 am, Karl Zierle finished his fifteenth or sixteenth beer for the night. At 11:00 am, Zierle was driving and rear-ended Wolfe. Zierle's blood alcohol level tested at 0.25%. Zierle also had three prior DUIs. Wolfe was injured in this accident, and he required treatment at the emergency room.
Zierle was insured by Allstate. Zierle's policy provided liability coverage up to $50,000, and the policy required Allstate to defend Zierle in suits by third parties arising out of automobile accidents. The policy stated that Allstate would " not defend an insured person sued for damages which are not covered by this policy." (App. 362.) Zierle's policy expressly excluded coverage for punitive damages.
Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate's adjuster. Allstate valued Wolfe's claim at $1200 to $1400, and Allstate responded with a counteroffer of $1200. Wolfe rejected this offer, and neither party moved from those numbers.
Wolfe then filed suit against Zierle. Allstate informed Zierle that, because Wolfe's complaint did not indicate the extent of the damages he was claiming, the possibility remained that Zierle could face damages in excess of the $50,000 protection afforded by his policy. If the verdict did exceed the policy limit, Zierle was warned that he would be personally liable for the excess. Zierle was advised that he could hire an attorney at his own expense to cooperate with Allstate's counsel. Zierle did hire his own counsel, but that attorney was not actively involved in the case.
During discovery, Wolfe learned of the extent of Zierle's intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.
During pretrial settlement conferences, two separate Court of Common Pleas judges placed a settlement value of $7500 on the compensatory damage portion of the case. Wolfe now indicates that he would have settled the case for $7500, although he had never communicated this willingness to Allstate. Prior to trial, Wolfe reiterated the $25,000 demand and emphasized that Allstate's $1200 offer was too low. Allstate stated that it would not increase its $1200 offer (despite having authority to offer $1400) unless Wolfe reduced his $25,000 demand. No further efforts at settlement were made by either party.
The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 compensatory damages award, but not the $50,000 punitive damages award. Following the trial, in return for Wolfe's agreement not to enforce the punitive damages judgment against him personally, Zierle assigned his rights against Allstate to Wolfe.
B. Procedural History
Wolfe, in Zierle's shoes, sued Allstate in the Pennsylvania Court of Common Pleas for Lycoming County, alleging breach of contract; bad faith conduct under Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. § 8371; and violation of Pennsylvania's
Unfair Trade Practices and Consumer Protection Law (" UTPCPL" ), 73 Pa. Stat. Ann. § § 201-1 et seq.  Under the breach of contract claim, Wolfe sought to recover the $50,000 in punitive damages awarded against Zierle, interest on that award, and attorney's fees and costs for his later suit. Under section 8371, Wolfe sought an award of statutory interest, punitive damages, and an assessment of court costs. Allstate removed the case to the United States District Court for the Middle District of Pennsylvania under 28 U.S.C. § 1441(b).
Allstate filed two pretrial motions that are the subject of this appeal. The District Court denied both motions. Those orders are now before us for review. First, Allstate moved for summary judgment, characterizing Wolfe's claim as attacking Allstate's failure to settle because settlement would have avoided the potential for the punitive damages award. Allstate urged that, since it had no duty to indemnify for punitive damages, it could not be required to consider the potential for punitive damages when deciding whether to settle the compensatory claim. Allstate also argued that it should be granted summary judgment based on the fact that the jury's compensatory damages award was within the policy limits and Allstate paid that portion of the verdict. The District Court 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 Allstate refused to increase its settlement offer over a period of years. Accordingly, a reasonable jury could find that Allstate was reckless and acted unreasonably during the settlement negotiations, amounting to bad faith. For the same reasons, the District Court denied summary judgment on the breach of contract claim.
Second, Allstate filed a motion in limine to exclude evidence related to the punitive damages awarded in the underlying 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. Allstate also argued that the evidence relating to the punitive damages award was irrelevant. The District Court denied the motion, because if a jury concluded that Allstate had failed to negotiate a settlement of the compensatory damages portion of Wolfe's claim in good faith, then the $50,000 would be relevant as flowing from that failure. If Allstate had settled the claim, then punitive ...