Birth Center v. St. Paul Companies, Inc.

The BIRTH CENTER v. INC., COMPANIES, The ST. PAUL Sharon Afonso, Al Dawson-Coates and Appeal Companies, of The Inc.

Supreme Pennsylvania. Court

Argued Oct. 2000. Decided Dec. Buchholz, Wagner, Bachrach, Thomas P. D. Carl Joshua Philadelphia, Inc., Companies, The St. Paul Nos. 25-26 M.D. Appeal Docket 2000. Brooks, Media, Bradley,

John S.J. Michael for The Birth Center, Nos. 25-26 M.D. Appeal Docket 2000. Buchholz,

Carl D. Philadelphia, for Companies, St. Paul Inc., No. 27 M.D. Appeal Docket 2000. Bachrach, Wagner,

Thomas P. Joshua Philadelphia, for The Companies, Inc., St. Appeal Paul No. 27 M.D. Docket 2000. Brooks, Media, John S.J. Bradley, Michael for The Birth Center, No. 27 M.D. Appeal Docket 2000. Bachrach,

Thomas P. Wagner, Joshua Philadelphia, for The Inc., Companies, St. Paul Appeal No. 28 M.D. Docket 2000. Buchholz, Companies, for Paul Philadelphia, D. St. Carl Inc., Appeal 28 M.D. Docket No. Media, Brooks, Bradley, S.J. Michael

John Center, Appeal M.D. Docket 2000. No. 28

OPINION NEWMAN, Justice. (“St.Paul”) from an Companies, appeals Inc.

The St. Superior Court that reversed the Order Order of (“trial court”), County of Delaware of Common Pleas Court judgment notwithstanding Paul’s motion for granted which St. evidence, found, convincing clear the verdict. a civil Paul acted in bad faith when refused settle St. (“Birth Center”), and that action1 The Birth Center causing faith conduct a substantial factor Paul’s bad to incur The Birth Center compensatpry $700,000.00. amount of Superior Court.

We affirm the decision a claim that could have an insurer refuses settle Where policy within limits without “a bona fide belief been resolved winning,” it breaches its good possibility ... that it has duty duty good fiduciary to act in faith and its contractual Casualty Surety Company, v. Aetna its insured. Cowden (1957). Therefore, A.2d the insurer known dam is liable for the foreseeable and/or faith reasonably insured that flow from the bad ages of its fact that the insurer’s intransi conduct of the insurer. The it to engage negotiations in settlement forced gent failure far in limits so as to avoid a pay damages excess award, from punitive damages does not insulate the insurer compensatory damages liability for its insured’s where insurer’s bad faith conduct caused prove insured can damages.2 Center, (Del. Co. Ct Common Pleas Docket No. 86- 1. Norris v. Birth ("Norris "). 16841) easily liability by engaging 2. St. Paul could have avoided Instead, patently disregarded negotiations. St. Paul settlement FACTUAL AND PROCEDURAL HISTORY Underlying The Birth The Action —Norris v. Center engage to This claim arose out of St. Paul’s bad refusal action, Norris. negotiations underlying in settlement (“Parents”) case, filed suit In that Gerald and Denise Norris alleging Birth Center3 that its on November daughter Lindsey, caused negligence during the birth of their physical injury permanent and brain her to suffer severe complaint, The Birth Center damage. After service carrier, Paul, professional liability to its insurance turned St. to legal for its defense.4 St. Paul hired counsel defend The investigation Birth and of the Parents’ Center undertook claim. 2, 1991, August proposed,

On the Parents on behalf of limits of Birth Lindsey, to settle the case within the The professional liability policy Center’s insurance with St. Paul. Birth firm making Center notified St. Paul that was limits. policy August demand settle the case within its On 7, 1991, St. Paul refused to settle or to even make an offer of settlement. conference,

During August pre-trial the course of an recommended settlement Norris within presiding judge limits of policy. Again, Center’s insurance St. conference, Paul At pre-trial refused. a second a second judge assigned to the also case recommended settlement within Birth policy Center’s limits. The Birth Center de- judge’s manded settlement in with accordance recommen- dation; but Paul or negotiate money. St. refused offer by refusing negotiate. example, interests of its insured For after the $4,500,000.00 verdict, began

trial but before the announced its St. any money. Paul offer refused to any money For an insurer to refuse to offer and to state that it tries 16) (N.T. baby regardless “all of these bad cases" 5/6/96 impact might that decision have on its insured invites a bad iaith case. (who employed) 3. The Parents also sued two doctors Birth Center attending midwife. liability professional 4. St. Paul insured Birth Center under a $1,000,000.00 policy limit. attor- January requested the defense doctors involved

neys for The Birth Center one of the Lindsey’s delivery prepare pre-trial reports for St. Paul’s Paul, counsel for report consideration. her to St. defense best, had, a that The Birth Center at The Birth Center stated successfully defending lawsuit at fifty-percent chance of the Furthermore, jury that could trial. she advised the verdict $1,250,000.00 $1,500,000.00. range from The doctor’s de- Birth counsel advised Paul that he believed fense St. thirty-five winning a of at trial and percent Center had chance $5,000,000.00 $6,000,000.00. predicted jury a verdict of 27, 1992, Birth January executive director of The On the put potential Paul on written notice of the Center St. compensatory damages expressed deep her concerns re- garding possibility the of a verdict excess of Birth Center’s policy explained that such a verdict would have limits. She devastating upon The Birth Center and could risk its effects concerns to expressing continued existence. When the same case, representative assigned the St. Paul claims to the the Paul “all representative claims informed her that St. tries of cases, (N.T. these bad and we’re to trial.” baby going 5/6/96 16) added). (emphasis at trial, judge, of the Norris a third

Before the commencement trial, ultimately presided who over held another confer- Birth ence and recommended settlement within The Center’s policy limits.5 Paul to make offer whatsoever. St. refused Then, 12,1993, February high/low on the Parents made a offer settlement, pay in which Paul a of St. would non-refundable If, $300,000.00 however, regardless amount the verdict. Birth jury policy returned a verdict in excess of Center’s limits, agreed accept limits as total the Parents Finally, pro- satisfaction of the verdict. the settlement offer jury that if a than The Birth vided returned verdict lower figure than of coverage, higher Center’s maximum but the low $300,000.00, as full accept then the Parents would such verdict Clouse, Judge 5. Kenneth A. the Court Common Pleas Delaware of of Co., action, presided underlying over the trial of the Norris v. The Birth Center. liability. Birth Paul refused satisfaction of The Center’s St. and made no counter-offer. this offer settlement 16, 1993, trial, day pre-trial a final February On judge. room of trial place robing conference took time, high/low At this the Parents reasserted their offer of its desire that expressed settlement. The Center St. but, agree representative proposal; the Parents’ Paul, room, present during robing the discussion rejected high/low on the record. Fol- offer settlement lowing rejection, judge St. Paul’s stated he believed putting that St. Paul’s actions were bad faith and that was (N.T., 2/16/93, its interests ahead of of its those insured. 15-19). trial, Norris trial ensued. After the start of the but verdict, judge

before the trial returned instructed for defense counsel The Birth Center to contact St. Paul to see if it intended to make offer settlement. When counsel Paul, telephone returned from her conversation with St. she present robing “They stated to those in room: must be crazy. They’re not offering They give a dime. won’t me authority case, to any money you offer in this know I can’t 69). (N.T., 5/3/96, it.” believe 4, 1993, On March in jury returned a verdict favor of the $4,500,000.00, Parents for Birth The Center liable for sixty percent of that amount. final to The verdict molded $7,196,238. delay damages include and and interest totaled liability The Birth Center’s ultimate to amounted $4,317,743.00. agreed indemnify Paul Birth St. The Center for parties the entire verdict and the settled the for case $5,000,000. verdict, paid request- Before St. Paul it the excess sign exchange ed that The Birth for Center a release payment, sign but The Birth Center refused to the release. 20, Paul paid September St. on

The Birth Center v. St. Paul —The Bad Faith Action 3, 1994, Paul, On Birth alleging June The Center sued St. Center, that fiduciary duty St. Paul breached its to The Birth its implied covenant of and its contract. The Birth also claimed that Paul’s Center St. failure settle Norris within its limits negligence, constituted reckless disre- Center, Birth gard rights for the willful and wanton behav- Statute, pursuant ior and bad faith to the Bad Faith § 8371. Pa.C.S.A. 3,May began. the trial Birth

On The Center claimed engage that St. Paul’s refusal reasonable settlement business, negotiations damaged reputation “its and credit.” trial, found, Appellee’s Br. at. 11. jury After the clear evidence, and that Paul convincing St. acted bad that its in bringing actions were substantial factor about $700,000.00 totaling, compensato- harm to The Birth Center ry damages. punitive damages. The did not award judgment notwithstanding

St. moved the verdict. 7, 1997, trial February granted On court6 Paul’s St. motion. trial payment The court concluded that Paul’s St. claim, the excess verdict Birth bad faith nullified Center’s compensatory damages pursuant are available that, C.S.A. because believed that it had not claim, charged jury on breach of contract Birth Center could not compensatory damages recover based theory. on that The Birth v. Companies, See Center St Paul (C.P. Inc., 94-6492, slip op. County Aug No. at 9 Delaware 1997). The trial court denied Center’s motion for 10, 1997, reconsideration. On June the trial court entered judgment in favor of Paul. appeal, Superior payment

On Court determined did not preclude compensa- the excess verdict the award of tory damages that charged jury the trial court had on Therefore, of contract. breach it reversed the decision of the court, award, trial reinstated remanded the case a for determination of The Birth Center’s entitlement interest, attorney’s pursuant fees and costs to 42 Pa.C.S.A. § 8371.7 Koudelis, Judge George Judge of the Court of Common Pleas Dela- Co., presided ware over the trial of the Birth Center's bad faith action against St. Paul. Inc., (1999). Companies

7. The v. St. Birth Center Paul A.2d 1144 to this decision Superior Paul Court’s appealed St. Court.

DISCUSSION Arguments Opposition to the Paul’s St. Damages Compensatory Award of for Birth why it is not liable Paul forth four reasons St. sets First, its damages. it asserts compensatory Center’s Birth Center’s bad excess verdict barred payment despite faith claims argues allowing bad claim. St. Paul discourage “voluntary” payment would an insurer’s excess future excess verdicts. satisfying from companies insurance Second, v. Pennsylvania contends that D’Ambrosio St. Paul (1981) Ins., bars The National Mut. Third, to 42 Pa.C.S.A. points claim. Birth Center’s St. damages, punitive § which authorizes the award is found to have attorneys costs an insurer fees and when statute does in bad and asserts that because the acted none are available. compensatory damages, not mention Fourth, charge did not argues that the trial court St. Paul that, of contract claim and jury on The Birth Center’s breach result, may compensatory Birth not recover as a The Center turn, reject address and on that claim. In we based Paul’s arguments. St. Charged Jury Trial on Breach Contract

The Court argument, is Paul’s final we address Although this St. charge jury on if trial court did first because contract, only could recover The Birth Center breach theory damages from Paul if some other opinion, in this recovery. As we discuss provided basis cause of 8371 nor other relevant neither Pa.C.S.A. Thus, Birth recovery. basis for Center’s provide action Birth on compensatory damage depends award whether action and whether the a contract cause of Center asserted claim. jury regarding charged trial court that The Superior properly Court determined of contract claim. Birth Center’s asserted a breach Center Complaint requests compensatory damages upon based its ¶¶ Complaint insurance contract St. Paul. 76-77. The with Complaint provides: By failing

76. to settle the Norris claim within the limits Center, the insurance of The Birth the Defendants obligations herein breached their contractual to Birth The insurance, policy of by failing protect Center under said to The Birth Center and their [sic] assets. herein, performance The Defendants in the of the said

contract, Center, fiduciary owed to The Birth duty to act in good and to use due in representing care The Birth Center’s interests.

[*] X X WHEREFORE, Plaintiff The Birth judg- demands Center ment Defendants in an amount excess of ... $50,000, plus additional compensatory consequential and/or law, damages by together thereon, allowed with interest costs, attorney’s Court fees and such other relief as the just proper. Court deems Therefore, Id. it is Birth alleged clear Center a claim sounding in contract.

Additionally, trial court charged regard with The Birth Center’s contract cause of action. The court alia, charged jurors, they inter that if found that St. Paul Center, breached its contract with Birth they were award compensatory damages if the breach caused the dam- ages, and reasonably were foreseeable parties time the entered into contract and at the time of Specifically, judge the breach. the trial charged, among other things, that: contract, party

where one contract breaches that party may other injuries recover those which have been proved you certainty. with reasonable

X X ^[*] you If find defendant St. Paul breached its contract Center, you must then decide based on all of what presented money compen- evidence amount of will injuries, sate the Plaintiff for those which were a direct foreseeable result the breach St. Paul which the parties reasonably they could foresee the time made that and at of contract the time the Defendant’s breach the contract.

(N.T., 5/10/96, added).8 emphasis jury at 246-247 The re- finding turned verdict that St. Paul in bad faith in acted its case, handling underlying the that Norris the bad faith conduct was a substantial factor in bringing about harm to $700,000. The Birth in the amount of jury Center The verdict sufficiently jury established that the considered the breach of jury contract claim. found that St. acted in bad faith; faith; duty St. Paul had a contractual to act in therefore, St. Paul breached its contract. reviewing propriety granting of an order or verdict,

denying judgment notwithstanding the we must deter mine whether there was competent sufficient evidence to sustain the v. verdict. Wenrick Ak Schloemann-Siemag 1, (1989). 1244, 564 tiengesellschaft, A.2d 1246 523 We light view the in the evidence most favorable to the verdict give winner him or her of every the benefit reasonable arising inference from rejecting there while all unfavorable Raeuchle, testimony and 394, inferences. Moure v. 529 Pa. 1003, (1992). 604 A.2d Moreover, 1007 judgment “[a] n.o.v. only should be entered in a clear case and doubts must be see, Id.; resolved favor of the verdict winner.” Atkins v. Urban Redevelopment Authority Pittsburgh, 489 Pa. (1980). 100 Finally, judge’s A.2d “a appraisement of evidence is not to on be based how he would have he voted had Moure, been a ...” jury member of the 604 A.2d at 1007 quoting Brown v. Shirks Motor 393 Pa. Express, 143 A.2d (1958). Accordingly, charge, 8. in Birth Center's bad faith action St. Paul, specifically jury authorized to award upon based judge breach of contract claim. If the did not want charge jury regard possibility to the for a breach of contract recovery, charge he should have limited his Pa.C.S.A. p. 16 See infra. finding “the evidence may jury’s not vacate a unless

A court that disagree minds could that no two reasonable was such in favor of the movant.” should have been rendered outcome Moure, Nazareth quoting Cummings at 1007 v. 604 A.2d (1967). respect While we Borough, engage that Paul’s refusal to Judge opinion Koudelis’ was the negotiations was not bad settlement all of the evidence upon fact. It found that based finder of “by convincing clear and evi- proved that Birth Center handling faith in acted in bad [St. Paul] dence We also note of Norris v. The Birth Center.” underlying case Clouse, case, stated, underlying Judge who tried the trial, posture day believed that St. Paul’s settlement he fiduciary duty with its to the in bad faith and inconsistent opin- Judge expressed Clouse his Specifically, Birth Center. n ion that: I think the is a clear indication of bad here. [t]here responsible in a man- company proceeding insurance is not obligation its to its discharging fiduciary ner and is not company ... I think this insurance has insureds this case I want it clear highly irresponsible in a manner. operated $300,000.00 they highfiow have turned this offer fiduciary in which I think is a breach their down [sic] I want that on to their insureds. And clear responsibility this record. added).

(N.T., 2/16/93, 15-19, Judge emphasis While jury’s to the determina- opinion arguably is irrelevant Clouse’s compelling Paul in bad it is a tion that St. acted jury a reasonable could have come to a indication of how Paul in bad faith. similar conclusion that St. acted verdict, disagree with a he or she judge may aWhile simply a motion for because he or she may grant J.N.O.V. Indeed, would to a different conclusion. the ver have come for it. legal unless there is no basis Without dict must stand Clouse, Judge Judge Koudelis or agreeing disagreeing or light most favorable to Birth evidence we view the winner, Center, every give it the benefit the verdict all un- arising rejecting while reasonable inference therefrom testimony perspective, From that and inferences. favorable could have to conclude that no reasonable we are unable Therefore, although, Paul acted in bad faith. found that St. Koudelis, the same may we not have reached Judge like to sustain the was sufficient evidence jury, verdict as the there found, have jurors basis for the verdict and a reasonable in bad faith. Conse- from evidence—that St. acted motion for granted trial court should not have quently, the that it did not argument based on St. Paul’s directed verdict act in bad faith.

Payment of the Excess Verdict Next, arguments Paul’s that the trial we address St. judgment its motion for a notwith properly granted court (1) that: standing verdict because of its contentions all bad faith payment precludes insurer’s of an excess verdict claims, (2) additional allowing The Birth Center to recover compensatory damages discourage companies would insurance satisfying from excess verdicts. Paul states: Superior holding discourage The effect of the Court’s is to satisfying from companies insurance excess verdicts unless company do If can they required are so. an insurance exposed voluntarily still be to a bad faith suit even after verdict, no satisfying company an excess has incentive pay the excess. punitive

If it claim and exposed remains to the bad faith damages anyway, the obvious for the insurance course claim, ground, is to stand its faith company defend the bad and leave its insured to its own devices.

Appellant’s Br. at 15. argument appeal, Paul’s has facial it does not

While St. pay to Paul did not up stand closer examination. St. the It had goodness excess out of the of its heart. reason verdict going to that Birth to sue for bad believe The Center was faith9 it that if it to acted in bad and knew were found have appear dispute The Birth Center 9. St. Paul does not the contention of stating private attorney threats that its sent St. Paul "dozens” of written faith, punitive damages it would be liable for as well as the It, amount of the excess verdict. Pa.C.S.A. 8371. there- fore, appears paid attempt10 that Paul the excess in an St. a punitive damages avoid award. of in actions is to purpose damages

The contract parties position they would in but return the the have been Gedeon, relationship for 188 A.2d at 822 n. 5. the breach. dispute Birth Paul flow from between The Center St. 12. ... Gray, their contract. 223 A.2d at “Breach of [the] act in obligation constitutes breach [to faith] contract for which an action in will lie.” assumpsit insurance Therefore, Id. acts in bad insured where insurer damages is entitled to recover such sufficient to return it to it position would have been but the breach. St. payment Paul’s of the excess verdict does not bar The compensatory damages claim for The Birth Center’s because prove Center was able to that Paul’s bad faith conduct was St. suffering damages a substantial factor The Birth Center addition to the excess verdict.

Furthermore, is no to limit there reason damages can amount the verdict where the insured show damages. insurer’s bad conduct caused additional , subject underlying insurer’s conduct is not the of the' court against and, except action the insured for the amount verdict, damages from bad faith stemming excess the insurer’s conduct are not resolved action the insured. Where, here, prove as can it sustained insured verdict, damages payment excess of the the insurer’s damages. According- has to do with excess little the insured’s ly, payment the insurer’s should not it from free excess other known or it has its insured foreseeable caused to incur.

D’Ambrosio Does Not Bar The Birth Center’s Claim

Next, D’Ambrosio, St. contends that 431 A.2d bars Birth claim for Center’s verdict, pay if Paul did would the excess Birth Center sue Appellee’s St. Paul for its bad faith conduct. Br. at 10. punitive damages. It was a successful one. The did not award was a disagree. holding in D’Ambrosio damages. We Our by D a claim an insured that narrow one. Ambrosio involved by failing explain why his in bad faith to was insurer acted claim. declining pay property damages a The insured stating that the claim implicitly asserted the insurer bad faith claim as was fraudulent. We described the insured’s allegations in “dubious.” Id. at 971. We held that where the complaint to show insurer in bad failed how the acted punitive we would not allow the insured recover damages damages trespass or for emotional distress on his of action. contractual of action was cause cause never fact, that, In expressly before the Court.11 we stated case, appropriate an insured could recover dam- action, ages based on a contract because of an cause insurer’s bad faith conduct. explained: We possibility cannot be ruled out emotional distress where,

damages may be recoverable on a contract example, the breach is of such a kind that serious emotional a particularly likely present disturbance was result.... The record falls far short establishing such conduct. (internal citations, 431 A.2d at 970 quotations omitted and added). emphasis Similarly, concurring Chief Justice Nix’s opinion, he stated: provisions addition to the deterrent Unfair Insur- Act ... appellant position

ance Practices was also contract, theory seek relief under of breach or pursuing accept the common law tort of I do not deceit.... implicit premise the dissent’s that these existent remedies inadequate appellant are to make whole. (internal added). emphasis

Id. at 973-974 citations omitted nothing party bringing Because DAmbrosio bars a a bad sounding recovering action in contract from actions, that are otherwise in contract parties available we respect assumpsit 11. We observed with to the claim ”[t]his that: count appellee is not now before us. The trial court has directed to file its answer”. 431 A.2d at 967. reject argument Paul’s that D’Ambrosio bars Birth Cen- ter’s claim.12 §

42 Does Pa.C.S.A. 8371 Not Prohibit the Damages Compensatory Award incorrectly In Paul’s third argument, asserts may an compensatory damages not be awarded when faith conduct insured to incur actual insurer’s bad causes the 42 damages, damages are not mentioned in Pa. because the may § Birth not C.S.A. 8371.13 While The Center recover 8371, damages on Section based Section rights. not common law contract does alter The Center’s words of begin pro We with the the statute. Section 8371 vides: policies

§ on 8371. Actions insurance arising policy, In an action an if court under insurance finds that the insurer has acted in bad faith toward the insured, may all following the court take of the actions: (1) Award interest on the amount of the claim from the date equal claim was in an amount made the insured prime plus of interest 8%. rate (2) punitive damages against Award insurer. (3) attorney costs and Assess court fees the insurer. 42 Pa.C.S.A. prohibit not of compensatory

The statute does the award damages. merely provides remedy It an additional and autho damages.14 Specifically, rizes the award of additional Beane, 12. Justice Cappy, concurring opinion his in Johnson v. 541 (1995), correctly Pa. 664 A.2d 96 at 101-102 examined this issue Cowden, that at least observed since this Court's 1957 decision in rights permit Pa. 389 134 A.2d 223 common law contract compensatory damages insured to recover in bad faith actions. subchapter legislature 13. Section 8371 is Article G. The entitled Subchapter "Special Damages”. adjective "special” G use modify damages implies types word that not all provisions subchapter. are available are discussed within the within the require question 14. This case does not that we resolve the of whether independent 8371 creates an cause of action or Section an additional courts, has find that an insurer acted authorizes which statute insured, damages, punitive its to award in bad faith toward fees, Id. statute does not attorneys’ interest and costs. it, law, reject and the explicitly common does not reference the with the common statute is not inconsistent application of the Met remedy common law survives. Consequently, law. Insurance, Co. v. Liability Insurance ropolitan Property A.2d Pennsylvania, 525 Commissioner of (1990). an insured’s Metropolitan rejected we Property, abrogated Practices Act argument that the Unfair Insurance contractual, Id. right law of rescission. insurer’s common not the statute did explained at 302-303. We that because law and its concur remedy to the common rescission refer with the statute that the not inconsistent application rent remedy. Id. We preclude legislature did intend that: determined 1 .. . Act. Pa.C.S. [Statutory the Construction

Under interpreted as seq] implication § an cannot be 1921 et alone affirmatively must abrogating existing legislature law. The accepted common existing specifically preempt law or repeal prior disregarded. law for law to be (the provision at issue 40 Pa.C.S. 1171.5 [Because ]) to com- no reference the Metropolitan Property makes [sjmuch cannot right to rescission . .. an omission mon law long- such a interpreted as an intention to foreclose be standing right. 311, A.2d

Id. at 580 300. Hess, 264, (1954), 106 A.2d 461 Similarly, in Rahn v. presumed to make innova- stated: “statutes are never we prior common law or principles tion in the rules and provi- in their existing beyond expressly law what is declared 270, Indeed, Id. 106 the context of sions.” A.2d 42 8371 altered the burden of determining whether Pa.C.S.A. applied Pennsylvania Third Circuit law ex- proof, the expressly did not alter plained legislature because the remedy. issue here because the issue is We make no comment on squarely before us. not 404 v. Nation law, it did not Polselli it.

prior change intend Co., (3d wide Mutual Fire Insurance 747, 23 F.3d Cir. 1994). There, the court that: observed statute, enacting legislature presumed is to have law, familiar with as it judicial

been then existed and the Dist., Raymond v. School construing it. decisions See (1958). 352, Pa.Super. 142 A.2d 749 legislature Had changes respect intended make the law persuasion necessary prove burden of bad it could Nabati, See Harka v. expressly. have done so 337 Pa.Su (1985). 617, 432, per. By 487 A.2d failing to articulate any changes, legislature implicitly acknowledged existing applicable. standards remain where, here, reasoning applies 23 F.3d at 751. The same as legislature expressly did prohibit the continued award compensatory damages when insurer’s bad faith conduct causes them.

Therefore, contention, contrary to St. Paul’s Section 8371 prohibit does not courts from dam- awarding compensatory 8371, ages that are otherwise available.15 . In Section compen- 15. Before the enactment of Section courts could award satory damages in contract cases when the were known or subject Lampus foreseeable and to calculation. R.I. Co. v. Neville Cowden, (1977); Corp., 474 Pa. Cement Products Lampus, quoted 134 A.2d 223. In R.I. we Professor Corbin for following proposition law: necessary, charge All that is in order to the defendant with the loss, particular ordinarily is that it one that is follows the breach of events, such a contract the usual course of or that reasonable men position parties probable the of the would have foreseen aas result of breach. 291, Corbin, quoting 378 A.2d A. 5 Corbin on Contracts at 1010 (1964). legislature year 79 The the same enacted Section 8371 we were stated, breaking ground allowing not new when we "in addition to Cjode, compensatory damages under [the Uniform Commercial Penn- sylvania damages compensatory profits allows in the form of lost to be Co., recovered.” Franchise Association v. Atlantic AM/PM Richfield 110, 915, Indeed, (1990). by 526 Pa. 584 A.2d 920 that time 8371, legislature long enacted Section had been axiomatic that damages compensatory were available in contract where the actions damages Delahanty were the foreseeable result of the breach. v. First N.A., 90, Pennsylvania (1983). Pa.Super. Bank Delahanty court that: observed legislature granted authority the court additional to award interest, damages, attorneys’ costs and fees. fact punitive damages authorized courts to award that statute these prohibit granting they not from other remedies that does them power grant had to award without the theretofore authority. additional

Finally, argument by not damages St. Paul’s that mentioned 8371 are not available is with St. Paul’s Section inconsistent 8371, damages, that not listed in admission other Section Appellant’s Reply Notwithstanding remain viable. Br. at 3. provide may that an require Section 8371 does that courts refuses, pay insurer to an verdict in bad excess when it case, must,16 admits, a Paul to settle St. as it that such an permissible. is award states: it has long been held this Commonwealth that an when company insurance fails to claim third-party settle insured, its the insurer can be for the full liable amount verdict, if any excess not to decision settle was made bad faith. right Paul also admits this [St. that] has been nature; held to be contractual in by it can be enforced Pennsylvania profits It is well settled law in that loss are recovera- upon proper proof general ble in contract . . . The rule of law applicable profits for loss of in both contract and tort actions allows (1) damages such where there is evidence to them establish (2) certainty, they reasonable there is evidence to show that were the and, actions, proximate consequence wrong; of the in the contract they reasonably were foreseeable. compensatory Id. at 1258. Because were available at the time legislature provide enacted Section and that Section does not longer may damages, court no award those damages remain available. insurer, by unreasonably refusing 16. An who acts bad faith 1o settle a case, may notwithstanding be liable for the full amount aof verdict Cowden, the verdict exceeds the insured's limits. Cowden, 134 A.2d 223. we stated that an insurer: may judgment be liable for ihe entire amount of a secured a third insured, party against regardless policy, limitation in the if claim, handling including accept insurer's a failure to settlement, proflered was done in such a manner as to evidence bad part discharge faith on the of the insurer in the of its contractual duty. Gray Co., Id. at 224. See also v. Nationwide Insurance (1966). A.2d 8 406 injured third assignable to the assumpsit; in is

action party. Paul, thereby, that an Br. at 3. concedes

Appellant’s Reply damages other may subject in faith be to who acts bad insurer just as Accordingly, 8371. than forth Section those set an verdict even require pay an insurer to excess may courts liability, verdict 8371 does not mention excess though Section 8371 does damages from Section compensatory the absence award authority of courts to not alter the damages. faith, insurers, pay act in bad to excess who

Requiring that, insur- liability from absent the protects insured verdicts conduct, would not have incurred.17 the insured er’s bad pay verdict requiring an to an excess rationale for insurer right of an action. to control the defense derives from the insurer’s Cowden, company takes control A.2d at 228. Where the insurance 134 (cid:127) brought by parties, litigate third the to settle or actions of the decision fiduciary duty, among policyholder other company its a owes insurance things, negotiations. v. State engage good faith settlement Gadeon to Company, 320 410 Pa. 188 A.2d Mutual Automobile Insurance Farm Gedeon, (1963). In we stated that: against right by asserting insured, policy in the to handle all claims settlement, right binding including make a the insurer fiduciary position towards the insured and becomes obli- a assumes representing due care in gated act in faith and with interests of insured. litigation, controlling the insurer's role in Id. at 322. Because of fiduciary relationship accepts with its insured and enters a insurer Gray protect of its v. Nation responsibility to the interests insured. (1966) Company, A.2d wide Mutual Insurance right an award in of his (holding that an insured's to recover excess insurer, refuses settle a claim policy from his when the insurer limits assignable). against the inured bad insured, duty Notwithstanding to its the insurer's contractual always consistent and and their insureds are interests of insurers Indeed, an insured's frequently in conflict with one another. are willingness plaintiff expresses a particularly at risk when a interests are policy When it becomes clear that an insurer to settle for the limits. insured for the limits of the third-party claim its could settle any worry policy, thereby its insured from about excess release verdict, vigilant ensure that it has a reasonable the insurer must be breaching fiduciary duty to its tiy the case and that it is not its basis to Cowden, insured, upon chance of a defense verdict. based a small A.2d at 228. forgoing particularly jeopardy under the are An insured's interests for the limits or looses whether the insurer settles facts because liability type for an The insured’s excess verdict is damage for which this court has compensatory allowed recov- Therefore, ery. when an insurer breaches its insurance con- case, by tract a bad faith to a it is appropriate refusal settle require pay it to that it or damages other knew should have known the insured would incur of the bad faith because conduct. an

The dissent would hold that insurer’s bad faith refusal to give settle a claim its insured does rise a contract cause action. For the reasons set forth in this opinion, However, respectfully disagree. respond we we point out by that the characterization of claim the the dissent bearing has no on particular the outcome this case. Wheth- Birth tort, er of action Center’s cause sounds in contract or in by the found convincing clear and evidence St. Paul in acted bad faith and that its a actions were substantial factor bringing about harm to totaling Center $700,000.00 compensatory damages. appropriate circum- stances, compensatory damages are available in both contract Indeed, and tort generally, causes of action.

damages are easier to recover in tort actions than contract case, Consequently, actions. in this which does not involve a issue, statute limitations the dissent’s assertion that claim should sound tort instead contract is irrelevant. only applicable by issue raised the dissent is whether Statute, the Bad Faith 42 Pa.C.S.A. bars recovery of compensatory damages. E’or the reasons we have dis- cussed, persuaded by we are not contrary, the dissent. To the provision prohibit does not the award of compensatory damages; it merely provides a basis to award additional damages. law, The statute does not reference the common explicitly it, does not reject application and the of the statute is not inconsistent with Accordingly, the common law. trial, same; instances, its risk is the in both and absent bad all situation, pay it would have to would be the limits. Id. In such a case; nothing a faithless insurer trying would have to loose it might hope well as take the risk and for a delense verdict. At the same time, Cowden, the insured have would no reason to risk a trial.

A.2d at 223. would remedy survives. To hold otherwise as the dissent does n pro- authorizes additional read statute —that —to already which compensatory damages, hibit award of were cannot counte- power within the of the courts to award. We directly such a because it conflicts the one nance result legislature intended.

CONCLUSION faith, by acts in bad Today, we hold that where insurer claim, its contrac- unreasonably refusing to settle breaches fiduciary duty duty tual to act in faith and its its Therefore, insurer is liable for the known insured. and/or compensatory damages of its insured that reason- foreseeable Accordingly, bad faith conduct. ably flow from the insurer’s .Court, Superior affirm the decision of the reinstate the we for a jury’s verdict and remand this case to the trial court interest, determination of The Center’s entitlement attorneys’ pursuant and to 42 Pa.C.S.A. reasonable fees costs § 8371.

NIGRO, Justice, concurring opinion. a files ZAPPALA, Justice, dissenting opinion a in which files CASTILLE, joins. Justice

NIGRO, (concurring). Justice agree majority Superior properly I with the that the Court jury’s reversed the trial court’s order and reinstated the $700,000.00in granting consequential award The Birth Center addition, damages.1 agree majority I with the that The damages may referred 1. While the awarded also be to as damages, they [Specifically consequential. are more defined as Com damages damages injured party pensatory place are meant to in the (6th dictionary place prior injury, 390 he was to the law black’s ed.1990). "general” Compensatory damages "con consist of both and sequential” "special” damages. general damages compensate or While sustained, injured injury consequen party for the immediate or loss damages consequences the direct tial are that flow from injury. consequential damages, litigant prove Id. To recover must "reasonably they they parties to the at the time were foreseeable” Rich entered into the contract. Franchise Assoc. v. Atlantic AM/PM

409 consequential damages sounds Birth Center’s claim for Nat’l Mutual Pennsylvania D'Ambrosio v. contract law. See (1981); Co., 501, v. Nationwide Gray Ins. 494 (1966). Co., I neverthe Ins. 422 Pa. 223 A.2d Mutual that, unlike separately my to assert view Justice less write estab I that the law in this Commonwealth Zappalla, believe that an separate “bad faith” claims lishes that there are two contract claim for bring against can an insurer —a insured act in implied duty contractual breach sounding in tort statutory bad faith tort claim under claim, contract an insured § 8371. Pursuant to the Pa.C.S. damages, including compen traditional contract may recover claim, however, in statutory satories. Pursuant to the only damages specifically set forth may sured recover those i.e., fees, attorney court punitive damages, 42 Pa.C.S. costs interest. law in this Commonwealth

Although historically the case of the common law has been less than clear as to the nature i.e., insurer, it sounds in “bad faith” claim whether contract,2 any ambiguity regard I in that tort or believe D'Ambrosio, by explicitly which stated there settled law bad faith tort claim. 431 A.2d at 970. is no common DAmbrosio, however, viability of bad did not address the claim, roots in faith contract which has its case (1952)(first Wilson, A.2d 189 Perkoski v. faith), assumpsit action for bad and was reaffirm recognizing Gray. Accordingly, this Court in DAmbrosio left the ed long-recognized contractual bad faith claim undisturbed. 110, 915, (1990). case, In the instant

field, 526 Pa. 584 A.2d 920-21 general damage by liability suffered The Birth Center was its However, voluntarily, paid verdict. the excess excess because St. Rather, part damages the excess was not of The Birth Center's claim. of, sought damages, consisting among consequential The Birth Center things, properly lost business and lost clients. The trial court other damages charged consequential if it that it could award such they parties] “reasonably that were foreseeable at the time [the found 5/10/96, made the contract.” N.T. at 247. 459, Co., Surety 389 Pa. 134 Compare Casualty Cowden v. Aetna & 2. (1957)(considering trespass), claim A.2d 223 a bad faith asserted 500, (characterizing 422 Pa. 223 A.2d 8 bad faith claim as Gray with assumpsit), one in 410 8371,

By subsequently enacting § 42 Pa.C.S. the General Assembly that in D gap filled the we had identified Ambrosio a statutory By cause of action in tort for bad faith.3 8371, may § virtue of now supplement insureds the breach of they contract can through obtain their bad faith bringing § contract action also a claim under 8371 for the specific damages authorized in that statute.

ZAPPALA, Justice, (dissenting). respectfully grounds

I must dissent on the that a claim for tort, bad faith refusal sounds in settle not contract. Therefore, only viable action to Appellee regard- available ing Appellants’ bad refusal to settle is an action in tort. Appellee The remedies available to consist of recovery of: (1) law, pursuant the excess verdict to common see Cowden v. Co., 459, Casualty Aetna Pa. Surety 389 134 A.2d 223 (2) (1957); interest, punitive damages, court costs and attorney statute, pursuant fees to the bad faith see Pa.C.S. § 8371. consequential damages Since are available under statute, common law or they the bad faith I are barred. would Superior therefore reverse the order of the Court. Co.,

In Gray v. Nationwide Mutual Insurance (1966), this right Court held that an insured’s recover an award in excess his limits from his insurer, as a result of bad faith the insurer’s refusal to settle insured, underlying claim assignable. law, Although general proposition this that a claim for bad seeking faith refusal to settle to recover an excess verdict is assignable, law, is sound and remains I that in believe reaching the course of in Gray, the result this Court errone- ously characterized an insured’s cause action for bad faith I conclude Pa.C.S. 8371 sounds in tort both because it appears response to have been enacted in to D’Ambrosio and because it permits punitive damages, typically the insured to recover which are Contractors, Inc., remedy only in tort actions. See Kirkbride v. Lisbon (1989); Assoc., 555 A.2d see also Franchise AM/PM (holding punitive type may 584 A.2d at 927 relief not be awarded action). in contract assumpsit.1 Gray, action in 223 A.2d to as an refusal settle 11. contract, any liability in addition to a insurance

Under exchange in obligations by undertaken the insurer specific obligations: an insurer undertakes three policy premium, (1) liability indemnify against agrees to the insured the insurer (2) agrees to defend by policy; the insurer covered (3) against and arising policy; suits under the insured and fiduciary to the insured responsibility assumes a insurer in good to act in faith and with due care obligated becomes v. the interests of the insured. See Gedeon State representing Co., 55, 188 A.2d Mutual Automobile Insurance Farm (1963).2 is hornbook law that a breach of either the It of indemnify duty or to constitutes a breach duty to defend liability gives in contract and promise a set forth insurance contractu; duty of action ex rise to a cause breach fiduciary duty act in faith arises from a breach of the gives and growing liability out of the insurance contract rise (action in sounding a cause of action ex delicto. See Gedeon defend); claiming Cowden assumpsit breach covenant (action sounding trespass claiming bad faith refusal settle). However, of a Gray, this Court’s characterization assumpsit, as an action in claim for bad refusal to settle a claim for bad directly conflicts with the characterization of an action ex giving faith refusal to settle as a tort rise to delicto. County Gray originated Philadelphia case Com- brought by Gray as a trespass

mon Pleas Court action Robert personal injuries property MacLatchie for Robert resulting loss from an automobile accident. At the time 1. on contract; ed. action of Assumpsit 1991) (emphasis recovery 1ort, assumpsit or a contract is defined as: "A common law form of action which lies for upon differs from a contract....” original). for the is neither trespass non-performance Black's record trover, Law nor under seal... of a Dictionary which are parol or founded simple . The (6th Although concerned the insurer's duties in the context of an Gedeon liability policy, where the automobile these duties are not altered liability subject policy professional protection. is for accident, MacLatchie was insured Mutual In- Nationwide Company liability an policy, surance under automobile $5,000. of which was coverage limited Nationwide defended in Gray subsequently MacLatchie the action. obtained a $15,000 against jury-verdict MacLatchie. After Nationwide policy Gray, Gray limits to tendered the demanded the balance MacLatchie, of from judgment assigned who then all of his rights Gray. against Nationwide MacLatchie, assignment by Gray

On the basis of the filed in assumpsit pleas against an action the common court Nation- judgment, claiming wide to recover the balance of the in by refusing Nationwide had acted bad faith to settle Gray for an within amount MacLatchie’s limits. Na- objections in preliminary tionwide’s the nature of a demurrer Gray’s complaint Gray were sustained was dismissed. banc, appealed Superior to the Court en which affirmed the trial by equally court’s order an court. Gray divided v. 1, Nationwide Mutual Insurance 207 Company, Pa.Super. (1965). 214 Judge Wright A.2d 634 in opinion concluded his supporting the affirmance of the order MacLatchie’s claim against assignable Gray Nationwide was not aas law: matter of obligation

Breach of insurer’s to act in faith and representing with due care in the interests of the insured tort, creates a cause of action in not in A assumpsit. claim of assignable the instant nature is not before verdict: Sen Co., 168, (1910) senig ]; v. Pa. Railroad 229 Pa. 78 A. 91 [ Bardell, Seaboard v. Corp. Commercial 49 D. 300 & C. (1944) [ ]. .

214 A.2d at 635.3 appeal,

On this Court stated: Although Judge Wright characterizing correct in was the action as tort, sounding Sensenig this Court's decision in did not control assignability. Sensenig, issue of tort, In this Court held that an action in unliquidated damages, capable assignment. to recover was not Nerone, 381, (1939) Pa.Super. See also Sniderman v. (holding unliquidated personal injuries claim for for is curiam, attachment), assignable subject per not nor 'd aff (1939). Nationwide, however, Gray's against 9 A.2d claim MaeLatchie, Our task is to determine whether the in- sured, a assumpsit against has cause of action or tort wrongful the insurer for its refusal to settle. Cowden v. Aetna 389 Pa. at Casualty Surety Company, A.2d the late Mr. Alvin Chief Justice Charles Jones by stated: “It is greatly preponderant established weight authority country, against this that an insurer public liability personal injury may for be liable judgment entire amount of a party secured a. third insured, regardless limitation in the claim, if policy, handling including insurer’s settlement, accept proffered failure to was done in such a manner as to part evidence bad faith on the of the insurer in the discharge its contractual duty.” (Emphasis add of ed). rule, Giving the reason for this Mr. Chief Justice “And, Jones continued: in Weiner v. Targan, Pa.Super. 278, 284, was recognized that the contractual relationship indemnity under an policy was ‘a requiring high degree one good of faith in the conduct of indemnity company’s the ” * * generally 469, counsel *.’ 389 Pa. at 134 A.2d at 228. added). (Emphasis In v. Gedeon State Farm Mutual In surance (1963), Company, Pa. Mr. Justice Cohen on elaborated the duties of the insurer to his typical insured: “Under a liability automobile insurance policy, us, such as the one before the insurer undertakes three distinct types obligations, each of which involves of thereof, different of proof elements to establish breach from the breach of which recovery different measures of added). result.” 410 188 A.2d 320. (Emphasis “Thirdly, by in asserting right the the to handle all insured, claims including right amake settlement, binding fiduciary position insurer assumes a towards the insured and becomes in obligated good to act faith and with due in representing care interests added). insured.” 410 Pa. at 188 A.2d 320. (Emphasis law, employing We believe that this recent case contrac- unliquidated damages. Gray sought one for a sum certain: the amount of the excess verdict. represent obligation the insurer to tual terms for the insured, rights a breach good indicates in faith the of the insur- obligation a breach such an constitutes assumpsit in will lie. for which an action ance contract added). (emphasis A.2d at 11 Gray, 223 is that the “recent case reasoning in this glaring error of the law, obligation terms for the employing contractual rights of insured” in faith the represent insurer to regarding whether the dispositive court found Gray which the tort, logically to the lay assumpsit in or does lead action in Neither assumpsit. that the bad faith claim lies conclusion claiming that an action bad nor indicate Coivden Gedeon Cowden, this Court sounds contract.4 refusal to settle that, claiming action bad faith refusal trespass in a found amount of settle, could be liable for the entire the insurer handling of the claim evidenced if the insurer’s excess verdict concerned an faith. This Court’s decision Gedeon bad covenant to defend. claiming action breach of the assumpsit legal sound reason- supplying case can be read as Neither as a claim for bad faith refusal settle ing construing assumpsit. sounding tort, bad faith refusal to settle sounds

Because a claim for contract, only Appellee available to consist not in remedies (1) to common recovery pursuant the excess verdict of: (2) interest, law; damages, court costs and attor- punitive consequen- to the bad faith statute. Since ney pursuant fees law under common or the damages tial are recoverable statute, D’Ambrosio v. Penn- they are barred. See bad faith Co., National Mutual Insurance sylvania (1981). A.2d 966 (1930), petition Targan, Pa.Super. 278 concerned a

4. Weiner v. judgment, averring judgment procured fraud. open that the petition to Superior reversed the trial court’s denial of the Court casualty company Superior when a open. The Court observed that policy, pursuant to the terms of its it is the defense of an action assumes defense, conducting rule of held to a strict therefore, casualty company in the course commits fraud where a defense, conducting held liable for the should be naturally resulting therefrom. Superior order Court should therefore be re- versed.

CAST1LLE, Justice, joins dissenting opinion. this Pennsylvania, Appellee,

COMMONWEALTH of v. DeJESUS, Appellant. Jose Supreme Pennsylvania. Court of

Submitted March 2001. Decided Dec.

Case Details

Case Name: Birth Center v. St. Paul Companies, Inc.

Court Name: Supreme Court of Pennsylvania

Date Published: Dec 31, 2001

Citation: 787 A.2d 376

Docket Number: 25-28 M.D. Appeal Docket 2000

Court Abbreviation: Pa.