A Pennsylvania state court has found Nationwide Insurance Co. engaged in bad faith in handling its insured’s first party auto insurance claim and in its litigation tactics when the dispute led to a lawsuit. The court’s forty page opinion catalogues the types of specific conduct that evidences bad faith in violation of Pennsylvania Insurance Bad Faith Statute ( 42 Pa. C. S. A. § 8371), which warrants an imposition of punitive damages to deter insurers from engaging in such conduct.
The insurance claim arose from a September 4, 1996 collision in which another vehicle struck plaintiff Sheryl Berg’s 1996 Jeep Grand Cherokee. The Jeep spun around four times and hit a pole resulting in a bent frame and other “severe” damage according to Nationwide’s claim file notes. Six days later, Nationwide’s authorized repair shop under its Blue Ribbon Repair Program inspected the Jeep and prepared an appraisal declaring the vehicle a $25,000 total loss. Ten days later, and under Nationwide’s directive (see below), a revised appraisal report was prepared by the same shop indicating the Jeep could be repaired for $12,300. The repair process took over four months, and the Jeep continued to have problems after it was returned to the Bergs.
In October 1997, the Bergs learned from a former employee of the repair shop, which was a participant in Nationwide’s Blue Ribbon Repair Program, that there were structural repair problems with the Jeep posing safety risks, and in January 1998, the Bergs brought suit against the repair shop and Nationwide. In April 1998, in a pre-complaint deposition, the Bergs learned for the first time about the first appraisal declaring the Jeep a total loss due to the badly twisted frame.
The trial was bifurcated with the first phase consisting of a jury trial on Plaintiffs’ claims for common law fraud, conspiracy and liability under Pennsylvania’s Unfair Trade Practices and Consumer Protective Law (the “Unfair Trade Practices Act”). The jury found the repair shop and Nationwide liable under the Unfair Trade Practices Act and awarded compensatory damages to the Bergs of $1,925 against the repair shop and $295 against Nationwide. The second phase was a bench trial that began on June 5, 2007 on the issues of treble damages under the Unfair Trade Practices Act. The trial court granted Nationwide’s motion for directed verdict because the court found that the repair shop that operated under the Blue Ribbon Program was not a direct repair shop for Nationwide. The Bergs appealed.
In 2012, the Superior Court reversed the trial court’s entry of a directed verdict (44 A. 3d 1164). Among other things, the Superior Court concluded that “whether processing claims for loss through a third party repair facility or through a direct repair program, insurers must at all times act in good faith vis-à-vis their insureds.” (44 A. 3d at 1173). The jury’s finding of violation of the Unfair Trade Practices Act amounted to “some evidence” supporting the Bergs’ claim of insurance bad faith which precluded entry of a directed verdict.
The Superior Court also found there was evidence presented that Nationwide had returned the Jeep to the Bergs with actual knowledge the repairs had failed and the frame was structurally unsound. The court also found the Bergs had offered evidence that Nationwide used a litigation strategy emphasizing a lack of cooperation and aggressive efforts in handling claims under $25,000 to create a “defense-minded” perception designed to deter insureds from filing other similar, small claims. The Superior Court also found merit to the Bergs’ argument that the trial court erred in refusing to permit evidence of the amount paid by Nationwide in attorneys’ fees as part of its litigation strategy and in failing to perform in camera inspection of documents to determine whether Nationwide had concealed relevant documents through false assertions of attorney-client privilege. The appellate opinion stressed that in bad faith litigation, “the fact finder needs to consider ‘all the evidence available’” and directed the trial court to conduct an in camera inspection of the disputed documents to resolve the claims of privilege before retrial. The case was remanded for a new trial of the second phase issues. On April 24, 2013, the Pennsylvania Supreme Court refused to grant Nationwide’s request for further appeal.
Guided by the Superior Court’s decisions, conclusions and directions, the trial court’s forty page opinion after the retrial offers a scathing indictment of practices the court found indicative of insurance bad faith. Among other things, the court found:
● repairs were made by a third party body shop without the knowledge or consent of the insureds;
● the first appraisal totaling the Jeep was improperly concealed from the insured until litigation was instituted;
● the insurer failed to tell the insured of its right to have repairs done at any repair shop at no cost to the insured;
● the insurer failed to tell the insured that the Jeep was unsafe to drive after being repaired due to the structural damage;
● the insurer wrongfully withheld from discovery entries in the claims file which were not protected by privilege;
● high ranking employees of the insurer admitted in depositions that the insurer’s tough defense procedures remained in effect but during the first trial all four reversed field and testified under oath that they were mistaken in their deposition testimony;
● Nationwide spent $3 million in resisting the insureds’ lawsuit claiming only a few thousand dollars.
In particular, the court was troubled by Nationwide’s conduct in returning the Jeep to the insureds with hidden structural problems making it unsafe to drive, and said such conduct constituted a high degree of reprehensibility. In addition to awarding $18 million in punitive damages, and statutory pre-judgment interest, the court awarded attorneys’ fees of $3 million. It concluded Plaintiffs were entitled to at least the amount of attorneys’ fees that Nationwide had expended in defending against the claims. Plaintiffs’ counsel had taken the case on a contingent fee basis and had fought on behalf of the insured for more than sixteen years in what the court characterized at “astonishing cost, risk, and exposure.”
The court lamented that Sheryl Berg, the occupant of the Jeep at the time of the collision, would never see the case concluded because she died in May 2014. In the wake of this decision it is unclear whether Nationwide will pursue another round of appeals. But Pennsylvania courts are clearly determined to hold insurers accountable for a broad range of conduct that indicates breach of their fiduciary duties to their insured, including conduct during litigation. When insurers are penny wise and pound foolish, determined lawyers and courts will remind them their insureds are in the driver’s seat of the relationship.
Kang Haggerty LLC has successfully represented insureds in bad faith insurance litigation. For additional information, contact Edward T. Kang at 215-525-5850 or ekang@lawkhf.com.