• Should Attorneys Fees Incurred In A Statutory Bad Faith Claim Include Fees Incurred Solely In Pursuit Of The Bad Faith Claim: Time To Revisit The Polselli Prediction?
  • June 5, 2012 | Author: R. Bruce Morrison
  • Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Philadelphia Office
  • Key Points:

    • Attorneys fees recoverable in a statutory bad faith claim should be limited to those fees incurred to obtain benefits wrongfully denied.
    • Allowing recovery of attorneys fees to obtain damages beyond the policy limit or to recover other types of damages would allow insureds to recover attorneys fees and should not be permitted.

    While it seemingly has not generated much active debate or discussion in recent years, one issue which has never been considered or addressed by the Pennsylvania Supreme Court is the scope of attorneys fees recoverable by an insured in a statutory bad faith case brought under the Pennsylvania statute. More specifically, although that statute unquestionably gives the trial court the discretion to award a successful insured attorneys fees and costs, the question is whether such an award can or should include those attorneys fees incurred after the underlying insurance claim has been settled and paid, or even adjudicated and paid, such that the continued proceedings relate solely to the pursuit of the statutory bad faith claim itself.

    Although there is precious little Pennsylvania case law which actually deals with this issue, it is not an entirely clean slate. Instead, for guidance, we have two opinions, dusty though they may be, which come from the same case, the infamous Polselli case.

    By way of brief background, the Polselli case originated in a contested first party fire loss claim under a homeowners insurance policy. At the time of the fire, which occurred on January 1, 1991, plaintiff Regina Polselli and her daughter lived in the Aldan, Pennsylvania, home owned by her estranged husband, Rudolph Polselli. Also at the time of the fire, Rudolph Polselli was the sole named insured on the homeowners insurance policy issued by Nationwide. Rudolph and Regina Polselli were in the midst of divorce proceedings when the fire occurred. Each submitted competing claims to the proceeds claimed under the policy. On March 4, 1991, a mere 61 days following the fire, Regina Polselli filed her lawsuit against Nationwide, asserting both her entitlement to benefits under the policy and a statutory bad faith claim pursuant to the brand new Pennsylvania bad faith statute, 42 Pa. C.S.A. §8371.

    There had never been much dispute among the interested parties about the biggest portion of the fire claim, as the agreed upon proceeds for the building claim were put into escrow to be allocated in the Polsellis' divorce proceedings. There were, however, questions and issues surrounding the contents and ALE claims, and once the bad faith litigation was filed, a good deal of the parties' attention turned to that portion of the case. Shortly before the trial was scheduled to occur, the parties settled the contents and ALE claims, and Mrs. Polselli proceeded with the trial of her statutory bad faith claim. A quick check of Shepards for the Polselli case will give the long roadmap of the bad faith litigation which ensued thereafter, including multiple trips to the Third Circuit Court of Appeals on the "clear and convincing" burden of proof and then the issues surrounding attorneys fees.

    Focusing here on the issue of "attorneys fees," it is significant to note that the trial court, per Judge Yohn, agreed with the insurer's position and limited his award of attorneys fees to the fees incurred in pursuit of the underlying insurance claim. In Polselli v. Nationwide, 1995 U.S. Dist. LEXIS 17006 (E.D. Pa., Nov. 15, 1995), Judge Yohn wrote the following:

    The court will assess fees in favor of plaintiff only for work conducted in relation to the insurance contract claims for personalty losses and ALE. At oral argument, the parties agreed that an appropriate method of allocation would be to assess fees up until the day of the bench trial on the bad faith claim and that they would attempt to resolve the number of hours amicably.

    Polselli v. Nationwide, id., p. 7-10. After further discussion achieved an amicable resolution on the number of hours devoted to pursuit of the contract claim, this "scope of fees" issue itself reached the Third Circuit Court of Appeals.

    In Polselli v. Nationwide, 126 F.23d 524 (3d Cir. 1997), the Third Circuit reversed Judge Yohn. It concluded that insureds who prevailed on a Section 8371 bad faith claim could recover both the fees incurred in pursuing the underlying insurance claim and those additional fees incurred pursuing the statutory bad faith claim itself.

    In the Third Circuit's view, despite the fact the courts consistently note that a § 8371 claim is a separate and independent claim from the underlying contractual claim for benefits, the bad faith action still fits somehow with the statutory framework of "[i]n an action arising under an insurance policy." It reconciled that view by first recognizing that there had to have been an underlying contract claim at some point, and because the duty of "good faith" which is being protected or enforced by the bad faith claim itself arises under the insurance contract (even though most courts would say that that duty of mutual good faith is implied by law). In this author's humble opinion, those rationalizations are unpersuasive.

    The second reason for awarding fees offered by the Third Circuit was that such fees are a necessary component of compensation in order "to make the successful plaintiff completely whole." id., 126 F.3d at 531. Although the court recognized that § 8371 "is not a traditional fee-shifting statute" where a successful party is automatically entitled to recover fees, the court relied on the axiom of "liberal construction" of statutes to achieve their objective and "promote justice." The concept of continuing to award fees for the pursuit of fees seems to create a self-fulfilling cycle, promoting and prolonging litigation as opposed to incenting its resolution. This author's views notwithstanding, the question remains, where does the Polselli case leave us?

    First, we must keep in mind that the Third Circuit decision in Polselli is binding in the District Courts in Pennsylvania, but not in the state courts. As the court recognized, its role was simply to predict what it believed the Pennsylvania Supreme Court would do if that Court were deciding the issue.

    Second, the Third Circuit's rationalization of the statutory language notwithstanding, the many cases which explicitly recognize that statutory bad faith claims under § 8371 are, in fact, separate, independent and distinct from the underlying claim for contractual benefits (which underlying claim may or may not actually result in litigation) offer strong support for the view that that separate statutory claim is not "an action arising under an insurance policy."

    Third, despite its express recognition that § 8371 is not a fee-shifting statute, the Third Circuit's prediction runs counter to "the American rule," which is well settled here in Pennsylvania. Under that American rule, attorneys fees are generally not recoverable, either as costs or damages, unless their recovery is expressly authorized by statute, court rule or some recognized exception. Burnside v. State Farm, 538 N.W. 2d 749, 751 (Mich. App., 1994); Snyder v. Snyder, 620 A.2d 1133, 1138 (Pa. 1993).

    Fourth, there is nothing in the language of § 8371 which suggests that it was meant to include reimbursement of the fees incurred seeking a bad faith recovery. Indeed, when one reads the statute in its entirety, it is respectfully suggested that it is designed to include both compensatory and punitive elements for an insurer's bad faith handling of an insurance claim. Where such bad faith handling has resulted in an unreasonable delay in paying the claim, the court may compensate the insured by awarding interest on the claim during that delay at an interest rate of prime plus 3%. Where that handling has forced an insured to retain counsel to recover the claim, and perhaps to file suit on the claim, the statute empowers the court to compensate the insured by assessing those court costs and attorneys fees on the insurer. Finally, in those instances where the court determines the insurer's conduct to have been so outrageous as to warrant punishment, the statute authorizes the court to award punitive damages for its handling of the claim.

    In reading that statute, then, two important points emerge. The first is that each of the remedies is extra-contractual. They are not remedies provided for under the insurance policy itself but are, instead, created by that statute. Consequently, an action seeking damages under § 8371 is not "an action arising under an insurance policy." The second is that each of the remedies, and indeed the statute itself, is directed toward the insurer's handling of the underlying insurance claim in dispute. In other words, it is meant to provide a remedy for any harm done by the bad faith conduct (including the potential imposition of punishment via punitive damages), not to fund the prosecution of the independent statutory claim. There is simply nothing contained in § 8371 which suggests that, where the disputed insurance claim has been settled, the insured may also seek to recover the attorneys fees incurred in the prosecution of the insured's extra-contractual statutory claim.

    Fifth, limiting the recoverable fees to only those fees incurred in pursuing the underlying benefits is consistent with existing Pennsylvania law in two closely-related areas of insurance law. In instances where a liability insurer has denied coverage for a third party liability claim against an insured, an insured who successfully brings or defends a declaratory judgment which establishes that the legal defense was owed is entitled to recover the underlying defense fees incurred as a measure of compensatory damages. At the same time, however, the successful insured is only entitled to recover the fees incurred in litigating the coverage issue where the insured also establishes that the insurer's denial of coverage had no reasonable basis or was in bad faith. See Kiewit Eastern Co., Inc. v. L. & R. Construction, 44 F. 3d 1994, 1205 (3d Cir., 1995); Kelmo Enterprises v. Commercial Union Ins. Co., 426 2d 680 (Pa. Super. 1981).

    Similarly, in instances of withheld or disputed PIP benefits under the MVFRL, § 1798 provides for an award of attorneys fees in addition to the benefits owed and interest "in the event an insurer is found to have acted with no reasonable foundation in refusing to pay the benefits."...75 Pa. C.S.A. §1798. In those instances, then, Pennsylvania allows for the recovery of attorneys fees incurred seeking coverage or benefits which were withheld or denied in bad faith, but does not provide a basis to further augment those fees thereafter.

    Sixth, the majority of other states which have considered and decided this issue do not allow for reimbursement of the fees incurred pursuing the separate bad faith claim. Even in California, the law acknowledged in the District Court's Polselli opinion remains the prevailing view. See Brandt v. Superior Court of San Diego, 693 P. 2d 796 (Cal. 1985); Essex Ins. Co. v. Five Star Dye House, Inc., 137 P. 3d 192, 195 (Cal. 2006).

    Finally, and as a matter of public policy, the law has always favored resolution and settlement, as opposed to encouraging or even incenting the proliferation of litigation. Awarding additional attorneys fees for the separate pursuit of alleged bad faith where the underlying insurance claim has already been settled or otherwise closed produces the opposite result. It encourages not only the pursuit of litigation about litigation, but it actually incents the over-litigating of the bad faith claim because the fees incurred by an insured's counsel become a self-fulfilling prophecy.

    Perhaps, at the end of the day, the focus will have to return to the discretionary nature of an attorneys fee award, and having the court parse out an insured's fee claim to those fees which were truly necessary and productive in obtaining for the insured what he was entitled to. However, court should not reward unnecessary litigation for the sake of litigation.