Pennsylvania Supreme Court Leaves Intact Pro-Policyholder Decision Regarding Insurance Company Bad Faith

(from an Anderson Kill press release)

In Hollock v. Erie Insurance Exchange, the Pennsylvania Supreme Court dismissed as “improvidently granted” the appeal of Erie Insurance Exchange to one of the leading cases nationwide regarding punitive damages and an insurance company’s duty of good faith during litigation with its policyholder.

The Pennsylvania Supreme Court’s decision in Hollock v. Erie Insurance Exchange maintains the Superior Court’s decision that an insurance company’s duty of good faith and fair dealing continues through litigation. The decision also means that an award of $2.8 million in punitive damages will stand.

In an en banc 8-2 decision issued on January 22, 2004, the Pennsylvania Superior Court addressed issues of bad faith and punitive damages. Pennsylvania has a statute that allows policyholders to sue for insurance company bad faith. Known as the Bad Faith Statute, the law allows an award of punitive damages, interest, and attorneys’ fees. The Pennsylvania Superior Court affirmed an award of $2.8 million in punitive damages and $278,825 for attorneys’ fees, interest, and costs, approximately a 10:1 ratio to compensatory damages.

The Superior Court ruled that the conduct of Erie Insurance Exchange in the bad faith litigation could be considered in determining whether Erie acted in bad faith toward its policyholder, Jean Hollock. The trial court had found that the conduct of Erie’s witnesses at trial was “an intentional attempt to conceal, hide or otherwise cover-up the conduct of Erie employees.” The Superior Court ruled that “it was appropriate for the trial court to consider Erie’s continued conduct in relation to its insured” because the statutory remedy was designed to remedy all instances of insurance company bad faith, whether occurring before, during or after litigation.

The Superior Court also ruled that, in order to recover punitive damages under the Bad Faith Statute, a policyholder need not prove anything more than bad faith. The policyholder need not also prove malice, vindictiveness, or a wanton disregard of the rights of others, which may be required to obtain punitive damages in a case of common law fraud in Pennsylvania.

Finally, the Superior Court considered whether the amount of punitive damages violated substantive due process under the standards enunciated by the United States Supreme Court in State Farm v. Campbell. Noting the trial court’s findings that Erie was “a company run [amok]” whose supervisory personnel “sanction[ed] deceit” in the service of a “corporate belief that it is acceptable to tell a little lie so long as no one really gets hurt,” the Superior Court found Erie’s conduct to be reprehensible. The Superior Court also found the 10:1 ratio appropriate because (1) the compensatory damages contained no punitive element; (2) Erie has significant wealth; (3) the compensatory award was limited; (4) Erie engaged in reprehensible conduct; and (5) Erie faced potentially harsh civil penalties for its misconduct, including the suspension or revocation of Erie’s license to sell insurance in Pennsylvania.

The Hollock decision will provide important protection for policyholders in Pennsylvania. Timothy P. Law, of Anderson Kill & Olick’s Philadelphia office, who submitted an amicus brief on behalf of United Policyholders in support of Ms. Hollock, commented: “The Pennsylvania Supreme Court’s ruling leaving the Superior Court decision intact ensures that insurance companies will not be permitted to disregard their obligations to their policyholders when policyholders fight back in court against insurance companies. The courts in Pennsylvania take very seriously the obligations of insurance companies to fulfill their promises with utmost good faith and diligence and to treat their customers with respect. When insurance companies act in bad faith, they are on notice that very significant punitive damages may result.”

United Policyholders was founded in 1991 as a non-profit organization dedicated to educating the public on insurance issues and consumer rights. Timothy P. Law of Anderson Kill & Olick, P.C., in Philadelphia, Pennsylvania, represented United Policyholders. Anderson Kill & Olick is a national law firm with offices in New York, Philadelphia, Washington, Chicago, and Newark, NJ. Anderson Kill & Olick regularly represents policyholders in insurance disputes, including those involving insurance company bad faith.